Edited version of private advice

Authorisation Number: 1051892253952

Date of advice: 26 August 2021

Ruling

Subject: Winding up

Question 1

Will the sale of Portfolio A by the Company to the Individual trigger CGT event A1 to happen pursuant to section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the sale of Portfolio B by the Trust to the Individual trigger CGT event A1 to happen pursuant to section 104-10 of the ITAA 1997?

Answer

Yes

Question 3

Will section 109D of the Income Tax Assessment Act 1936 (ITAA 1936) apply to deem that the loan owing by the Individual to the Company from the sale of Portfolio A to be dividend if that loan is re-paid prior to the lodgement date of the Company's Income Tax Return for the income year in which the loan is made?

Answer

No

Question 4A

Will section 47 of the ITAA 1936 apply to deem that part of the liquidator's distribution debited against the Company's pre-CGT Capital reserve to be a dividend paid out of profits of the Company and assessable to its shareholders under section 44 of the ITAA 1936?

Answer

No

Question 4B

Will section 47 of the ITAA 1936 apply to deem that part of the liquidator's distribution debited against the Company's paid up share capital account to be a dividend paid out of profits and assessable to its shareholders under section 44 of the ITAA 1936?

Answer

No

Question 4C

Will section 47 of the ITAA 1936 apply to deem that part of the liquidator's distribution that is debited against the Company's post-CGT Capital reserve and Retained Profits account to be a dividend paid out of profits and assessable to its shareholders under section 44 of the ITAA 1936?

Answer

Yes

Question5

Will CGT event C2 apply on cancellation of the shares on liquidation of the Company, pursuant to section 104-25 of the ITAA 1997?

Answer

Yes

Question6

Will the anti-overlap provision, namely section 118-20 of the (ITAA 1997), apply to reduce any resulting capital gain (if in fact there is a capital gain)?

Answer

Yes

Question 7

Will any of the offsets or amounts assigned by the Company to be the forgiveness of a debt and treated as a deemed dividend under section 109F of the ITAA 1936?

Answer

No

Question 8A

The amount that would be owing by the Company to the Trust is proposed to be satisfied in part by the Company assigning to the Trust the loan rights that the Company is owed by the. Would this proposed assignment to be made by the Company result in a net forgiven amount of nil under section 245-85(1) of the ITAA 1997?

Answer

No

Question 8B

The assigned loan rights proposed to be held by the Trust (that were originally owed to the Company by the Individual but now owed to the Trust by the Individual) is proposed to be offset against the unpaid entitlement owing from the Trust to the Individual. Would this proposed offset result in a net forgiven amount of nil under section 245-85(1) of the ITAA 1997?

Answer

Yes

Question 8C

The existing loan owing by the Individual to the Trust is proposed to be forgiven by the Trust. Would this proposed offset result in a net forgiven amount of nil under section 245-85(1) of the ITAA 1997?

Answer

Yes

Question 8D

The sale of Portfolio B from the Trust to the Individual creates a loan owing to the Trust by the Individual. This newly created loan is proposed to be forgiven by the Trust. Would this proposed offset result in a net forgiven amount of nil under section 245-85(1) of the ITAA 1997?

Answer

No

Question 9

Would section 100A of the ITAA 1936 have application where the 2021 profits of the Trust are distributed (appointed) to the Individual where the resulting unpaid present entitlement is satisfied by offsetting the amount against loans owing?

Answer

No

Question 10

Is the Company allowed franking credits where the liquidator makes an early payment of company tax as a result of liquidation, pursuant to section 205-15 of the ITAA 1997?

Answer

Yes

Question 11

Is the capital gain resulting from the death of the deceased for either the trustee of the deceased's estate, or the Individual who had her remainder interest crystallised on the subsequent death of the life interest holder, disregarded under section 128-10 of the ITAA 1997?

Answer

No

Question 12

Will the first element of the CGT cost base of the Company's pre-CGT shareholdings be equal to the market value of each class of shares at the date of death of the individual pursuant to subsection 128-15(4)?

Answer

Yes

Question 13

Will the first element of the CGT cost base of the Company's post-CGT shareholdings in the hands of the Trust be equal to the market value of each class of shares at the date of the deceased's death pursuant to subsection 128-15(4)?

Answer

Yes

Question 14

Will CGT event K6 apply on the cancellation of the shares, upon the liquidation of the Company, pursuant to section 104-230 of the ITAA 1997?

Answer

No

Question 15

Where the Trust distributes (appoints) a capital gain to the Individual arising from the disposal of shares in the Company, will the Trustee be assessed under section 98 of the ITAA 1936?

Answer

Yes

Question 16

Where the Trust is assessed and is liable to pay tax under section 98(3) and that tax is greater than the amount of income tax assessed against the beneficiary, will the Individual receive an amount equal to the difference between the two amounts from the Commissioner under section 98A(2)(b) of the ITAA 1936?

Answer

Yes

Question 17

Will the Individual be assessed on the distribution of corpus made by the Trust under Division 6 of the ITAA 1936?

Answer

No

Answer

No

This ruling applies for the following period periods:

Year ending 30 June 20XX

The scheme commences on:

30 June 20XX

Relevant facts and circumstances

The Group consists of an individual taxpayer, the Individual, a company, namely the Company and a Testamentary Trust, namely te Trust.

The Individual is a foreign resident for tax purposes. The Individual acquired their shares in the Company via the Estate of the Deceased. They also acquired her contingent discretionary entitlements in the Trust as a result of the passing of the life interest owner. The Individual acquired the shares and entitlements whilst being a non-resident for tax purposes of Australia. The deceased and the life interest owner were Australian tax residents and were the parents of the Individual.

The Company

The Company is a tax resident of Australia. The company holds a passive investment portfolio comprise of ASX listed shares.

The Company is owned by the Individual (X%) and the Trust (X%). The draft Financial Accounts of the Company show it holds an Investment Portfolio (Portfolio A) with a market value of $X, a Pre-CGT Profits Reserve of $X, Retained Profits of $X and a post CGT Profits Reserve of $X.

History of the Company's shareholdings

In relation to the rights attached to the shares on issue, it is noted that the "A" class shares and "B" class shares have the same entitlement to income and capital. Also, the Memorandum and Articles of Association states that "A" class shares hold one vote per share, whilst "B" class shares hold one vote for every hundred shares held.

Prior to the Individual acquiring any shares/interest in the Company 100% of the issued shares were held by their parents.

All of the above shareholdings were acquired by the Individual's parents before 20 September 1985, with the exception of the parcel of X "A" class shares held by the life interest owner. This parcel was acquired on post-CGT for $X.

The deceased died.

The shares held by the deceased were distributed via her will as follows:

§     X "A" class shares - life interest acquired by life interest owner. Remainder interest effectively acquired by the Individual that crystallised subsequent to the life interst owner's death and the Individual calling for the appointment of capital to be distributed to them.

§     X "B" class shares - life interest acquired by life interest owner. Remainder interest acquired by the Individual that crystallised subsequent to the life interest owner's death and the Individual calling for the appointment of capital to be distributed to them.

§     X "B" class shares - fully distributed to the Individual.

§     X "B" class shares originally held jointly- the deceased's interest in the jointly held parcel of "B" class shares passed to the life interest owner. This means that, subsequent to the deceased's passing, 100% of this parcel of shares are held by the life interest owner.

The life interest owner died.

At this point in time, the life interests in the relevant Company shares were crystallised. The Individual becomes the outright owner of these shares via their remainder interest and calling the trustees to appoint the capital to them.

All other shares in the Company held by the life interest owner were distributed to the Trust via his will.

The Trust

The Tust is a tax resident of Australia and holds a passive investment portfolio being ASX Listed shares. The Trust also holds a portion of the shares on issue in the Company.

The Trust is a Discretionary Testamentary Trust. The Trust's capital and income objects include The Individual, their spouse, children and their spouses and 'eligible companies' (i.e. a company in which at least one share is held by at least one of the beforementioned persons). The Trustees of the Trust are independent Australian individual trustees.

The draft Financial Accounts of the Trust include an Investment Portfolio of ASX listed shares (Portfolio B) with a market value of $X, a debit loan owing to the Trust from the Individual in the amount of $X, and undistributed (retained) corpus of $X. The X% shares held in the Company by the Trust are recorded at cost.

The Individual

The Individual has been a non-resident of Australia for many years and would like to wind-up their Australian entities in an efficient and expeditious manner.

Scheme to wind up the Company and the Trust

The Company and Trust will be wound up through the following transactions.

(i)            The Company will sell Portfolio A to the Individual for market value consideration. The Individual would not pay cash, but will incur a liability to pay the Company the Market value of Portfolio A.

(ii)           The sale would trigger CGT event A1 in the hands of the Company. It will pay this tax as soon possible generating a credit in the company's franking account.

(iii)          A liquidator will then be appointed to the Company to facilitate the voluntary liquidation.

(iv)          The liquidation will proceed as follows

a.    The Company will declare a dividend equal to the amount standing to credit in the company's Retained Profits account and a separate dividend equal to the Post-CGT Capital Profits Reserve. The dividend would be payable to "A" class and "B" class shareholders equally in proportion to the number of shares on issue. That is, the dividend would not discriminate between "A" and "B" classes.

b.    The dividend payable would not be satisfied in cash but rather would be satisfied by offsetting it against loans owned to the Company (refer below).

c.     The dividend would be franked to the maximum extent possible.

(v)           The liquidator will resolve to distribute to shareholders the total amount standing to credit in the Pre-CGT Capital Profits Reserve to "A" class and "B" class shareholders in proportion to the number of shares on issue.

(vi)          The liquidator will resolve and distribute to shareholders the remaining paid-up share capital to shareholders.

(vii)        The entitlements payable would not be physically paid in cash but will be satisfied by various offsetting of the entitlement against debts owing to the Company (refer below).

(viii)       The Company will subsequently be deregistered.

Winding up of the Trust

(ix)          The trustees will resolve to distribute the 2021 profits to the Individual. These profits will include liquidator's distributions received from the Company and are estimated to be in the amount of $X.

(x)           The trustees of the Trust will agree to sell Portfolio B to the Trust at market value. The Trust will not pay in cash, but rather a loan account would be established ($X (Market value less estimated tax repayments by the Trust)).

Offsetting of distributions and existing debts

In relation to the remaining loans/entitlements it is proposed that the following offsets/assignments take place based on the distributions to be made above (on a dollar for dollar basis):

(i)            The amount payable by the Company to the Individual be offset against the amount owed to the Company by the Individual from the sale of portfolio A.

(ii)           The amount payable by the Company to the Trust will be satisfied by the Company assigning to MF part of the debt owed to the Company by the Individual.

(iii)          The remaining balance of the debt owed to the Company by the Individual will be repaid by the Individual before lodgement of the Company's Income Tax Return.

(iv)          The Trust will discharge the debt it now owes to the Individual, by offsetting it against the unpaid entitlement owing from the Trust to the Individual.

(v)           The debt owed by the Individual to the Trust of $X and the loan created on sale of Portfolio B that resulted in the Individual owing the Trust will be forgiven by the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 section 47

Income Tax Assessment Act 1936 subsection 47(1)

Income Tax Assessment Act 1936 subsection 47(1A)

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 subsection 98A(2)

Income Tax Assessment Act 1936 section 100A

Income Tax Assessment Act 1936 subsection 100A(1)

Income Tax Assessment Act 1936 subsection 100A(7)

Income Tax Assessment Act 1936 subsection 100A(13)

Income Tax Assessment Act 1936 section 104-25

Income Tax Assessment Act 1936 section 104-135

Income Tax Assessment Act 1936 subsection 109D(1)

Income Tax Assessment Act 1936 paragraph 109D(1)(b)

Income Tax Assessment Act 1936 section 109F

Income Tax Assessment Act 1936 subsection 109F(5)

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 104-230

Income Tax Assessment Act 1997 paragraph 104-230(1)(a)

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 112-115

Income Tax Assessment Act 1997 section 112-150

Income Tax Assessment Act 1997 paragraph 124-795(2)(a)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 subsection 128-15(4)

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 section 205-15

Income Tax Assessment Act 1997 subsection 205-15(1)

Income Tax Assessment Act 1997 subsection 205-20(3)

Income Tax Assessment Act 1997 paragraph 205-20(3)(a)

Income Tax Assessment Act 1997 Division 245

Income Tax Assessment Act 1997 Subdivision 245-E

Income Tax Assessment Act 1997 section 245-10

Income Tax Assessment Act 1997 section 245-36

Income Tax Assessment Act 1997 section 245-55

Income Tax Assessment Act 1997 section 245-65

Income Tax Assessment Act 1997 subsection 245-65(1)

Income Tax Assessment Act 1997 section 245-75

Income Tax Assessment Act 1997 paragraph 245-75(2)(a)

Income Tax Assessment Act 1997 subsection 245-85(1)

Income Tax Assessment Act 1997 subsection 245-85(2)

Income Tax Assessment Act 1997 section 245-95

Income Tax Assessment Act 1997 section 245-105

Income Tax Assessment Act 1997 section 245-115

Income Tax Assessment Act 1997 section 245-130

Income Tax Assessment Act 1997 section 245-145

Income Tax Assessment Act 1997 section 245-175

Schedule 1 to the Taxation Administration Act 1953 section 260-45

Reasons for decision

Question 1

CGT event A1 happens if a taxpayer disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997). A taxpayer disposes of a CGT asset for the purposes of CGT event A1 if there is a change in ownership of the assets from the taxpayer to another entity (subsection 104-10(2) of the ITAA 1997). Therefore, CGT event A1 happens when the Company sells Portfolio A to the Individual.

Question 2

CGT event A1 happens if a taxpayer disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997). A taxpayer disposes of a CGT asset for the purposes of CGT event A1 if there is a change in ownership of the assets from the taxpayer to another entity (subsection 104-10(2) of the ITAA 1997). Therefore, CGT event A1 happens when the Trust sells Portfolio B to the Individual.

Question 3

Under subsection 109D(1) of the ITAA 1936, a private company is taken to pay a dividend to an entity at the end of one of the private company's years of income (the current year) if:

(a) the private company makes a loan to the entity during the current year; and

(b) the loan is not fully repaid before the lodgment day for the current year; and

(c) Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and

(d) either:

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

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

As the loan will be repaid before to the lodgement date of the Company's income tax return, the loan will not trigger a deemed dividend under subsection 109D(1) of the ITAA 1936.

Question 4

Question 4A

Pre-CGT capital reserve

At common law, a distribution to a shareholder by a liquidator is capital, not income, in the hands of the shareholder since it is a realisation of the shareholder's interest in the company: FC of T (NSW) v Stevenson (1937) 4 ATD 415; (1937) 59 CLR 80; FC of T v Blakely (1951) 9 ATD 239 at 245, 247; (1951) 82 CLR 388 at 402, 407; FC of T v Brewing Investments Ltd [2000] FCA 920; 2000 ATC 4431 per Hill J at 18 - 19.

Liquidator distributions from the capital reserve account sourced from assets acquired prior to 20 September 1985 are, in some circumstances, not taxable as either a deemed dividend under section 47 of the ITAA 1936, or a net capital gain under section 104-25 of the ITAA 1997. If the assets were acquired prior to 20 September 1985 and a capital gain is disregarded, then these assets maintain the tax-free status of the distribution from the capital profits reserve account.

Archer Bros Pty Ltd (In Vol Liq) v. FCT (1953) 90 CLR 140; 27 ALJ 353; 10 ATD 192 (Archers Case) discusses distributions. In a joint judgement, the Full High Court of Australia in Archers Case observed by way of obiter dicta:

'By a proper system of bookkeeping the liquidator, in the same way as the accountant of a private company which is a going concern, could so keep his accounts that...distributions could be made wholly and

exclusively out of...particular profits...or income...'

Taxation Determination TD 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions? discusses the significance of the "Archer Brothers principle" in the context of liquidation distributions:

The observations in Archers Case have given rise to what is known as the Archer Brothers principle. The principle is that if a liquidator appropriates a particular fund of profit or income in making a distribution, that appropriation ordinarily determines the character of the distributed amount for the purposes of the Income Tax Assessment Act. Generally, a liquidator may rely on the Archer Brothers principle, except where a specific provision produces a different result.

Archers Case refers to 'profits' or 'income'. However, if a liquidator ostensibly distributes an amount representing capital actually contributed by shareholders, we accept that the distribution is treated as a non-dividend return of capital.

Provided the liquidator is able to identify the source from which a particular distribution is made, we will accept a liquidators nominated appropriation. For example, identifying pre-CGT non-assessable profits separately to post-CGT capital gains.

If the Trust and the Individual receive a capital distribution from the Company that was sourced from pre-CGT profits. This amount is not considered to be a dividend in their hands and will be a return of capital. As the distribution debited against Pre-CGT Capital reserve can be identified as a being gain from Pre-CGT assets, it will not be deemed to be a dividend under section 47. It will be a distribution of capital.

Consequently, those distributions debited against the Company's paid up share capital account and pre-cgt capital reserve will not be deemed to be a dividend under subsection 47(1) of the ITAA 1936.

Post-CGT capital profits reserve and retained profits

Section 47 of the ITAA 1936 specifically deems certain amounts to be dividends paid to the shareholders out of the profits derived by the Company.

Specifically, subsection 47(1) of the ITAA 1936 provides that:

Distributions to shareholders of a company by a liquidator in the course of winding-up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it.

Under section 47(1A) income include any amounts that are included in a company's assessable income for a year (other than as a net capital gain), and a net capital gain that would be included in a company's assessable income for a year of income if the ITAA 1997 required a net capital gain to be worked out as follows:

Step 1.

Work out each capital gain (except a capital gain that is disregarded) that the company made during that year of income. Do so without indexing any amount used to work out the cost base of a CGT asset.

Step 2.

Total the capital gain or gains worked out under Step 1. The result is the net capital gain for that year of income.

Consequently, those distributions debited against the Company's post-CGT capital profits reserve and retained profits distributed to the Trust and the Individual will be deemed to be a dividend under subsection 47(1) of the ITAA 1936, paid to the shareholders out of profits derived by it.

Question5

Section 104-25 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by

the asset:

a) being redeemed or cancelled

b) being released, discharged or satisfied

c) expiring; or

d) being abandoned, surrendered or forfeited; or

....

The time of the event is when you enter into the contract that results in the asset ending or if there is no contract, when the asset ends: subsection 102-25(2).

Taxation Determination TD 2001/27 Income tax: capital gains: how do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997') treat:

a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the

Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend; and

b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)?

Paragraph 1 of TD 2001/27 states that:

The full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 (about cancellation, surrender and similar endings) in section 104-25 of the ITAA 1997. After the winding-up of a company, CGT event C2 happens to the shares when the company ceases to exist in accordance with the Corporations Act 2001 (see Taxation Determination TD 2000/7 paragraphs 3 and 4).

If all or part of a final distribution made by a liquidator of a company is deemed by subsection 47(1) of the ITAA 1936 to be a dividend paid out of profits, and to be assessable income of a shareholder under subsection 44(1) of the ITAA 1936, this does not alter the position stated in paragraph 1 of TD 2001/27.

Question 6

Subsection 118-20(1) of the ITAA 1997 states that a capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of this part) includes an amount (for any income year) in:

a) your assessable income or exempt income; or

b) if you are a partner in a partnership, the assessable income or exempt income of the partnership.

in relation to a CGT asset as if it were so included because of the CGT event referred to in that subsection if the amount would also be taken into account in working out the amount of a capital gain you make.

The distribution made in the course of the voluntary liquidation, to the extent to which it is made out of a reserve that represents a capital gain that has been reduced to nil (due to it being profits from the sale of a pre-CGT asset), will not be deemed a dividend paid by the company out of profits under subsection 47(1) of the ITAA 1936. It will instead form part of the capital proceeds for the ending of shares on liquidation.

As per TD 2000/7 at paragraph 4, it is considered that when a company is deregistered under subsection 509(5) of the Corporations Act 2001, a CGT event (usually being C2) happens to the member's shares. In this case C2 occurs when the company is deregistered. This deregistration occurs three months after the liquidator lodges a return of the holding of the final meeting of members or of members and creditors.

The assessable capital gain or loss will be the difference between the capital proceeds from the liquidator distributions and the cost base of the shares. If there is a capital gain it will be reduced by the amount of any part of the distribution deemed to be dividend under section 47 ITAA 1936. If the capital gain does not exceed the dividend, it will be reduced to zero (subsection 118-20(2) ITAA 1997).

Question 7

Under subsection 109F(1) of the ITAA 1936 a private company is taken to pay a dividend at the end of the private company's year of income if all or part of a debt the entity owed the private company is forgiven in that year and either the amount is forgiven when the entity is a shareholder or an associate of a shareholder in the private company, or, a reasonable person would conclude that the amount is forgiven because the entity has been such a shareholder or associate at some time.

Further, subsection 109F(5) states that an amount of debt a debtor owes a private company is also forgiven for the purposes of this Division if the private company assigns the right to receive payment of the amount to a new creditor who is either an associate of the debtor or a party to an arrangement with the debtor about the assignment and a reasonable person would conclude (having regard to all the circumstances) that the new credit will not exercise the assigned right.

In this case, as all rights will be exercised and loans will be repaid, Subsection 109F(5) will not apply.

Question 8

Division 245 of the ITAA 1997 relates to the forgiveness of commercial debts.

For the Commercial Debt Forgiveness provisions to apply, the debts between the parties would need to be commercial debts as per section 245-10 of the ITAA 1997. We have assumed for the purpose of the reasoning below the relevant debts are commercial debts.

Under section 245-36 of the ITAA 1997, a debt is forgiven if and when the creditor assigns the right to receive payment of the debt to another entity (the new creditor) and the following conditions are met:

a. either the new creditor is the debtor's associate or the assignment occurred under an arrangement to which the new creditor and debtor were parties;

b. the right to receive payment of the debt was not acquired by the new creditor in the ordinary course of trading on a market, exchange or other place on which, or facility by means of which, offers to sell, buy or exchange securities (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)) are made or accepted.

Where there is a relevant debt forgiven, the effect of the forgiveness depends on whether there is there is 'total net forgiven amount' for an income year (refer subdivision 245-D of the ITAA 1997) which in turn turns on whether there are any net forgiven amounts in the income year (section 245-105).

In accordance with section 245-85(2) of the ITAA 1997, the 'net forgiven amount' in relation to a debt is equal to the 'gross forgiven amount' less certain amounts specified in section 245-85(1). The 'gross forgiven amount' is taken under section 245-75 of the ITAA 1997 (where section 245-65 applies) to be the 'value' of the debt less certain offsets as specified in the table to section 245-65. The 'value' of the debt, in accordance with section 245-55 of the ITAA 1997, is the debt's market value at the time of the forgiveness, assuming solvency of the debtor and the debtors ability to repay was the same as when the debt was incurred and at the forgiveness time.

The relevant 'offsets' in calculating the gross forgiven amount are set out in under section 245-65 of the ITAA 1997. This section provides that the amount offset against the value of a debt in working out the Gross Forgiven Amount of the debt is calculated in accordance with the table in that section. Relevantly, item 4 in the table applies to identify the amount to offset against the Gross Forgiven Amount where a debt is assigned per section 245-36 and the parties were dealing with each other at arm's length and the debt is not a money lending debt. It provides that the offset is equal the sum of the market value of consideration provided by the debtor in respect of the assignment and the amount or market value of consideration given by the new creditor in respect of the assignment.

Question 8A

Forgiveness of the amount that would be owing by the Company to the Trust in the amount of $X proposed to be satisfied in part by the Company assigning to the Trsut the loan rights that the Company is owed by the Individual in the amount of $X.

In accordance with section 245-85(2) of the ITAA 1997, the 'net forgiven amount' is equal to the 'gross forgiven amount' less certain amounts specified in section 245-85(1).

The offsetting of mutual debts will not of itself result in a net forgiveness amount for the purposes of section 245-85 of the ITAA 1997.

The gross forgiven amount is calculated in accordance with section 245-75 of the ITAA 1997. Paragraph 245-75(2)(a) of the ITAA 1997 provides that if the value of the debt when it was forgiven is equal to or less than the amount offset (under section 245-65 of ITAA 1997), there is no gross forgiven amount.

Thus, there is a gross forgiveness amount for the purposes of section 245-35 of the ITAA 1997.

As such, of itself, the proposed assignment to be made by the Company will not result in a net forgiven amount of nil under section 245-85(1) of the ITAA 1997.

Question 8B

Forgiveness of the amount assigned to loan rights proposed to be held by the Trust proposed to be offset against the unpaid entitlement.

As stated previously, paragraph 245-75(2)(a) of the ITAA 1997 provides that if the value of the debt when it was forgiven is equal to or less than the amount offset (under section 245-65), there is no gross forgiven amount. The mere discharge of debt by way of offsetting mutual debts will not of itself necessarily result in a net forgiven amount.

The loan rights assigned to the Individual from the Company is for the loan amount the Company is owed by the Individual ($X). The loan rights have only offset in part the amount owing by the Company to the Trust ($X). The amount of the unpaid entitlement owning from the Trust to the Individual is estimated to be $X. Where the assignment of the loan rights results in a net forgiven amount, the subsequent offset of the unpaid entitlement is equal to the value of the debt when it was forgiven and as such the net forgiven amount is nil.

As such, the proposed offset of the assigned loan rights held by the Trust against the unpaid entitlement owning from the Trust to the Individual will result in a net forgiven amount of nil under section 245-85(1) of the ITAA 1997.

Question 8C

Forgiveness of the existing loan owing by the Individual to the Trust in the amount of $X by way of an offset.

The discharge by offsetting the amount owed under mutual debts will not of itself necessarily result in a net forgiven amount. An offset is calculated under section 245-65 of the ITAA 1997 which outlines the calculation of an offset against the value of the debt when it is forgiven. Where the value of the debt when it is forgiven is equal to or less than the amount of offset, there is no gross forgiven amount.

Subsequently, a mere offset, of itself, will not result in a net forgiven amount under section 245-85(1) of the ITAA 1997.

Question 8D

Forgiveness of amount as a result of proposed offset from the sale of Portfolio B from the Trust to the Individual that creates a loan owing to the Trust by the Individual.

The discharge by offsetting the amount owed under mutual debts will not of itself necessarily result in a net forgiven amount. An offset is calculated under section 245-65 of the ITAA 1997 which outlines the calculation of an offset against the value of the debt when it is forgiven.

There is a gross forgiveness amount for the purposes of section 245-35 of the ITAA 1997 where:

•         a loan owing by the Individual to the Trust in the amount of $X currently exists,

•         the sale of Portfolio B from the Trust to the Individual creates a loan owing to the Trust by the Individual of an amount of $1,135,422,

•         there has not been a full discharge of the debt owing by the Individual to the Trust, and

•         where the Individual is released from the obligation to pay the remaining debt owing to the Trust by the Trust.

As such, of itself, the proposed offset from the sale of Portfolio B resulting in a debt from the Trust to the Individual against the debt currently owing by the Individual to the Trust will not result in a net forgiven amount of nil under section 245-85(1) of the ITAA 1997.

Question 9

Section 100A of the ITAA 1936 applies where the present entitlement of a beneficiary to a share or a part of a share of trust income has arisen out of, or by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement. Where it applies, the trustee rather than the presently entitled beneficiary is liable to tax on the share of the net income to which that trust income corresponds, at the top marginal rate of tax.

Subsection 100A(13) provides:

'agreement' means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.

In this case, the Individual is the presently entitled beneficiary. Even though the unpaid present entitlement to the Individual is satisfied by offsetting the amount against loans owing to the Trust by the Individual, there is no tax being avoided as the Individual is and will be the ultimate beneficiary.

Question 10

Should the Company be able to ascertain its final tax liability for the income year prior to the end of that income year, the early payment of company tax will give rise to a franking credit in accordance with item 2 of the table under subsection 205-15(1) of the ITAA 1997, arising on the day the payment is made when the liability is discharged.

For a franking credit to arise under item 2 of the table under subsection 205-15(1), the entity is to have "paid income tax" within the meaning given under subsection 205-20(3) of the ITAA 1997. Paragraph 205-20(3)(a) requires that the entity have a liability to pay the income tax. In consideration of the ATO Interpretative Decision ATO ID 2001/757 Income Tax Franking Accounts - early payment of company tax, the liability would have come into existence at the time that the final tax liability was ascertained, even though that liability was ascertained prior to the end of the income year.

In consideration of the ATO Interpretative Decision ATO ID 2001/757 Income Tax Franking

Accounts - early payment of company tax, the liquidator of a company is required, in accordance with section 260-45 of the Taxation Administration Act 1953, Schedule 1, to notify the Commissioner within 14 days of being appointed liquidator. The Commissioner is then required to notify the liquidator of the amount of tax due and payable by the company. It is at this point in time that the final tax liability of the company is ascertained, and the tax debt comes into existence which can be discharged against the early payment. The company will then become entitled to the franking credits under section 205-15 of the ITAA 1997, crediting the franking account of the Company on the day that the payment was made.

Question 11

By way of background, on the deceased's death, life interests were created in some of the the Company's shares. Subsequent to the life interest owner's death, the Individual could make a call to the trustees of Vera's estate to appoint these shares to herself, which she did.

CGT event E7 would prima facie apply where the shares in question are transferred to a beneficiary (the Individual) in satisfaction of the beneficiary's interest. However, section 128-10 of the ITAA 1997 provides that where you die and a CGT asset you own devolves to your legal personal representative or to a beneficiary, any gain or loss from a CGT event will be disregarded.

The Commissioner, at paragraph 79 of Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests provides that in the context of CGT events E5, E6, and E7 that an exception to those events will apply where an asset owned by the deceased when they die passes to a beneficiary in accordance with section 128-20.

As such, when the life interest owner died and the trustees of the deceased's estate subsequently pass the the Company shares in question to the Individual, there will be no CGT consequences for the estate and there will be no CGT consequences for the Individual on the crystallisation of her remainder interest as the CGT event is disregarded under section 128-10 of the ITAA 1997. She will obtain a deemed cost-base in the shares in question.

Question 12

Where a current shareholder acquired their shares from a deceased individual that acquired the shares prior to 20 September 1985, the cost base will be equal to the market value of each class of shares at the date the deceased passed away (refer to item 4 in the table in subsection 128-15(4)).

Question 13

Where the current shareholders received their shares from a deceased individual that acquired the

shares on or after 20 September 1985, the first element of the cost base of each class of shares will be equal to what was the cost base of the shares in the hands of the deceased (refer to item 1 in the table in subsection 128-15(4) of the ITAA 1997).

Question 14

CGT event K6 is an anti-avoidance measure designed to prevent the possible avoidance of CGT where the owners of interests in a company or trust, acquired prior to 20 September 1985, dispose of these interests, rather than actual property of the company or trust acquired after 20 September 1985.

Under subsection 104-230(1), CGT event K6 happens if you own shares in a company that were acquired before 20 September 1985 (pre-CGT shares), a CGT event happens in relation to the shares, there is no roll-over for the other CGT event and the requirement in subsection (2) is satisfied. The time of the CGT event K6 is when the other CGT event happens.

Subsection 104-230(2) requires that the market value of property of the company (that is not trading stock) that was acquired on or after 20 September 1985 (post-CGT property) be at least 75% of the net value of the company.

The various parcels of shares that were originally acquired before 20 September 1985 would be deemed to be Post-CGT Assets in the hands of the taxpayers that inherited the shares with a deemed cost base based on the market value of the shares at the respective dates of death. By virtue of the shares being Post-CGT Assets in the hands of the current shareholders, CGT event K6 cannot happen because for that event to apply, paragraph 104-230(1)(a) of the ITAA 1997 requires the shareholder to have acquired the shares prior to 20 September 1985.

CGT Event K6 did not happen on the death of each of the deceased and the life interest owner as there was a tax roll-over of the shares.

The term rollover is not limited to roll-overs that are listed in section 112-115 and section 112-150 and extends rollovers to any provision that has the effect of deferring, but not eliminating, the tax recognition of a capital gain and providing for a cost base transfer: Taxation Determination TD 2006/9 Income tax: capital gains tax: scrip for scrip roll-over: is the reference to a roll-over in paragraph 124-795(2)(a) of the Income Tax Assessment Act 1997 limited to a replacement asset roll-over listed in section 112-115 of the Income Tax Assessment Act 1997 or to a same asset roll-over listed in section 112-150 of the Income Tax Assessment Act 1997?

Para 12 of TD 2006/9 states that Division 128 of the ITAA 1997 provides a form of roll-over in respect of the assets owned by an individual when they die.

In this case Division 128 of the ITAA 1997 is a relevant form of roll-over that would be triggered on the deaths of the deceased and the life interest owner, therefore when they had passed away, CGT Event K6 had no application.

Question 15

Section 98(2A) of the ITAA 1936 states that if:

(a)        a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate:

(i)      is a non-resident at the end of the year of income; and

(ii)     is not, in respect of that share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate; and

(iii)    is not a beneficiary to whom section 97A applies in relation to the year of income; and

(iv)   is not a beneficiary to whom subsection 97(3) applies; and

(b)        the trustee of the trust estate is not assessed and is not liable to pay tax under subsection (1) or (2) in respect of any part of that share of the net income of the trust estate;

subsection (3) applies to the trustee in respect of:

(c)        so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(d)        so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

Section 98(3) provides that a trustee to whom this subsection applies in respect of an amount of net income is to be assessed and is liable to pay tax if the beneficiary is not a company.

Therefore, the trustee of the Trust will be liable to pay tax on any distributions to the Individual, while they are a non-resident.

Question 16

Tax assessed to a trustee in relation to a non-resident beneficiary is generally not a final tax. If the trustees of the Trust are assessed and liable for an amount under subsection 98(3) in respect of the Individual, then the Individual will be assessed under subsection 98A(1) and allowed a credit under subsection 98A(2) for tax paid by the trustees.

Question 17

Distributions of corpus will not be assessable in the hands of the trustees or the Individual as corpus is not net income of the trust and not assessable under Division 6 of the ITAA 1936.