Edited version of private advice

Authorisation Number: 1051623161623

Date of advice: 20 December 2019

Ruling

Subject: Tax integrity measures - Part IVA - General anti-avoidance rules

Question 1

Will the proposed 'dividend access share' arrangement of the type described in the scheme of the private ruling application be considered a scheme 'by way of or in the nature of dividend stripping' for the purposes of section 177E of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will the issue of five (5) 'Z' class shares to NewCo give rise to a direct value shift (DVS) under section 725-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Will section 45A of the ITAA 1936 apply to the proposed issue of the five (5) 'Z' class shares?

Answer

No.

Question 4

Will section 45B of the ITAA 1936 apply to the proposed issue of the five (5) 'Z' class shares?

Answer

No.

Question 5

Will the payment of a fully franked dividend to the holder of the proposed 'Z' class shares from Company A to NewCo be considered dividend streaming under Subdivision 204-D of the ITAA 1997?

Answer

No.

Question 6

Will section 177EA of the ITAA 1936 apply to any distributions of fully franked dividends to the holders of the proposed 'Z' class shares?

Answer

No.

Question 7

Will Part IVA of the ITAA 1936 apply to the proposed transaction?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX May 20XX

Relevant facts and circumstances

1.     This description of facts is based on the following documents. The documents form part of and are to be read with this description. The relevant documents are:

(a)   The private ruling application submitted by the tax agent, which includes the relevant extract of the proposed binding financial agreement;

(b)   Emails from the Australian Taxation Office (ATO) to the tax agent dated late 2019.

(c)   Emails from the tax agent dated late 2019.

2.        Individual A and Individual B:

(a)   were married on XX Month 20XX;

(b)   are presently separated; and,

(c)   are negotiating a binding financial agreement (BFA) under the Family Law Act 1975 (FLA).

3.        The material asset of the BFA is the sole share held by Individual A in Company A.

4.        Company A is an Australian private company which:

(a)   Holds a range of passive investments (the market value of these assets is approximately equal to their respective cost bases);

(b)   Has $Xm of retained earnings as of 30 June 20XX; and,

(c)   Has a franking credit balance of $X as of 30 June 20XX.

5.        The purpose of the BFA is to split the assets of Company A in approximately equal shares.

The proposed arrangement

6.        The proposed arrangement is detailed at paragraphs X to X of the BFA and is summarised in the following paragraphs.

7.        Individual B will incorporate NewCo (final entity name to be confirmed at the time of incorporation) as an Australian proprietary company limited by shares.

8.        Individual A will be the sole legal and beneficial shareholder of a single $1 initial subscriber share in NewCo.

9.        Individual B will be the sole director of NewCo.

10.     Company A will establish a new class of shares (the 'Z' class shares), which will carry no voting rights but will include a right in the holder of the 'Z' class shares to receive a dividend from Company A.

11.     Company A will issue five (5) of these 'Z' class shares to NewCo.

12.     Within 14 days of creating and issuing the 'Z' class shares, Company A will declare a fully franked dividend to NewCo. The amount of the dividend will be $X on the following basis:

(a)      The distribution statement accompanying the distribution will state that approximately $X of the franking credits has been allocated and the franking percentage is 100%.

(b)      Company A will account for the distribution of that dividend income as a loan owing by Company A to NewCo. This loan will be repayable to NewCo within 60 days.

(c)      Company A will transfer a number of assets to NewCo for the purposes of satisfying the loan.

(d)      Where the value of these assets does not satisfy the loan owing to NewCo, Company A will pay the residual balance to NewCo in cash.

13.     Within four years of the creation and issuance of the 'Z' class shares to NewCo, these 'Z' class shares will be redeemed.

14.     Individual A will cause the transfer of his single share in NewCo to Individual B (to hold legally and beneficially in their own name).

15.     Individual B will pay $1 as consideration for this share transfer.

Assumption

1.     Dividends, where paid by NewCo, will be paid to Individual B (in their capacity as an individual) only.

Relevant legislative provisions

Income Tax Assessment Act 1936, section 45A

Income Tax Assessment Act 1936, section 45B

Income Tax Assessment Act 1936, subsection 45B(2)

Income Tax Assessment Act 1936, paragraph 45B(2)(a)

Income Tax Assessment Act 1936, paragraph 45B(2)(b)

Income Tax Assessment Act 1936, subsection 45B(3)

Income Tax Assessment Act 1936, subsection 45B(8)

Income Tax Assessment Act 1936, section 45C

Income Tax Assessment Act 1936, Part IVA

Income Tax Assessment Act 1936, section 177C

Income Tax Assessment Act 1936, section 177CB

Income Tax Assessment Act 1936, section 177D

Income Tax Assessment Act 1936, subsection 177D(2)

Income Tax Assessment Act 1936, section 177E

Income Tax Assessment Act 1936, paragraph 177E(1)(a)

Income Tax Assessment Act 1936, paragraph 177E(1)(b)

Income Tax Assessment Act 1936, paragraph 177E(1)(c)

Income Tax Assessment Act 1936, paragraph 177E(1)(d)

Income Tax Assessment Act 1936, paragraph 177E(1)(e)

Income Tax Assessment Act 1936, paragraph 177E(1)(f)

Income Tax Assessment Act 1936, paragraph 177E(1)(g)

Income Tax Assessment Act 1936, section 177EA

Income Tax Assessment Act 1936, subsection 177EA(3)

Income Tax Assessment Act 1936, section 177F

Income Tax Assessment Act 1997, Subdivision 204-D

Income Tax Assessment Act 1997, section 204-30

Income Tax Assessment Act 1997, subsection 204-30(8)

Income Tax Assessment Act 1997, Division 725

Income Tax Assessment Act 1997, section 725-90

Income Tax Assessment Act 1997, subsection 725-90(1)

Income Tax Assessment Act 1997, section 725-145

Income Tax Assessment Act 1997, subsection 725-145(1)

Income Tax Assessment Act 1997, paragraph 725-145(1)(a)

Income Tax Assessment Act 1997, paragraph 725-145(1)(b)

Income Tax Assessment Act 1997, subsection 725-145(2)

Income Tax Assessment Act 1997, subsection 725-145(3)

Reasons for decision

Question 1

Will the proposed 'dividend access share' arrangement of the type described in the scheme of the private ruling application be considered a scheme 'by way of or in the nature of dividend stripping' for the purposes of section 177E of the ITAA 1936?

Summary

For the purposes of section 177E of the ITAA 1936, the proposed arrangement will not constitute a scheme by way of or in the nature of dividend stripping.

Detailed reasoning

Section 177E of the ITAA 1936 is an anti-avoidance provision designed to prevent a taxpayer from obtaining a tax benefit as part of:

(a)   a scheme by way of or in the nature of dividend stripping, and

(b)   a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping.

Where paragraphs 177E(1)(a) to (d) of the ITAA 1936 are satisfied, such a scheme is taken to be a scheme to which Part IVA of the ITAA 1936 applies: pursuant to paragraph 177E(1)(e) of the ITAA 1936. Further, the taxpayer is taken to have obtained a tax benefit in connection with that scheme (see paragraphs 177E(1)(f) and (g) of the ITAA 1936).

As highlighted in paragraph 174 of the decision in Commissioner of Taxation v Consolidated Press Holdings Ltd and Others (No 1) (1999) 91 FCR 524, section 177E of the ITAA 1936:

embraces only a scheme which can be said objectively to have the dominant (although not necessarily the exclusive) purpose of avoiding tax. The requirement of a tax avoidance purpose flows from the use by Parliament of the undefined expression "a scheme by way of or in the nature of dividend stripping".

While the Commissioner notes that the current circumstances involve a degree of tax deferral, which can constitute a tax benefit for the purposes of section 177E of the ITAA 1936, on the facts the Commissioner is not satisfied that there is a sufficient tax avoidance purpose necessary to engage the application of section 177E of the ITAA 1936.

As a result, the proposed arrangement will not constitute a scheme by way of or in the nature of dividend stripping.

Question 2

Will the issue of five (5) 'Z' class shares to NewCo give rise to a DVS under section 725-145 of the ITAA 1997?

Summary

For the purposes of section 725-145 of the ITAA 1997, the issue of the five 'Z' class shares in Company A to NewCo will not give rise to a DVS pursuant to section 725-90 of the ITAA 1997.

Detailed reasoning

Subsection 725-145(1) of the ITAA 1997 provides that a DVS occurs when:

(a)   There is a decrease in the market value of one or more equity or loan interests in the target entity; and

(b)      The decrease is reasonably attributable to one or more things done under the scheme, and occurs at or after the time when the things, or the first of those things is done; and

(c)      Either or both of subsections (2) or (3) of section 725-145 of the ITAA 1997 are satisfied.

Subsections 725-145(2) of the ITAA 1997 relevantly provides that one or more equity or loan interests in the target entity must be issued at a discount. The decrease in the interest must occur at or after the time of the issue and be reasonably attributable to it.

Subsection 725-145(3) of the ITAA 1997 also provides that there must be an increase in the market value of one or more equity or loan interests in the target entity. The increase must be reasonably attributable to the decrease in the other interest.

Subsection 725-90(1) of the ITAA 1997 also states that a direct value shift does not have any consequences for a taxpayer under Division 725 of the ITAA 1997 if:

(a)   The one or more things referred to in paragraph 725-145(1)(b) of the ITAA 1997 brought about a state of affairs, but for which the direct value shift would not have happened; and

(b)      As at the time referred to in that paragraph, it is more likely than not that, because of the scheme, that state of affairs will cease to exist within 4 years after that time.

On the facts, the Commissioner is satisfied that the proposed arrangement will give rise to a DVS. However, even where the proposed arrangement does give rise to a direct value shift, the Commissioner is satisfied that the state of affairs for the purpose of section 725-90 of the ITAA 1997 will cease to exist within four years as the 'Z' class shares will be redeemed within four years from the date they are issued to NewCo. As a result, section 725-90 of the ITAA 1997 will operate such that any DVS will not have any consequences under Division 725 of the ITAA 1997.

Question 3

Will section 45A of the ITAA 1936 apply to the proposed issue of the five (5) 'Z' class shares?

Summary

No. The Commissioner is satisfied that section 45A of the ITAA 1936 will not apply to the proposed issue of the five 'Z' class shares to NewCo.

Question 4

Will section 45B of the ITAA 1936 apply to the proposed issue of the five (5) 'Z' class shares?

Summary

No. The Commissioner is satisfied that the proposed issue of the five 'Z' class shares will meet paragraphs 45B(2)(a) and (b) of the ITAA 1936; however, having regard to the 'relevant circumstances' outlined in subsection 45B(8) of the ITAA 1936, the Commissioner is not satisfied that there is a sufficient tax avoidance purpose necessary to engage the application of section 45B of the ITAA 1936.

Detailed reasoning

Overview

Sections 45A and 45B of the ITAA 1936 are anti-avoidance provisions which allow the Commissioner to make a determination that section 45C of the ITAA 1936 applies. The effect of such a determination is that all or part of the capital component received by a taxpayer would be treated as the payment of an unfranked dividend.

Section 45A of the ITAA 1936

Section 45A of the ITAA 1936 applies where capital benefits are streamed to certain shareholders (the advantaged shareholders) who derive a greater benefit from the capital benefits than other shareholders, and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends.

Relevantly here, the proposed arrangement involves the issue of 'Z' class shares to NewCo. Prior to the issue of these 'Z' class shares, NewCo will not be a shareholder of Company A.

As a result, the Commissioner is satisfied that section 45A of the ITAA 1936 will not apply to the proposed issue of the five 'Z' class shares to NewCo.

Section 45B of the ITAA 1936

Section 45B of the ITAA 1936 applies where certain payments are made to shareholders in substitution of dividends. Subsection 45B(2) of the ITAA 1936 sets out the conditions under which the Commissioner may make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies. These conditions include that:

(a)   There is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company;

(b)      Under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the capital benefit, obtains a tax benefit; and,

(c)      having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a tax benefit.

The 'relevant circumstances' of the scheme include the various matters listed in subsection 45B(8) of the ITAA 1936.

The Commissioner is satisfied that the proposed issue of the five 'Z' class shares will meet paragraphs 45B(2)(a) and (b) of the ITAA 1936; however, having regard to the 'relevant circumstances' outlined in subsection 45B(8) of the ITAA 1936, the Commissioner is not satisfied that there is a sufficient tax avoidance purpose necessary to engage the application of section 45B of the ITAA 1936.

Question 5

Will the payment of a fully franked dividend to the holder of the proposed 'Z' class shares from Company A to NewCo be considered dividend streaming under Subdivision 204-D of the ITAA 1997?

Summary

No. The Commissioner is not empowered to make a determination under Subdivision 204-D of the ITAA 1997.

Detailed reasoning

Subdivision 204-D of the ITAA 1997 contains provisions which aim to prevent the streaming of franking credits to one member of a corporate tax entity in preference to another.

Section 204-30 of the ITAA 1997 applies where an entity streams one or more distributions in such a way that the franking credits attaching to the distribution are received by those members of the entity who derive a greater benefit from them, and other members receive lesser imputation or no imputation benefits.

For this section to apply, members to whom distributions are streamed must be in a position to derive a greater benefit from the franking credits than other members.

Subsection 204-30(8) of the ITAA 1997 details examples of when a member of an entity will be taken to have derived a greater benefit from franking credits than another member. These are where the other member:

(a)   is not an Australian resident;

(b)      is not entitled to use the tax offset under Division 207 of the ITAA 1997;

(c)      incurs a tax liability as a result of the distribution that is less than the benefit associated with the tax offset attributable to the distributions;

(d)      is a corporate tax entity at the time the distribution is made, but no franking credit arises for the entity as a result of the distribution;

(e)      is a corporate tax entity at the time the distribution is made, but cannot use the franking credits to frank a distribution to its own members because it is not a franking entity or is unable to make a frankable distribution; or,

(f)       is an exempting entity.

Relevantly here, the Commissioner is satisfied that Individual A, Individual B, Company A and NewCo (when it is incorporated) are all residents of Australia for Australian taxation purposes. As a result, for the purposes of paragraph 204-30(8)(a) of the ITAA 1997, no entity will derive a greater benefit from the franking credits than any other entity.

On the facts, the Commissioner is also satisfied that:

(a)   the proposed holder of the 'Z' class shares will not derive a greater benefit from any franking credits attached to distributions paid by Company A than other Company A shareholders in some other way; and,

(b)      none of the other factors listed in subsection 204-30(8) of the ITAA 1997 apply.

Therefore, the Commissioner is not empowered to make a determination under Subdivision 204-D of the ITAA 1997.

Question 6

Will section 177EA of the ITAA 1936 apply to any distributions of fully franked dividends to the holders of the proposed 'Z' class shares?

Summary

No. The Commissioner will not make a determination under section 177EA of the ITAA 1936 to create a franking debit or cancel the franking credits relating to the fully franked dividends distributed under the proposed arrangement.

Detailed reasoning

Section 177EA of the ITAA 1936 is a general anti-avoidance provision that supports the operation of the imputation system with the purpose of ensuring that the benefits of the imputation system flows to the economic owner of the share which is the source of the franked distribution. This section is directed at schemes involving the transfer of franking credits on dividend income from entities that cannot fully utilise the franking credits to entities that can.

If this section applies, the Commissioner can create a franking debit in the company's franking account or deny the franking credit benefit to the recipient of the dividend income.

Specifically, subsection 177EA(3) of the ITAA 1936 provides that the following must be present in order for section 177EA to apply:

(a)   There is a scheme for the disposition of shares, or interests in shares, in a company;

(b)    A franked distribution has been paid, or expected to be paid, directly or indirectly;

(c)    The relevant taxpayer would, or could reasonably be expected to, receive imputation benefits from the distribution; and,

(d)    Having regard to the circumstances of the scheme it would be concluded that the scheme was entered into for the purpose of enabling the relevant taxpayer to obtain imputation benefits.

Having regard to the circumstances outlined by the applicants, the Commissioner is not satisfied that the proposed arrangement was entered into for the purpose of enabling Individual A, Individual B or NewCo to obtain imputation benefits.

As a result, the Commissioner will not make a determination under section 177EA of the ITAA 1936 to create a franking debit or cancel the franking credits relating to the fully franked dividends distributed under the proposed arrangement.

Question 7

Will Part IVA of the ITAA 1936 apply to the proposed transaction?

Summary

The proposed arrangement will not constitute a scheme to which section 177D of Part IVA of the ITAA 1936 applies.

Detailed reasoning

Part IVA of the ITAA 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or DPT tax benefit in connection with an arrangement. Broadly, Part IVA of the ITAA 1936 allows the Commissioner the discretion to cancel a tax benefit obtained by a taxpayer in relation to a scheme where the sole or dominant purpose of the scheme was to obtain a tax benefit.

A conclusion about a relevant person's purpose for the purpose of section 177D of the ITAA 1936 is the conclusion of a reasonable person based on all the facts and evidence relevant to the matters outlined in subsection 177D(2) of the ITAA 1936.

The Commissioner notes that in the current circumstances there is a degree of tax deferral, which can constitute a tax benefit for the purposes of section 177D of the ITAA 1936, and in some circumstances a binding financial agreement under section 90C of the FLA may be implemented with an underlying tax avoidance purpose; however, on the facts (and having consideration of the matters outlined in subsection 177D(2) of the ITAA 1936), the Commissioner is not satisfied that there is a sufficient tax avoidance purpose necessary to engage the application of the general anti-avoidance provisions contained in Part IVA of the ITAA 1936.