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Edited version of private advice
Authorisation Number: 1051906515265
Date of advice: 7 October 2021
Ruling
Subject: Marriage breakdown - transfer of units in a trust to another trust
Question 1
Will the Commissioner seek to apply Subdivision E of the Income Tax Assessment Act 1936 (ITAA 1936), in particular section 109XA if:
• A proportion of the units in the Business A Unit Trust held by the Person A Family Trust were transferred to Person B in their individual capacity; and/or
• A proportion of the units in the Person C Unit Trust held by Person B Family Trust were transferred to Person B in their individual capacity.
Answer
No. Taking into account the facts below and the reason for the transfer the Commissioner would not apply section 109XA.
Question 2
If section 109XA does not have application to the proposed transfer of units, would the Commissioner seek to apply section 109T of the ITAA 1936.
Answer
No. Taking into account the facts below and the reason for the transfer the Commissioner would not apply section 109T.
Question 3
If a proportion of the ordinary shares held by Person A in Person A Pty Ltd were required to be transferred to the spouse under a Family Court order, would the Commissioner seek to apply Part IVA, in particular section 177 E of the ITAA 1936 given the position taken in the Audit of the group finalised some years ago?
Answer
No. Taking into account the facts below and the reason for the transfer the Commissioner would not apply section 177E.
This ruling applies for the following periods:
Financial year ended 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
The marriage of Person A and Person B has broken down and the parties have separated. The parties have not agreed on a final division of marital assets. Assets will be required to be transferred under Orders issued by the Family Court.
It is proposed a proportion of the following marital assets be transferred to the Person B under a Family Court order:
• Units in the Business A Unit Trust owned by the Person A Family Trust.
• Units in the Person C Unit Trust owned by the Person B Family Trust.
• Ordinary shares in Person A Pty Ltd.
It is proposed the finalisation of the division of marital assets and issue of Family Court orders will occur in the 20xx-xx financial year.
The business structures concerned are:
Business A Unit Trust
• Business A Unit Trust was established by deed over XX years ago.
• The trustee of the Business A Unit Trust is Trustee Z Pty Ltd.
• A1 units were issued on establishment of the trust at an issue price of $X per unit.
• Trustee Y Pty Ltd as trustee for the Person A Family Trust holds A2 units in the Business A Unit Trust.
• There have been no changes to the original unit holdings.
Person C Unit Trust
• The Person C Unit Trust was established by deed over XX years ago.
• The trustee of the Person C Unit Trust is Person C Holdings Pty Ltd.
• C1 units were issued on establishment of the trust at an issue price of $X per unit.
• Trustee Y Pty Ltd as trustee for the Person B Family Trust holds C2 units in the Person C Unit Trust.
• There have been no changes to the original unit holdings.
Person A Family Trust
• The Person A Family Trust was settled by way of deed over XX years ago.
• The trustee of the Person A Family Trust is Trustee Y Pty Ltd.
• Person A and Person B are joint Appointors of the Person A Family Trust.
• Person B is an A Class Beneficiary of Person A Family Trust.
• The vesting date of Person A Family Trust is over XX years in the future.
• Person A Family Trust owns A2 units in Business A Unit Trust.
• Person A Family Trust has an unpaid present entitlement owing to Business B Pty Ltd.
Person B Family Trust
• Person B Family Trust was settled by way of deed over XX years ago.
• The trustee of Person B Family Trust is Trustee Y Pty Ltd.
• The joint Appointors of the Person B Family Trust are Person A and Person B.
• Person B is an additional member of the Class of General Beneficiaries.
• The vesting date of Person B Family Trust is over XX years in the future.
• Person B Family Trust owns C2 units in the Person C Unit Trust.
• Person B Family Trust has an unpaid present entitlement owing to Business B Pty Ltd.
Business B Pty Ltd
• Business B Pty Ltd was incorporated over XX years ago.
• The ordinary shareholders were:
Person A - BB1 A Class Shares
Person D - BB1 B Class Shares; and
Person E - BB1 C Class Shares.
• The shares originally owned by Person E were passed to Person F on the death of Person E.
• The current shareholders of Business B Pty Ltd are:
|
Share Class |
Number Issued |
Shareholder |
|
A Class Ordinary |
BB1 |
Person A |
|
B Class Ordinary |
BB1 |
Person G |
|
C Class Ordinary |
BB1 |
Person F |
|
D Class Ordinary |
BB2 |
Person A Pty Ltd |
|
E Class Ordinary |
BB2 |
Business C Pty Ltd |
|
F Class Ordinary |
BB2 |
Person H Pty Ltd |
In the xxxx-xx financial year, a corporate restructure was undertaken as part of a family succession plan and D, E and F Class Ordinary shares were issued to the following entities ("the New Companies"):
Person A Pty Ltd
Business C Pty Ltd; and
Person H Pty.
• In the xxxx-xx financial year the entire retained profits of Business B Pty Ltd were distributed in equal proportions to the holders of the D, E and F Class Ordinary shares.
• Some years ago, the ATO considered the application of section 177E of the Income Tax Assessment Act 1936 (ITAA 1936) to the payment of the dividends from Business B Pty Ltd to the holders of the D, E and F Class Ordinary shares. The ATO found section 177E of the ITAA 1936 did not apply at the time the dividends were paid from Business B Pty Ltd, however it was noted the Commissioner would consider applying Part IVA if in the future, either;
The New Companies declare a dividend to a shareholder who is not the original shareholder of Business B Pty Ltd and that entity has a preferred tax profile in comparison to the original shareholder, or
Division 7A would have taken an amount to be a dividend paid by Business B Pty Ltd if it had had a distributable surplus.
Person A Pty Ltd
Person A Pty Ltd was incorporated about XX years ago.
The shareholders of Person A Pty Ltd are as follows:
|
Share Class |
Number Issued |
Shareholder |
|
DV - Ordinary |
PA1 |
Person A |
|
DV1 - Dividend (V) |
PA1 |
Person I |
|
DV2 - Dividend (V) |
PA1 |
Person J |
|
E - E Class Shares |
PA1 |
Person B |
|
F - F Class Shares |
PA1 |
Person K |
|
ORD - Ordinary Shares |
PA2 |
Person A |
Relevant legislative provisions
Income Tax Assessment Act 1936 section 109T
Income Tax Assessment Act 1936 section 109XA
Income Tax Assessment Act 1936 section 177E