Edited version of private advice

Authorisation Number: 1051707750053

Date of advice: 29 June 2020

Ruling

Subject: Liquidator's distributions of pre-CGT property

Question 1:

Will section 109NA of the Income Tax Assessment Act 1936 ('ITAA 1936') prevent section 109C of the ITAA 1936 from applying to the transfer of the property to Taxpayer J at the direction of the shareholders of Company W?

Answer:

Yes

Question 2:

Will section 109T of the ITAA 1936 apply to the transfer of the property to Taxpayer J at the direction of the shareholders of Company W?

Answer:

No

This ruling applies for the following periods

1 July 20XX to 30 June 20YY

RELEVANT FACTS AND CIRCUMSTANCES

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Incorporation of Company W

1. Company P was incorporated on xx XX 19XX.
2. Company P changed its name to Company W on yy YY 19YY.
3. Company W is an Australian based proprietary company, incorporated in XYZ.
4. Company W's directors are Taxpayer H and Taxpayer E.

Shareholders of Company W

1. In 19YY, Company W had zzz shares on issue with a par value of £x each. These shares were owned by members of the A family.
2. Sometime before yy YY 19YY, the shareholdings in Company W changed such that Taxpayer H and Taxpayer W each owned xyz shares in Company W (50% in their own right and 50% as tenants in common).
3. On zz ZZ 19ZZ, Taxpayer H acquired xzy shares in Company W from Taxpayer W.
4. On yy YY 19ZZ, Taxpayer H transferred x share in Company W to his wife, Taxpayer E.
5. By xx XX 19ZZ, the date that the CGT provisions were introduced, Taxpayer H and Taxpayer E owned 100% of Company W - this shareholding continues to the present time.
6. Company W is a "pre-CGT" company.

Acquisition of land

1. Some time prior to xx XX 19ZZ, Company W acquired a property named ABC near the small town of XXX for $xyz.
2. The property continues to be held by Company W. The last set of financial statements prepared for Company W shows this asset. Company W has had no transactions since the 19zz financial year.
3. ABC is currently worth approximately $xyz.

Current activities of Company W

1. Company W does not trade and has not done so since at least 19YY.
2. Company W has retained the property to the present day with minimal improvements.
3. Company W acts as the Trustee of the AAA Family Trust and the W Superannuation Fund.
4. Company W holds the ABC property in its own right and at no point was an interest in the property granted to the AAA Family Trust or any other entity.

Proposed transaction

1. The A family is proposing to appoint a Liquidator to liquidate Company W.
2. Prior to any action being taken to wind up Company W, Company W would cease to be the Trustee for the AAA Family Trust and the w Superannuation Fund.
3. The ABC property is to be transferred to the son, namely Taxpayer J, in the course of winding up the company by the liquidator.
4. The liquidator is empowered to, at the direction of the shareholders, transfer the property to the son, rather than the shareholders, in the course of winding up the company.

Information provided

1. You have provided a number of documents containing detailed information in relation to Company W, including:

a)     Private Binding Ruling ('PBR') Application, dated yy YY 20YY

b)     Response to further questions provided

c)     Further information provided during numerous phone calls and emails

2. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 Section 109NA

Income Tax Assessment Act 1936 Section 109T

Income Tax Assessment Act 1936 Section 109ZA

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 paragraph 960-100(1)(a)

Further issues for you to consider

Not applicable.
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REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

QUESTION:

Will section 109NA of the Income Tax Assessment Act 1936 ('ITAA 1936') prevent section 109C of the ITAA 1936 from applying to the transfer of the property to Taxpayer J at the direction of the shareholders of Company W?

DETAILED REASONING

1. A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A even if the participants treat it as some other form of transaction such as a loan, advance, gift or writing off a debt.
2. Division 7A of Part III of the ITAA 1936 (Division 7A) is intended to prevent profits or assets being provided to shareholders or their associates tax free. It applies where a private company has made a payment or loan to, or forgiven the debt of, an entity in an income year and in that income year either:

·        The entity was a shareholder or shareholder's associate of the private company at the time the payment, loan or debt forgiveness was made, or

·        A reasonable person would conclude that the loan, payment or debt forgiveness was made because the entity had been a shareholder or shareholder's associate at some time.

3. An entity includes an individual (section 109ZD and paragraph 960-100(1)(a) of the ITAA 1936).
4. An associate includes a relative of an entity (section 109ZD of the ITAA 1936 and section 318 of the ITAA 1936).
5. Section 109C of the ITAA 1936 outlines when payments are treated as dividends, as follows:

When private company is taken to pay a dividend

(1) A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

(a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or

(b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.

Note 1: Some payments do not give rise to dividends under Subdivision D. This section also does not give rise to a dividend if the amount is paid to a CGT concession stakeholder under subsection 152-325(1) of the Income Tax Assessment Act 1997 (see subsection 152-325(11)).

Note 2: A private company is treated as making a payment to a shareholder or shareholder's associate if an interposed entity makes a payment to the shareholder or associate. See Subdivision E.

Amount of dividend

(2) The dividend is taken to equal the amount paid, subject to section 109Y.

Note: Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.

What is a payment to an entity?

(3) In this Division, payment to an entity means:

(a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and

(b) a credit of an amount to the extent that it is:

(i) to the entity; or

(ii) on behalf of the entity; or

(iii) for the benefit of the entity; and

a transfer of property to the entity.

Note: See also section 109CA (Payment includes provision of asset).

Loans are not payments

(3A) However, a loan to an entity is not a payment to the entity.

Note: Payments converted to loans before the private company's lodgment day are treated as loans (see subsection 109D(4A)).

Value of payment by transfer of property

(4) The amount of a payment consisting of a transfer of property is the amount that would have been paid for the transfer by parties dealing at arm's length less any consideration given by the transferee for the transfer. (The amount of a payment is nil if the consideration given by the transferee equals or exceeds the amount that would have been paid at arm's length for the transfer.)

1. Section 109C of the ITAA 1936 has wide application and extends to an in-specie transfer of property. Such a distribution by a private company to a shareholder or a shareholder's associate is considered a payment and in turn is taken to be a dividend under section 109C of the ITAA 1936, unless one of the exceptions in sections 109J to 109R of the ITAA 1936 applies.
2. Of relevance is the exception in section 109NA of the ITAA 1936, which operates in relation to certain liquidator's distributions and loans, as follows:

A private company is not taken under section 109C or subsection 109D(1) to pay a dividend because of a distribution or loan made in the course of the winding-up of the company by a liquidator.

Note: However, if such a loan is not fully repaid by the end of the following year of income, the company will be taken to have paid a dividend under subsection 109D(1A).

3. The term liquidator is defined in subsection 6(1) of the ITAA 1936, it provides the following:

Liquidator means the person who whether or not appointed as liquidator, is the person required by law to carry out the winding-up of a company.

APPLICATION TO YOUR CIRCUMSTANCES

1. Under the proposed voluntary liquidation of Company W, the ABC property is to be transferred at the direction of the shareholders to the shareholders' son Taxpayer J in the course of winding up the company by the liquidator.
2. This is considered a payment by a private company to the shareholders or an associate of the shareholders and in turn the company is taken to pay a dividend under section 109C of the ITAA 1936, unless one of the exceptions in sections 109J to 109R of the ITAA 1936 applies.
3. As the company is contemplating voluntary liquidation, it must be considered if the exception in section 109NA of the ITAA 1936 may apply, where the distribution is made in the course of winding-up of the company by a liquidator.
4. The in-specie transfer of the property by the liquidator is a distribution and it takes place in the course of winding-up the company by a liquidator, satisfying the requirements of section 109NA of the ITAA. As a result, section 109C of the ITAA 1936 will not apply to deem a dividend.

Question 2:

Will section 109T of the ITAA 1936 apply to the transfer of the property to taxpayer J at the direction of the shareholders of Company W?

SUMMARY

Section 109T of the ITAA 1936 will not apply to the transfer of property to Taxpayer J at the direction of the shareholders of Company W as the payment is exempt under 109NA of the ITAA 1936.

DETAILED REASONING

1. Subdivision E of Division 7A contains the interposed entity provisions. The provisions operate to treat a private company as paying a dividend to a target entity if an entity interposed between the private company and the target entity makes a payment or loan to the target entity where the circumstances set out in section 109T apply.
2. Section 109T of the ITAA 1936 outlines

(1) This Division operates as if a private company makes a payment or loan to an entity (the target entity) as described in section 109V or 109W if:

a)     the private company makes a payment or loan to another entity (the first interposed entity) that is interposed between the private company and the target entity; and

b)     a reasonable person would conclude (having regard to all the circumstances) that the private company made the payment or loan solely or mainly as part of an arrangement involving a payment or loan to the target entity; and

c)     either:

(i)     the first interposed entity makes a payment or loan to the target entity; or

(ii)    another entity interposed between the private company and the target entity makes a payment or loan to the target entity.

This section operates regardless of certain factors

(2) For the purposes of this section, it does not matter:

a)     whether the interposed entity made the payment or loan to the target entity before, after or at the same time as the first interposed entity received the payment or loan from the private company; or

b)     whether or not the interposed entity paid or lent the target entity the same amount as the private company paid or lent the first interposed entity.

This section does not operate if the payment or loan to the first interposed entity is treated as a dividend

(3) This Division does not operate as described in subsection (1) (and sections 109V and 109W) if the private company is taken under Subdivision B (as it applies apart from this Subdivision) to pay a dividend as a result of the payment or loan to the first interposed entity.

APPLICATION TO YOUR CIRCUMSTANCES

As the transfer of property to Taxpayer J at the direction of the shareholders of Company W is exempt under 109NA, section 109T will not apply.