Edited version of private advice

Authorisation Number: 1051951489870

Date of advice: 17 February 2022

Ruling

Subject: Unincorporated association transferring property or sale proceeds to members: capital gains, dividends, frankable distributions

Question 1

Will CGT Event A1 happen to the Association if it disposes of land to members?

Answer

Yes.

Question 2

Will any exemption, concession or other rule operate to reduce or disregard the amount of any capital gain on transferring land?

Answer

No.

Question 3

Will the value of any distributions from the Association (whether land or sale proceeds) be included in members' assessable income as dividends?

Answer

Yes.

Question 4

Will members have capital gains included in their assessable income if they receive distributions from the Association (whether land or sale proceeds)?

Answer

No.

Question 5

Will any distributions (whether land or sale proceeds) by the Association to its members be frankable distributions?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Association's formation and history

Sometime before 20 September 1985, real property was acquired on trust to provide accommodation for a newly formed community. In this edited version, we refer to it as the Association. The Association was a collection of like-minded family groups and individuals wishing to live in a co-operative and environmentally sustainable way.

Following professional advice, the Association was incorporated under the relevant state legislation.

Before the Association was incorporated, the land was held on trust, by certain trustees for natural person beneficiaries. The declaration of trust says:

..moneys to purchase the said land were advanced by the beneficiaries equally and we purchased the said land at the request of and upon trust for the beneficiaries in equal shares absolutely.

The trustee gifted the land to the Association sometime after 20 September 1985 but before 1991.

Under the gift deed, the natural person beneficiaries became the Association's members. Loan arrangements were put in place to recognise members' financial contributions. There was always a mathematical equivalence between the market value of the Association's net assets and the total value of the members' loans.

Since the gift, all natural person beneficiaries lived in residences on the land, as their main residence. The Association considers that from the gift until today, its members have had a right to occupy the land they lived on, under a licence. That licence was terminable on ceasing membership, which corresponds to ceasing to live on Association land. Members are understood to be all persons who have from time to time lived on the land, including subsequently acquired land. There have been more than 10 but less than 100 members throughout the Association's history. Some have left the community.

The Association's rules and membership

The Association's objects include maintaining, administering and beautifying the property owned by the association, providing amenities for the common use of members, and undertaking civic responsibilities.

The Association is a non-profit entity, established to achieve the common goals of its members. It isn't tax exempt under Division 50 of the ITAA 1997. It isn't a deductible gift recipient under Division 30 of the ITAA 1997.

The Association's Constitution and Rules has a prohibition against distributing its income and capital to members. One of the clauses says:

The income and capital of the Association shall be applied exclusively to the promotion of its objects and no portion shall be paid or distributed directly or indirectly to members or their associates except as bone fide remuneration of a member for services rendered or expenses incurred on behalf of the Association.

The Association's Constitution and Rules has rules about membership, management, meetings and winding up. We summarise some of these rules in Table 1.

Table 1: summary of selected clauses in the Association's Constitution and Rules

The Association has always strictly complied with its Rules of Association.

Members exercise independent judgment in making decisions and voting. While members are like-minded, they have disagreed on occasion.

Throughout the Association's history, all activities on the land have been private. The Association has not conducted business or commercial arrangements.

Loans from members to the Association

After the Association was incorporated, members gave unsecured non-interest bearing loans to the Association. Those loans were used by the Association to fund real property purchases, or improvements to existing real property.

Members who made loans to the Association entered written loan agreements with the Association on standard terms. The material terms of these loan agreements were:

•        No interest payable, except on default of repayment.

•        The repayment amount is adjusted by a revaluation factor. The revaluation factor is calculated as the sum of all member loans divided by the net market value of all the Association's real properties and other assets. This is recalculated at the start of each financial year.

The Association supported their application with a sample loan agreement. We've summarised some of the provisions in Table 2:

Table 2: summary of selected provisions in sample loan agreement

Members have equal voting and participation rights, and these rights aren't connected with their status as lenders. Voting and decision-making powers are exercised by members in their capacity as members. While generally all members are lenders, and vice versa, lenders do not have different or additional membership rights compared to non-lenders.

No non-members have entered these loan agreements with the Association. The Association once took out a borrowing from a financial institution to allow it to repay a loan from a member. Otherwise, the Association has had little or no external debt.

Roughly half of the former lenders have had their loans repaid. With one exception, the members were paid out on ceasing residency and membership. One former lender remains a member despite being paid out.

Most, and perhaps all, of the Association's members have made loans. Members made loans on admission as members. However, there was no compulsion about the amount a member lent. Not all lenders have lent the same amount. The Association has also sought loans from incumbent members on occasion. Examples are where the Association:

•        incurred expenditure on property maintenance or improvements, or

•        needed funds to pay out loans to members on exit.

The Association has not recorded loans and repayments through formal accounting records (such as recording them on a balance sheet). Rather, the Association has a standing record of loan amounts, adjusted each year according to the formula summarised in Table 2.

The Association's land

There are several titles of land. The first was acquired sometime before 20 September 1985. It was held on trust from acquisition until gifted to the Association. The other portions were acquired sometime after 20 September 1985, but more than 12 months before 30 June 2021.

Some titles have houses straddling two titles. Steps are being taken to retitle the land so that each house is on a separate title.

The land has otherwise been used to grow food for the community with the balance reverted to native vegetation, consistent with the Rules of Association, and members' concern for the environment.

The Association is considering winding up

There has been little change in living arrangements since the Association was formed. Some members have departed the Association, but more than 5 current members continue to live on the land. Some of those members are approaching old age. The Association is considering winding up. This may be effected by selling certain titles, or distributing sale proceeds, or distributing land to members, or a combination of those things. This would be effected so as to fully discharge all member loans. This is expected to involve loan repayment amounts exceeding the nominal value of the original loans, matching changes in the land's value.

Relevant legislative provisions

Section 4-1 of the Income Tax Assessment Act 1997

Section 4-10 of the Income Tax Assessment Act 1997

Section 4-15 of the Income Tax Assessment Act 1997

Section 102-5 of the Income Tax Assessment Act 1997

Section 102-20 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-135 of the Income Tax Assessment Act 1997

Section 108-5 of the Income Tax Assessment Act 1997

Section 110-25 of the Income Tax Assessment Act 1997

Section 115-10 of the Income Tax Assessment Act 1997

Section 115-25 of the Income Tax Assessment Act 1997

Subdivision 115-C of the Income Tax Assessment Act 1997

Section 116-20 of the Income Tax Assessment Act 1997

Section 116-30 of the Income Tax Assessment Act 1997

Section 118-12 of the Income Tax Assessment Act 1997

Section 118-20 of the Income Tax Assessment Act 1997

Section 118-110 of the Income Tax Assessment Act 1997

Section 152-125 of the Income Tax Assessment Act 1997

Section 202-5 of the Income Tax Assessment Act 1997

Section 202-15 of the Income Tax Assessment Act 1997

Section 202-40 of the Income Tax Assessment Act 1997

Section 202-45 of the Income Tax Assessment Act 1997

Section 220-105 of the Income Tax Assessment Act 1997

Section 960-100 of the Income Tax Assessment Act 1997

Section 960-120 of the Income Tax Assessment Act 1997

Section 974-15 of the Income Tax Assessment Act 1997

Section 974-20 of the Income Tax Assessment Act 1997

Section 974-30 of the Income Tax Assessment Act 1997

Section 974-35 of the Income Tax Assessment Act 1997

Section 974-40 of the Income Tax Assessment Act 1997

Section 974-50 of the Income Tax Assessment Act 1997

Section 974-70 of the Income Tax Assessment Act 1997

Section 974-75 of the Income Tax Assessment Act 1997

Section 974-85 of the Income Tax Assessment Act 1997

Section 974-115 of the Income Tax Assessment Act 1997

Section 974-120 of the Income Tax Assessment Act 1997

Section 974-135 of the Income Tax Assessment Act 1997

Section 974-145 of the Income Tax Assessment Act 1997

Section 974-160 of the Income Tax Assessment Act 1997

Section 975-300 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Section 6 of the Income Tax Assessment Act 1936

Section 44 of the Income Tax Assessment Act 1936

Section 45 of the Income Tax Assessment Act 1936

Section 45A of the Income Tax Assessment Act 1936

Section 45B of the Income Tax Assessment Act 1936

Section 45C of the Income Tax Assessment Act 1936

Section 47 of the Income Tax Assessment Act 1936

Section 103A of the Income Tax Assessment Act 1936

Section 109 of the Income Tax Assessment Act 1936

Section 109C of the Income Tax Assessment Act 1936

Section 109J of the Income Tax Assessment Act 1936

Section 109L of the Income Tax Assessment Act 1936

Section 109M of the Income Tax Assessment Act 1936

Section 109NA of the Income Tax Assessment Act 1936

Section 109Y of the Income Tax Assessment Act 1936

Section 117 of the Income Tax Assessment Act 1936

Section 159GZZZK of the Income Tax Assessment Act 1936

Section 159GZZZP of the Income Tax Assessment Act 1936

Section 318 of the Income Tax Assessment Act 1936

Former section 160ZZNA of the Income Tax Assessment Act 1936

Former section 160V of the Income Tax Assessment Act 1936

Section 58 of the Taxation Laws Amendment Act 1991

Reasons for decision

Question 1 - Will CGT Event A1 happen to the Association if it transfers land to members or third parties?

Summary

Yes. CGT Event A1 will happen to the Association if it disposes of land to members or third parties. The Association is a separate legal entity to its members, and is capable of recording capital gains. It will dispose of land if it transfers them to other entities. The mutuality principle doesn't apply to prevent CGT Event A1 happening to the Association.

Detailed reasoning

The Association is an entity for tax purposes, with potential tax obligations

Entities, including companies, pay income tax:

•        section 4-1 says that income tax is payable by each individual and company

•        section 4-10 says that you must pay income tax for each financial year

•        subsection 4-10(3) includes a formula for determining your income tax for an income year

•        section 4-5 says 'you' applies to entities generally

•        'entity' includes a body corporate: paragraph 960-100(1)(b)

•        'body corporate' is not defined in tax legislation, so its meaning is affected by its ordinary usage and context

•        the Macquarie Dictionary says 'body corporate' is a law term, meaning a person, association or group of persons legally incorporated in a corporation[1]

•        entities are exempt from income tax if they are eligible for exempt entity status under Division 50 of the ITAA 1997.

The Association is an entity with potential tax obligations. It's an association of people incorporated under the relevant state legislation. It meets the ordinary meaning of body corporate. Therefore, it's an entity for tax purposes. The Association is not an exempt entity under Division 50 of the ITAA 1997. The Association will have income tax obligations when it has an amount of income tax worked out under section 4-10.

CGT Event A1 will happen when the Association transfers land to members or other entities

Capital gains from disposing property are relevant to determining an entity's income tax:

•        your income tax is equal to your taxable income, multiplied by a rate, reduced by tax offsets: subsection 4-10(3)[2]

•        your taxable income is worked out as your assessable income less deductions: subsection 4-15(1)

•        net capital gains (worked out as capital gains less capital losses for an income year) are included in your assessable income: section 102-5

•        you may make capital gains or capital losses when a CGT event happens: section 102-20.

Transferring real property will usually trigger a CGT event.

•        CGT Event A1 happens if you dispose of a CGT asset: subsection 104-10(1).

•        CGT assets include any kind of property, and a legal or equitable right which isn't property: subsection 108-5(1). Note 1 says examples of CGT assets include land, shares in a company, and debts owed to you.

•        CGT Event A1 happens either when you enter a contract, or when the change of ownership occurs: subsection 104-10(3).

•        you dispose of a CGT asset if a change of ownership occurs, but not where there's a change of legal ownership without a change of beneficial ownership: subsection 104-10(2).

CGT Event A1 will happen to the Association if it sells land to third parties, or transfers land to its members. Land is a CGT asset because it is property. It received the beneficial interest in the land in June 1986 as a gift, so it wasn't holding as trustee for another entity. It will dispose of the land by transferring it to another entity, unless the recipient took it as trustee for the Association. We don't think that the Association was a trustee, for reasons we explain in Annexure 1 at paragraphs 85 to 87.

The Association has suggested that the mutuality principle will operate to ensure that dealings between it and its members will have no tax consequences.

In our view, the mutuality principle won't operate in this way for two reasons.

•        First, the mutuality principle doesn't apply to statutory income. It simply explains that some dealings between an association and its members don't have the character of ordinary income. It doesn't operate to exempt transactions otherwise caught by a specific taxing provision.

•        Second, the mutuality principle doesn't apply to the extent the Association, or its members, make a genuine gain. Either the Association, or its members, will make a genuine gain to the extent that the property's value on disposal exceeded its acquisition value.

See Annexure 1 at paragraphs 69 to 79 for our full reasoning on the mutuality principle.

Question 2 - Will any exemption, concession or other rule operate to reduce or disregard the amount of any capital gain the Association may have on transferring land?

Summary

No. The Association is unable to claim exemptions or concessions to reduce or disregard any capital gain. However, it may be able to index part of its cost base.

Detailed reasoning

Will the Association have a capital gain?

Broadly, capital gains happen where the proceeds from disposing of a CGT asset exceed its cost.

•        Capital gains from CGT Event A1 are worked out as the capital proceeds from disposal less the assets cost base: subsection 104-10(4).[3]

•        Capital proceeds include the money (or market value of property) you have received, or are entitled to receive, in respect of the event happening: subsection 116-20(1).

•        The general capital proceeds rules are sometimes modified. For example, the capital proceeds are replaced with the CGT asset's market value if section 116-30 applies. Broadly, this provision applies if you received:

­   no capital proceeds

­   capital proceeds which can't be valued

­   capital proceeds which differed from market value, under a non-arm's length dealing.

•        Cost base includes 5 elements. The first is the money paid to acquire the CGT asset: subsection 110-25(2). Some incidental costs, capital expenditure and ownership costs may also be included under other elements.

•        Broadly, the cost base of a CGT asset can be indexed if you acquired it before 21 September 1999. Extra conditions apply: see generally Division 114 of the ITAA 1997 and subdivision 960-M of the ITAA 1997. For example:

­   the expenditure must have been incurred before 21 September 1999

­   you can't index the third element (ownership costs)

­   you can only apply indexing up until 30 September 1999.

The Association will likely have a capital gain from transferring land. If the land is sold to third parties, the capital proceeds will include the proceeds of sale. If the land is transferred to members for no consideration, the proceeds will be the land's market value. The cost base would include amounts paid to acquire the property. The cost base could include amounts paid for the property. Indexing could be available up until 30 September 1999 for costs incurred before that date. The Association will have a capital gain to the extent the proceeds exceed the cost base.

Do any exemptions or concessions apply?

While the CGT regime includes exemptions, concessions, and other special treatments to reduce or disregard capital gains, none are available to the Association. We summarise in Table 3.

Table 3: exemptions, concessions and other treatments

Question 3 - Will the value of any distributions from the Association (whether land or sale proceeds) be included in members' assessable income as dividends?

Summary

Yes. The value of distributions from the Association will be included in members' assessable income as dividends to the extent that they exceed the nominal value of members' loan contributions. The distribution will be treated as a return of capital up to that nominal value.

Detailed reasoning

General principles about dividend taxation

Distributions from companies to their members may be included in their assessable income.

•        For tax purposes, the term 'company' includes body corporates and unincorporated associations: see section 995-1.

•        Broadly, section 44 includes dividends (from companies to shareholders) in the shareholder's assessable income.

•        Section 47 treats distributions to shareholders in the course of winding up a company as dividends for tax purposes.

•        Shareholder includes a member or stockholder: subsection 6(1).

•        It's also possible that payments from companies could be assessed on other bases if they fell outside these sections.[5]

For tax purposes, the Association is a company, and its members are shareholders. As discussed at paragraph 28, it's a body corporate because it's an association of members incorporated under the relevant state legislation. The definition of company includes bodies corporate. Similarly, the Association's members are shareholders under the definition in subsection 6(1). It's irrelevant that the relevant entities mightn't use the terms 'company' and 'shareholders' in their own dealings: they meet the relevant definitions.

Broadly, sections 44 and 47 assess shareholders on payments from companies, unless they are returns of share capital.

•        Dividends paid by a company out of profits are included in the shareholder's assessable income: subsection 44(1).

•        Subsection 6(1) says 'dividend' includes any distribution by a company to shareholders, whether in money or property, and amounts credited to shareholders:

dividend includes:

(a) any distribution made by a company to any of its shareholders, whether in money or other property; and

(b) any amount credited by a company to any of its shareholders as shareholders; ...

•        The requirement that amounts credited to shareholders in their capacity as shareholders in paragraph (b) doesn't seem to extend to distributions under paragraph (a).

•        However, the definition excludes repayments to shareholders out of the share capital account: see paragraph (d) of the same definition:

(but does not include):

(d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; ...

•        Section 975-300 says 'share capital account' means any account a company keeps of its share capital, including any account where the first amount credited was for share capital. However, an account won't be a share capital account if it is tainted.[6]

•        Dividends paid of an amount other than profits are taken to be paid out of profits: subsection 44(1A). Repayments of paid-up capital which fit within the definition of a dividend are also deemed to be paid out of profits: subsection 44(1B).

•        Distributions to shareholders on winding up are deemed to be dividends paid out of profits, to the extent they represent income derived by the company: subsection 47(1). However, similar to section 44, this rule doesn't extend to a return of paid-up share capital.

•        Subsection 47(1A) says income derived by the company includes net capital gains.

There is an authority suggesting a payment to a shareholder can be a dividend even if it forms part of a broader arrangement. In the Federal Court decision of Bill Acceptance Corporation Limited[7], a company made a payment to a shareholder under a complex series of loan and guarantee agreements. Justice Lindgren found that the payment had the character of a dividend notwithstanding this context:

While it is true that the declaration and payment of the amount of $24,808,553.00 occurred within and as part of a broader arrangement found in the Facility Agreement, the Mortgage of Shares, the Guarantee, the facility letter, the Deed of Postponement, the Deed of Release and Article 67A, and that that arrangement explains the broader commercial significance of the payment, it does not, in my view, deprive the payment of the character of a dividend.

Distributions can include property. The ATO view in TR 2003/8[8] is that the amount of a dividend made out of property will be the money value of the property, reduced, by any amount debited to the share capital account [paragraph 4]. Other points made in TR 2003/8 include:

•        a dividend is paid out profits if the market value of the company's assets exceeds its liabilities and share capital [paragraph 8]

•        a dividend which is a repayment of paid-up share capital is also taken to be paid out of profits[9] [paragraph 8]

•        profits are determined by comparing business assets between two dates [paragraph 12]

•        if a distributed asset's value has appreciated since the company acquired it, the appreciation is a profit [paragraph 18]

•        how the company chooses to record the transaction in its books of account is not decisive [paragraphs 12 to 18].

Applying these principles to the Association: returns to members will be taxed as dividends to the extent they exceed the nominal loan amount

If the Association distributes money or property to its members, members will be assessed to the extent their receipt exceeds their contributions. The amounts will be taxed as dividends, either under section 44 or section 47, depending on whether the payment is made on winding up.

•        Distributions to members will be deemed dividends to the extent they aren't a return of share capital.

•        Dividends, from any source, will be deemed paid out of profits.

•        We think that the nominal value of each members' loan to the Association is a contribution of share capital.

•        The nominal value of all members' loans is the Association's share capital account. While the Association don't treat it this way in its accounts, this isn't decisive. Members have loaned funds so the Association can buy property for communal use. They get a return based on the Association's net assets. In substance, we think they have made a capital contribution.

•        Distributions to members won't be dividends to the extent they simply return the nominal value of loans: to that extent, they are sourced from share capital.

•        While the loan value is effectively indexed under the loan agreements, we don't think this can affect the Association's share capital. The loan agreements say each member is entitled to a Repayment Amount on request, death, or winding up. The Repayment Amount is calculated as the loan balance (initial contribution plus extra contributions less repayments) multiplied by a revaluation factor to reflect the land's changing market value. If the Association's assets have increased in value, standard accounting practice would record that increase in an asset revaluation reserve account.[10] Share capital can't increase without further member contributions.

•        Therefore, shareholders wouldn't be assessed on the nominal value of the members contributions once they receive a repayment.

•        The excess will be assessed as a dividend.

We don't think it's relevant that the payment or transfer might be described as a loan repayment.

•        A payment of money or property to members would be caught by paragraph (a) of the dividend definition in subsection 6(1). It needn't be formally described as a dividend.

•        We have considered whether the payments could be characterised as loan repayments, rather than distributions to shareholders. Arguably, the payment could be characterised as being made under a separate loan agreement, irrelevant to their membership. In that case, it might have nothing to do with their shareholding capacity. It might follow that the loan repayment can't be a dividend.

•        We disagree with this suggestion for two reasons. First, lenders, under the terms of the agreements, are entitled to share in the Association's net assets. That means they have an interest in the Association's capital. We think this entitlement (aside from their membership) gives the loan interest a share character: we explain this again in Annexure 2 at paragraph 104. Therefore, the loan repayment directly relates to that shareholding interest. Second, following Lindgren J's comments in Bill Acceptance Corporation Limited, we don't think it would matter if the direct trigger for the dividend was a separate obligation or agreement.

We don't think that the mutuality principle will operate to prevent distributions to shareholders being assessed as dividends for reasons discussed at paragraph 33 and Annexure 1, at paragraphs 69 to 79.

Question 4 - Will members have capital gains included in their assessable income if they receive distributions from the Association (whether land or sale proceeds)?

Summary

No. Members are likely to have a CGT Event happen to them if they receive distributions from the Association. However, section 118-20 will ensure that amounts already assessed as dividends won't be assessed again. The return of capital component will be included in cost base calculations, which will ensure no net capital gain is included in members' assessable income.

Detailed reasoning

What CGT Events might be relevant?

CGT Events relevant to company membership include A1 (disposal), C2 (intangible asset cancelled), or G1 (capital payment for shares). Broadly:

•        CGT Event A1 happens when a change of ownership occurs: section 104-10. This would happen if a member transferred their shares to another entity.

•        CGT Event C2 happens when an intangible asset ends, for example, by being cancelled or discharged: see subsection 104-25(1).

•        'Intangible asset' isn't defined in taxation provisions, so the phrase's meaning will be affected by its ordinary usage and context. The Macquarie Dictionary[11] says that an intangible asset is:

noun an asset, such as a patent, copyright, brand name, etc., which has no physical properties but which can be identified, given a monetary value, and therefore recorded on a balance sheet.

This would cover legal or equitable rights - like debts, intellectual property rights, licenses and similar.

•        CGT Event G1 happens if a company makes a non-assessable payment in respect of a share: section 104-135.

Conceivably, CGT Event A1 could happen if some of the Association's members transfer their loan or membership interest to other entities on exiting. This would be a private transaction between members, or potential new entrants.[12] However, CGT Event A1 would not be relevant if the Association terminated the membership interest by paying the Repayment Amount.

CGT Event C2 would happen if the Association pays a Repayment Amount to a lender.[13] Lenders are entitled to receive a repayment amount under the loan agreements. This debt owed to them is a CGT asset: see section 108-5. A debt is an intangible asset. If the Association made a payment to lenders which discharged the obligation to pay the Repayment Amount, the debt would be discharged or satisfied.[14]

CGT Event G1 would happen if the Association makes payments or transfers to members without their membership ending. This might happen if the Association didn't treat those payments as being made under the loan agreements, and the lenders remained members. See Table 4 for details.

Table 4: Applying CGT event G1 conditions to the Association

Determining the capital gain if CGT Event C2 happens

If CGT Event C2 happens, members will likely have a capital gain. A capital gain will happen if the capital proceeds are more than the asset's cost base. The capital proceeds and cost base are determined under the general rules referenced at paragraph 35:

•        members' proceeds would include their distribution of money or property

•        their cost base would include the nominal value of the loan

•        they may be able to index their cost base up until 30 September 1999.

Members would have a capital gain if the value of the property transferred (or their share of the proceeds on sale) exceeds their loan contribution.

However, an anti-overlap rule will reduce the gain to the extent it has already been taxed:

•        subsection 118-20(1) reduces a capital gain if it was already included in your assessable income

•        the gain is reduced to zero if it doesn't exceed the amount included: paragraph 118-20(2)(a).

Here, the Association's members will have any capital gain reduced to nil. Their gain would be the amount by which the proceeds or property exceeds their nominal loan. However, this excess will already have been taxed as a dividend under either section 44 or 47. Subsections 118-20(1) and (2) will apply.

Determining the capital gain if CGT Event G1 happens

To determine the consequences of CGT Event G1, you need to compare the non-assessable part to the cost base.

•        There will be a capital gain if the non-assessable part is more than the share's cost base.

•        If a capital gain happens, the cost base (or reduced cost base) is reduced to nil: see subsection 104-135(3).

•        The non-assessable part has some exclusions. Subsections 104-135(1A) and 104-135(1B) exclude amounts which are non-assessable non-exempt, repaid, compensation, payments under the CGT small business concession, or deductible.

•        The cost base is determined under the general rules referenced at paragraph 35.

While CGT Event G1 would happen if the Association distributes money or property to members without ending their shares, there will be no capital gain:

•        The non-assessable part will be the amount which hasn't already been assessed to members as a dividend. None of the exclusions are relevant here.

•        That amount will be the return of capital component, equal to the nominal value of the loan.

•        The nominal value of each members' loan would also be their cost base.

•        Since the non-assessable part is equal to the cost base, members won't have a capital gain if CGT Event G1 happens.

Members won't have a capital gain included in their assessable income. If CGT Event C2 happens, section 118-20 will apply to avoid double taxation. If CGT Event G1 happens, there would be no capital gain because the non-assessable part will be equal to cost base.

Question 5 - Will any distributions (whether land or sale proceeds) by the Association to its members be frankable distributions?

Summary

Yes. The Association will be able to frank distributions to members to the extent that they exceed the nominal value of the members' loan contributions. The Association will be a franking entity, and the distributions won't be unfrankable.

Detailed reasoning

When can an entity frank a distribution?

Section 202-5 says that an entity can frank a distribution if it:

•        is a franking entity

•        meets the residency requirement

•        makes a frankable distribution, and

•        allocates a franking credit to that distribution.

Section 202-15 says an entity will be a franking entity if it:

•        is a corporate tax entity

•        isn't a life insurance company which is also a mutual insurance company

•        isn't acting in a trustee capacity.

A company will meet the residency requirement if it's an Australian resident.

•        Section 202-20 says a company satisfies the residency requirement if it's an Australian resident at that time.

•        A company is an Australian resident if it's incorporated in Australia: see paragraph (b) of the 'resident' definitionin subsection 6(1).

Corporate tax entity includes companies: see section 960-115. As discussed at paragraph 28, companies include body corporates.

The Association is a franking entity. It's a body corporate, which makes it a company, and a corporate tax entity. It's an Australian resident because it was incorporated in Australia. It can frank, if it attaches franking credits to frankable distributions.

Section 960-120 says a distribution, by a company, is a dividend, or something taken to be a dividend: see Item 1 in subsection 960-120(1).

Distributions are frankable if they aren't unfrankable: section 202-40. Section 202-45 lists types of unfrankable distributions. We summarise and apply the categories of unfrankable distributions to the Association in Table 5.

Table 5: Applying unfrankable distribution categories to the Association

Conclusion: distributions to the Association's members will be frankable

Distributions to the Association's members will be frankable distributions. They won't be unfrankable because none of the exceptions apply.

Annexure 1 - client's submissions and our responses

The client has made alternative submissions, any of which might support a more favourable tax outcome to the Association's members. We list them below, and address them in turn in this Annexure.

•        Mutuality. The mutuality principle will apply so that transactions between the Association and its members are disregarded for tax purposes. We address this submission at paragraphs 69 to 79.

•        Treat the Association as a look through entity. The CGT rules should be applied in a look through manner, so that the Association's members can claim CGT exemptions like the main residence exemption. We address this submission at paragraphs 80 to 88.

•        Exempt or NANE income producing asset exemption. The Association could disregard the capital gain by relying on the exemption for CGT assets used to produce exempt or NANE income. We address this submission at paragraphs 89 to 90.

•        Partnership to company rollover. The Association may be able to apply the partnership to company rollover in former section 160ZZNA of the ITAA 1936. We address this submission at paragraphs 91 to 93.

Mutuality won't apply to shield capital transactions or genuine gains from tax consequences

The Association's submission on mutuality: the mutuality principle will apply so that transactions between the Association and its members are disregarded for tax purposes.

The Association submit that sharing land or proceeds of sale with members shouldn't give rise to any taxing event.[15] They rely on the so-called mutuality principle, citing Bohemians Club.[16] Broadly, this applies where people contribute to a common fund created and controlled by members for a common purpose. Under that principle, any surplus arising from the use of the common fund isn't income, either to members or the fund.[17]

We disagree: we don't think the mutuality principle will apply to disregard the tax consequences that would flow from transferring land or proceed of sale for two reasons:

•        First, the mutuality principle doesn't apply to statutory income. It simply explains that some dealings between an association and its members don't have the character of ordinary income. It doesn't operate to exempt transactions otherwise caught by a specific taxing provision.

•        Second, the mutuality principle doesn't apply to the extent the Association, or its members, make a genuine gain. Either the Association, or its members, will make a genuine gain to the extent that the property's value on disposal exceeds its acquisition value.

Our summary of the mutuality principle: member contributions to an association aren't ordinary income, because they are capital and don't create a genuine gain

Broadly, under the mutuality principle, membership contributions aren't income for an association.[18] The High Court of Australia decision in Bohemians Club[19] serves to illustrate. The association was assessed on the surplus remaining after receiving excess membership contributions. The Court held the surplus wasn't income. Griffith CJ's judgment reasoned that the funds were advances of capital, like contributions of share capital:

....the nature of a club, which is a voluntary association of persons who agree to maintain for their common personal benefit, and not for profit, an establishment the expenses of which are to be defrayed by equal contributions of an amount estimated to be sufficient to defray those expenses...

The contributions are, in substance, advances of capital for a common purpose,which are expected to be exhausted during the year for which they are paid. They are not income of the collective body of members any more than the calls paid by members of a company upon their shares are income of the company. If anything is left unexpended it is not income or profits, but savings, which the members may claim to have returned to them. The notion that such savings are taxable income is quite novel, and quite inadmissible.[20]

Similarly, the mutuality principle means surplus association funds won't be income in members' hands when returned to them.[21] Barwick CJ's judgment in Sydney Water Board[22] made this point explicitly:

The description ''mutuality principle'' is used, unfortunately as I think, to express the reason for the conclusion that the return to a taxpayer of a share of the surplus of a fund to which he has contributed in common with others after its use for a purpose agreed between them is not income. There is, in my opinion, no independent principle involved in reaching such a result and the description of mutuality is apt to be misleading... What distinguishes the amount refunded in such circumstances from profit or income is that the payment is made out of moneys which are in substance the moneys of the contributors.... If the amount then paid exceeded the requirement of the fund, refunds were made to policy holders. Such refunds were thus no more than a return of the contributors' own money.

These passages suggest the mutuality principle is a shorthand explanation for why some internal association transactions don't have the character of ordinary income. Membership contributions are unlikely to be income under ordinary concepts for at least two reasons. First, membership contributions are capital not income.[23] Second, you can't make income (or a gain, or profits) from yourself.[24] Griffith CJ made this second point later in his judgment in Bohemians Club:

A man is not the source of his own income, though in another sense his exertions may be so described. A man's income consists of moneys derived from sources outside of himself. Contributions made by a person for expenditure in his business or otherwise for his own benefit cannot be regarded as his income, unless the Legislature expressly so declares. This Act does not contain any such declaration either express or implied.[25]

It follows from these points that mutuality doesn't extend to prevent transactions being taxed which do have the character of income. Broadly, it doesn't operate where an association:

•        derives income from investments, or from a business activity carried on by its members,[26] or

•        sells items at a profit (ie, greater than cost).[27]

The mutuality principle doesn't stop amounts being assessed as statutory income

The mutuality principle applies to the Association, to a limited extent:

•        The Association is an incorporated association, which received contributions from its members. It used those funds for common purposes: purchasing land for communal use.

•        Under ordinary concepts, contributions wouldn't be income to the Association.

•        If the Association had excess funds remaining after the contributions had been expended, and decided to return them to members, the repayments wouldn't be income to the members.

However, the mutuality principle doesn't stop taxing events happening under statutory income provisions. It merely recognises that within an association of members, contributions, and returns of excess contributions, aren't income under ordinary concepts. As Griffith CJ suggested in Bohemians Club, amounts otherwise covered by mutuality might be assessable if Parliament provides otherwise. We don't think the mutuality principle operates to prevent statutory income provisions applying to an association or its members. They wouldn't stop the dividend provisions or the CGT regime operating normally.

The mutuality principle doesn't apply if there is a genuine gain

But even if mutuality could shield amounts from being assessed as statutory income, it wouldn't apply to the extent the Association makes a gain. The premise behind the mutuality principle is that you can't make a gain from yourself. An association is simply a collection of members. If it pools funds for a common purpose, and returns the unused excess, neither the association, nor its members, have made a genuine profit or gain. But here, the Association has converted its pooled fund by purchasing property: it has made an investment. If that investment appreciates in value, it will make a gain (or a profit) on disposal. If property, or the proceeds of sale, are transferred to members, they would have made a gain from that investment. Arguably the mutuality principle would prevent members from being assessed on the return of their nominal capital contribution. But mutuality wouldn't apply to the excess, which represents a gain.

Following from that conclusion, we don't think the mutuality principle could allow the capital contribution to be indexed. We can see an argument that when a property increases in value, at least part of that increase just reflects inflation, and isn't a genuine gain. However, a capital contribution would be recorded in nominal terms under generally accepted accounting standards. While an asset might be revalued, the gain would normally be recorded against an asset revaluation reserve rather than share capital. We don't think that mutuality could justify any departure from that practice.

Conclusion: the mutuality principle doesn't apply

We conclude the mutuality principle can't apply to prevent tax consequences arising from the Association transferring property or sale proceeds to members for two reasons. First, the principle doesn't prevent amounts being assessed as statutory income. Second, it doesn't operate where members will make a genuine gain. Here, any amounts will be assessed as statutory income, and the Association and its members will make gains to the extent asset values exceed their contributions.

Look through CGT treatment isn't available to the Association

The Association's submission on look through CGT treatment: the CGT rules should be applied in a look through manner, so that the Association's members can claim the main residence exemption.

The Association have suggested that if it's treated as a look through entity, its members could be eligible for the main residence exemption.[28] The Association concede that the exemption in section 118-110 is only available for the disposal of an individual's main residence, or an ownership interest in it. However, they suggest the Commissioner could accept the Association is a look through type of entity. This would allow capital gains to be attributed to members, like capital gains flow through partnerships.

Tax provisions allow for at least two look through treatments for capital gains:

•        Partnerships: capital gains and losses from partnerships or partnership CGT assets are made by the partners individually on their interest in it: see section 106-5.

•        Trusts: capital gains made by trusts can be streamed to beneficiaries under subdivision 115-C of the ITAA 1997, where they are made specifically entitled. Where capital gains are not streamed, they may be included in the trust's net income. Beneficiaries or trustees could then be liable under general trust taxation rules in Division 6 of the ITAA 1936.

We haven't identified any other provisions that could allow the Association to be treated as a look through entity.

Is the Association a partnership?

'Partnership' is defined to include an association of persons, carrying on business as partners, or in receipt of ordinary income or statutory income jointly: section 995-1.

Neither the Association, nor its members, is a partnership. While they are an association of persons, it isn't (and its members aren't) carrying on business. It isn't (and its members aren't) receiving any form of income. Its members don't meet the tax definition of a partnership.

Is the Association a trust?

Trusts are a legal relationship between a trustee, and a beneficiary, in respect of certain property. The essential elements of that relationship are that a trustee holds legal title to property, under a personal (equitable or fiduciary) obligation to deal with that property, for the beneficiary's benefit.[29] In Harmer v Commissioner of Taxation[30] French J said that the essential elements of a trust could be distilled into four:

•        a trustee must hold a legal or equitable interest in trust property

•        the trust property must be capable of being held on trust

•        there must be one or more beneficiaries other than the trustee

•        the trustee must have a personal obligation to deal with the trust property for the benefit of beneficiaries, and this obligation must be annexed to the property.[31]

Trusts can be created in three ways:

•        by express declaration (for example, through a deed of trust, or verbal declaration)

•        by implied or presumed intention (sometimes known as a resulting trust)

•        by operation of law (sometimes known as a constructive trust).[32]

Broadly:

•        state and territory laws usually require express trusts of real property to be documented in writing[33]

•        resulting trusts are recognised where the circumstances (imperfectly expressed words or conduct) suggest the settlor (or transferor) intended to create a trust[34]

•        constructive trusts are imposed regardless of actual or presumed intention, where it would be unconscionable for the owner to rely on their legal title.[35]

The Association doesn't appear to be a trust.

•        Admittedly, the land now held by the Association was formally held by trustees, on trust for individuals who later became the Association's members.

•        However, the trust gifted the land to the Association. The deed documenting that gift said it assigned all the equitable or beneficial estate and interest in the land to the Association, and that the Association hold it absolutely. There is nothing in the gift deed to suggest that The Association would hold land as trustee for the members. Further, the facts don't suggest the Association later made any declaration of trust.

•        While trusts can sometimes be created without an express declaration, we don't see any circumstances which would create a resulting or constructive trust here. The trustee made a deed expressly making an absolute gift of trust property to the Association. While the Association's purpose is to allow members to live on the land as a community, this just reflects that it's an incorporated association. We don't think this is enough to imply a resulting trust, or make it unconscionable for the Association to rely on its legal title.

Conclusion: the Association can't be treated as a look through entity

We don't think it's possible to treat the Association as a look through entity for capital gains tax purposes. It doesn't appear to be a partnership or a trust. We haven't identified any other look through rules which could apply to attribute a capital gain to the Association's members.

The Association's submission on the exempt or NANE income producing asset exemption

The Association have suggested that the CGT exemption for CGT assets used to produce exempt or non-assessable non-exempt income could allow for relief.[36] Subsection 118-12(1) says:

A *capital gain or *capital loss you make from a *CGT asset that you used solely to produce your *exempt income or *non-assessable non-exempt income is disregarded.

Subsection 118-12(2) says the exemption doesn't apply to assets used to produce income which is made non-assessable non-exempt under a list of specified provisions.

The exemption in section 118-12 isn't relevant because the Association haven't produced any income. The Association's real property wasn't used solely to produce exempt or non-assessable non-exempt income. The exemption can't operate to disregard a capital gain or capital loss on transferring the real property.

The Association's submission on the partnership to company rollover

The Association have suggested that the rollover in former section 160ZZNA could allow for relief.[37] The Association suggest this might apply when the original land was transferred by the trustees under the Deed of Gift to the Association. The beneficiaries may have been able to establish absolute entitlement under former section 160V. They suggest two consequences flow from this. First, the trust's assets should be treated as having been held by the members directly, rather than the trust. Second, the members should be treated as being a partnership. As a partnership, they could have transferred the asset to a company, and claimed the rollover in section 160ZZNA. That may have preserved the pre-CGT status for land transferred sometime after 1985.

Broadly, former section 160ZZNA of the ITAA 1936 was a rollover provision for transferring partnership assets to a wholly owned company.

Section 160ZZNA of the ITAA 1936 was introduced in 1991, and it didn't have retrospective effect.

•        It was introduced by section 58 of Part 3 of the Taxation Laws Amendment Act 1991 (No. 48 of 1991).

•        The Act commenced on Royal Assent, which was 24 April 1991.

•        While some provisions commenced on earlier dates, they aren't relevant to section 58 of Part 3.

Subsection 160ZZNA(2) listed requirements for the rollover. One requirement was that partners in a partnership disposed of their interest/s in a partnership asset to a company: paragraph (a). Before the ITAA 1997, 'partnership' was defined in subsection 6(1) in similar terms to the present section 995-1:

"partnership" means an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company;

Broadly, former section 160V deemed trust assets to be held by absolutely entitled beneficiaries. Subsection 160V(1) said where a beneficiary was absolutely entitled to the asset as against the trustee, the CGT regime applied as if it was held by the beneficiary, not the trustee.

TR 2004/D25[38] is the ATO's preliminary view of the meaning of 'absolutely entitled to the asset as against the trustee'. While this ruling considers the phrase as used in section 106-50, former section 160V used similar wording. TR 2004/D25 is therefore relevant to section 160V, and we'll summarise some propositions made in it.

•        The beneficiary must be absolutely entitled to an asset of the trustee. [paragraph 53]

•        Absolute entitlement can't be satisfied if there are multiple beneficiaries in respect of a single asset such as land. No beneficiary is entitled to the whole asset. [paragraph 54]

•        The provisions apply to beneficiaries separately, not collectively. [paragraphs 56 to 59]

This rollover wasn't available to the Association when the land was transferred from the trustee to the newly incorporated association for at least three reasons.

•        First, the provision wasn't in force when the land was transferred. Section 160ZZNA was introduced in 1991, and didn't operate retrospectively. The land was transferred from the trust to the Association before 1991.

•        Second, the Association's members weren't absolutely entitled to CGT assets. Section 160V will only apply where a beneficiary, taken separately, is absolutely entitled to a particular CGT asset. Applying the reasoning in TR 2004/D25, particularly paragraph 54, multiple beneficiaries can't be absolutely entitled to a single trust asset like land. When the first portion of land was transferred, the trust had multiple beneficiaries and only one title of real property. No single beneficiary would have been able to demand the trustee transfer the land to them.

•        Third, the Association's members weren't a partnership. A partnership is an association of persons carrying on business as partners, or in receipt of income jointly. The Association wasn't carrying on business. It had no income. Its members couldn't have been a partnership for tax purposes.

Annexure 2 - detailed reasons on non-equity share issue

Summary

Distributions to the Association's members won't be in respect of a non-equity share. While we think the loan interests are shares, they will be classified as equity interests under the debt/equity rules.

•        They will be classified as shares because they give the lenders an interest in the company capital.

•        They meet the equity test because the amount of returns are contingent on the Association's economic performance, and the related party loan exceptions don't apply.

•        They don't meet the debt test because it isn't substantially more likely than not that lenders will receive greater financial benefits than they provide under the scheme.

Detailed reasoning

Are the distributions in respect of a share?

The effect of paragraph 202-45(d) is that distributions in respect of a non-equity share can't be franked.

The phrase 'in respect of' isn't defined, but is regularly used in legislative drafting. When discussing the phrase in a different provision, the ATO in TR 2010/4[39] at paragraph 53 suggested it has a very wide meaning.[40]

The Association's members will receive distributions in respect of their membership interest. Here, some of the Association's members will receive property, or sale proceeds, either before or on winding up. Some members have entered loan agreements with the Association which entitle them to a share of the Association's net assets sometime after making a request, death, or winding up. They will most likely receive distributions in their capacity as lenders. Therefore, we need to determine if their loan interests are non-equity shares.

What is a non-equity share?

To work out what a non-equity share means, we need to unpack several defined terms. Broadly:

•        a 'non-equity share' means a share that isn'tan equity interest in the company: section 995-1

•        a 'share' (in a company) means a 'a share in the capital of the company, and includes stock": section 995-1

•        subsection 974-70(1) says a scheme gives rise to an 'equity interest in a company', if it meets the equity test, and isn't also characterised as a debt interest

•        a scheme will pass the equity test in relation to the company if it:

­   meets one of Items 1 to 4 in the table in subsection 974-75(1)

­   doesn't fall within an exception for non-financing arrangements, or at-call loans: see subsections 974-75(2) through (6)

•        a scheme will be characterised as a 'debt interest in an entity' if it meets the debt test: section 974-15

•        a scheme will pass the debt test if it meets conditions in subsection 974-20(1) - including that:

­   the entity has an effectively non-contingent obligation to provide a financial benefit, and

­   it is substantially more likely than not that the value provided is at least equal to the value received.

In other words, a membership interest will be a non-equity share if is a share, which either:

•        doesn't pass the equity test, or

•        passes the debt test.

We think the loan interests are shares.

•        Members have loaned amounts to the Association.

•        The Association used those loans to buy real property or make capital improvements.

•        The real property and improvements were used for private, communal living purposes by the Association's members.

•        We think those loans are capital contributions which would form the Association's capital.

•        Lenders are entitled to receive a share of the Association's net assets: this gives them a 'share' in the Association's capital.

•        The loan interests meet the definition of a share because lenders have a share in the Association's capital.

We apply the equity and debt tests to the Association in paragraphs 106 to 136.

The Association's loan interests meet the equity test: the amount is contingent on the value of the Association's net assets

An interest meets the equity test if it's covered by a listed item, and doesn't fall within an exception. We list and apply the Items to the Association in Table 6.

Table 6: Applying the equity test to the Association

Subsection 974-75(2) says that schemes meeting Items 2, 3 and 4 will only be equity interests if they are a financing arrangement.

The Association's membership interests are financing arrangements. Broadly, a scheme is a 'financing arrangement' for an entity if it is entered into or undertaken to raise finance for the entity: paragraph 974-130(1)(a). Members have made loans to allow the Association to buy land, or make capital improvements to existing land. The loans raised finance for the Association.[41]

Nevertheless, the Association's membership interests won't meet the equity test if an exception applies.

There are three exceptions to the equity test: non-financing arrangements, pre 2005 at-call loans, and related-party at-call loans. We apply these to the Association in Table 7.

Table 7: exceptions to the equity test

Paragraph 974-75(4)(a) effectively has three requirements: there must be a loan, which is a financing arrangement, from connected entities. The loan and financing arrangement requirements are met, so we consider whether they were made by the Association's associates.

To work out whether someone is a connected entity of another, we need to unpack some definitions. A connected entity of an entity includes associates, and other members of the same wholly owned group: section 995-1. Only a company can be a member of a wholly owned group: see section 975-500. Therefore, we need to determine whether the Association's members are its associates.

Section 318 sets the meaning of 'associate'. Broadly, subsection 318(2) sets rules for determining if partners, spouses or children of partners, trustees, other companies, or other entities are a company's associates. The Association's members are individuals, and they aren't in partnership with it. The only relevant paragraph in subsection 318(2) is paragraph (d), applying to other entities. This paragraph says another entity (known as the 'controlling entity') will be a company's associate (the company being known as the 'primary entity') where either:

•        the primary entity is sufficiently influenced by the controlling entity, or

•        the controlling entity holds a majority voting interest[43] in the primary entity.

A company will be 'sufficiently influenced' by another entity where the company or its directors are:

•        accustomed to

•        under an obligation to

•        might reasonably be expected to

act in accordance with the directions, instructions or wishes of the other entity: paragraph 318(6)(b).

We don't have any information suggesting that the Association's members are connected entities:

•        The Association is an incorporated association with individual members. Individuals can't be members of the same wholly owned group so they can only be connected entities if they are its associates.

•        The Association's members could be its associate if they controlled majority voting interests in it, or had sufficient influence over it.

•        The Association's members, taken separately, don't have majority voting interests. Under the Association's rules, all members have equal rights to vote on resolutions. All members exercise independent judgment when voting or making decisions about the Association. It follows that no individual member can command a majority.

•        Likewise, the Association's members don't have sufficient influence for the same reasons. Since the Association's members exercise independent judgment, the Association doesn't act, and it isn't reasonable to expect it to act, in accordance with any member's directions, instructions or wishes.

It follows from this that the related party loans exceptions to the equity test don't apply. The Association's members aren't part of the same wholly owned group as the Association. The Association's members aren't its associates. The requirement that the loan providers are connected entities isn't met.

The Association's membership interests meet the equity test. It meets Item 2 of subsection 974-75(1). None of the exceptions apply.

The Association's membership interests don't meet the debt test: it isn't certain that lenders will receive back at least the present value of their loan

A scheme will be a debt interest if it passes the debt test: see subsection 974-15(1).

A scheme will pass the debt test if it meets conditions in subsection 974-20(1). Other provisions explain related concepts for applying the debt test. There are exceptions for schemes that meet section 974-25. We apply the debt test to the Association in Table 8.

Table 8: applying the debt test to the Association

Is there an effectively non-contingent obligation?

The debt test requires that the entity has an effectively non-contingent obligationto provide a benefit. The meaning of 'effectively non-contingent' is discussed in section 974-135. Propositions in this paragraph include:

•        an obligation is effectively non-contingent if it isn't contingent on any event, condition or situation (including the entity's economic performance) other than the ability or willingness to meet it: subsection 974-135(3)

•        there is an effectively non-contingent obligation if there is in substance or effect a non-contingent obligation: subsection 974-135(1)

•        the artificiality, or contrived nature, of any contingency is relevant to determining whether there is an effectively non-contingent obligation: subsection 974-135(6).

Something is contingent if it depends on something else. The word 'contingent' isn't defined in tax provisions, so its meaning is affected by its ordinary usage and context. Dictionary definitions include:

•        dependent for existence, occurrence, character...on something not yet certain...[44]

•        liable to happen or not; uncertain; possible[45]

•        conditional, dependent (on an uncertain event or circumstance). [46]

The relevant extrinsic material suggests the effectively non-contingent obligation requirement means remote contingencies can be ignored. The Explanatory Memorandum to the New Business Tax System (Debt and Equity) Bill 2001 discussed the phrase at paragraph 2.178 to 2.180. The word 'effectively' means the test is about economic substance, rather than legal form. This means that taxpayers can't impose artificial contingencies to prevent them being debt. Contingencies can be disregarded if they are

•        so remote as to be effectively inoperative

•        theoretical rather than a real possibility

•        artificial, used to disguise that an obligation is inherently non-contingent in substance.

Relevant facts here: the Association is obliged to pay members an amount, worked out under a formula, within 12 months after one of three possible events happen. The amount is worked out as the Association's total assets, less liabilities, divided by the number of member loans. The three events are:

•        when the member requests repayment

•        the members' death

•        when the Association passes a resolution to wind up the company.

The time may also be extended to 12 months after the resolution to wind up, if this happens while part of the loan is outstanding. The loan can be repaid at any time.

The Association has an effectively non-contingent obligation to repay its members: while there's uncertainty about the amount and timing, it can't escape the obligation arising.

•        Under the effectively non-contingent obligation test, it is the obligation which must be non-contingent. The obligation must depend on something uncertain. The obligation itself doesn't become contingent merely because the amount or time it arises depend on something else.

•        The Association's obligation is formally contingent on one of three events happening: a request for repayment, death, or resolution to wind up.

•        However, we think the obligation itself isn't effectively contingent where it's certain that a trigger event will happen. Here, it is certain that one of the crystallising events will happen, because all members are (mortal) individuals. Even if the Association is never wound up, or its members never request repayment, all of its members will die.[47] The timing and manner of the obligation arising is contingent on the three events. But the Association can't escape the obligation because at least one of those events will happen.

A counterargument could be that the obligation arising from those events is effectively contingent on the community having net assets at the crystallising event time. The formula sets the loan amount by multiplying the loan value by the revaluation factor. The revaluation factor is net assets divided by member loans. If there were no net assets, the repayment amount would be nil. There would be no effective obligation to repay an amount, where that amount is (or could be) nil.

We don't think this counterargument is the better view for two reasons. First, when one of the three crystallising events happen, the Association will be at least obliged to work out the member's entitlement to repayment. There's a theoretical possibility that the entitlement could be nil in some circumstances, but only where total liabilities are equal or greater than total assets. The obligation to determine the members' entitlement is genuine, and members have procedural entitlements to dispute asset valuations.[48] Second, we don't think the possibility of net assets being nil is enough to make the obligation to repay effectively contingent on that. We think there's still an effective obligation to make a payment. The possibility of the Association having nil net assets seems remote - it doesn't undermine the effectiveness of the obligation.

Is it substantially more likely than not that the benefits provided are at least equal to those received?

The debt test requires that it is substantially more likely than not that the value of financial benefits provided is at least equal to the value received.

The debt interest provisions have rules for determining how financial benefits are valued, which depend on the scheme's performance period:

•        the 'performance period' means the period within which, under the terms on which the interest is issued, the issuer's effectively non-contingent obligations to provide a financial benefit have to be met: subsection 974-35(3)

•        financial benefits are calculated in nominal terms if the performance period must end no later than 10 years after the interest is issued: subparagraph 974-35(1)(a)(i)

•        financial benefits are calculated in present value terms if the performance period must or may end more than 10 years after the interest is issued: subparagraph 974-35(1)(a)(ii)

•        the value of a financial benefit is calculated assuming the interest is held for the rest of its life: subsection 974-35(2).

We set out some other rules relevant to valuing financial benefits in Table 9:

Table 9: applying rules about valuing financial benefits to the Association

Section 974-50 is about calculating the present value of financial benefits. Subsection (3) says that the value is to be calculated assuming that all amounts are paid at the earliest time when the entity becomes liable to pay them. Subsection (4) sets a formula:

The value of a *financial benefit in present value terms is:

In the formula:

•        'adjusted benchmark rate of return' is 75% of the benchmark rate of return on the test interest

•        'n' is the number of years in the period from issue to the provision of the financial benefit.

Section 974-145 explains the 'benchmark rate of return'. Broadly:

•        this is the annually compounded internal rate of return on an ordinary debt interest with similar characteristics to the test interest: subsection 974-145(1)

•        if there is no interest which satisfies subsection (1), the benchmark rate of return should be based on the closest comparable interest, appropriately adjusted: subsection 974-145(2).

An ordinary debt interest is a debt interest arising from a scheme where none of the obligations are in substance or effect contingent on aspects of the economic performance of the issuer or its operations: section 974-140.

It isn't substantially more likely than not that the Association will provide financial benefits at least equal to those received under the scheme for two reasons. First, it is possible that a member's share of the Association's net assets could be less than their nominal loan contribution on repayment. Second, the repayment would have to be calculated in present value terms - the Association's arrangement is unusual so there's no reliable way to calculate this. We explain our reasoning in Table 10.

Table 10: Determining the likelihood that lenders will receive financial benefits at least equal to those they provide

The Association's obligation to repay may be less than their loan contribution, because the amount is tied to the Association' net assets. Even in nominal terms, we can't conclude that it is substantially more likely than not that the Association's net assets will have increased when it is required to repay its members.

•        The repayment amount will depend on fluctuations in assets and liabilities. This is because it is determined by the Association's total assets, less liabilities, divided by the number of member loans.

•        The Association won't necessarily have to repay the full nominal loan amount to a member. For example, the Association may acquire assets which decline in value, or incur debts which exceed any increase in the value of its assets.

•        While the Association has acquired real property, and real property generally increases in value, there is still uncertainty for members. Some properties have special characteristics or suffer events which impair property value growth, particularly in the short term. The performance period is uncertain, and property values might have declined or flatlined between issue and when the obligation materialises.

•        We don't think the debt tests should depend on a taxpayer's personal characteristics. We don't think the tests require foresight about the taxpayers' proposed investments and activities. It shouldn't be necessary to assess the likelihood that a particular taxpayer's assets will increase in value faster than their liabilities.

We can't calculate the present value of the Association's obligation to provide financial benefits.

•        The formula in subsection 974-50(4) requires us to calculate the present value using three variables.

•        Two of those variables are uncertain - the number of years, and the benchmark rate of return.

•        The uncertain loan term might not be fatal: it might be reasonable to make conclusions about likelihood by comparing results using a range of possible end dates.

•        However, we can't determine the benchmark rate of return because there is no comparable debt interest the Association's arrangement. We don't think it makes sense to apply the concept to the Association, because it's a non-commercial, communal living arrangement.

Conclusion - the Association's interests aren't non-equity shares because they meet the equity test and don't pass the debt test

Distributions to the Association's members won't be in respect of non-equity shares.

•        The loan interests are shares because they give members a share in the Association' capital.

•        The loan repayments will be in respect of those shares.

•        However, non-equity shares are shares which aren't classified as equity interests.

•        Interests are classified as equity if they pass the equity test and aren't classified as debt.

•        They pass the equity test in section 974-75.

•        They are classified as equity interests. They aren't debt interests because they don't pass the debt test in section 974-25. It isn't substantially more likely that the financial benefits provided are at least equal to those received.

Annexure 3 - detailed reasons on Division 7A

Summary

Division 7A of the ITAA 1936 won't apply to distributions of property or sale proceeds to the Association' members. While these will be payments under section 109C, the Association won't have a distributable surplus. The deemed dividend amount will be nil.

Detailed reasoning

Division 7A of the ITAA 1936 deems payments, loans and debt forgiveness by private companies to their shareholders to be dividends for tax purposes. Very broadly:

•        The operative provisions are in sections 109C (payments), 109D (loans) and 109F (debt forgiveness).

•        Provisions in Subdivision D exclude some amounts from being deemed dividends. Relevantly, section 109J excludes payments to discharge certain obligations, and section 109L excludes payments assessed or exempted under other tax provisions.

•        Section 109Y limits the deemed dividend to the private company's distributable surplus.

•        Division 7A deemed dividends are usually unfrankable: see section 202-45.

Section 109C may apply because the Association is a private company, making a payment to its members.

Section 109C of the ITAA 1936 treats certain payments by private companies to shareholders to be dividends. The requirements for section 109C are in subsection (1). For present purposes, we think it convenient to break the requirements up into the following elements:

•        the payer must be a private company

•        the private company must pay an amount

•        either:

­   the recipient was a shareholder (or associate) on receipt, or

­   the payment was made because the recipient was a shareholder at some time.

Other subsections define how the provision operates. We apply them to the Association in Table 11.

Table 11: subsection 109C

Section 109C will apply if the Association is a private company.

The Association is a private company because it isn't a public company

To determine if the Association is a private company, we need to work out if it is a public company. The relevant provision is section 103A of the ITAA 1936. Broadly:

•        A private company means a company that isn't a public company for the income year: subsection 103A(1).

•        A company is a 'public company' if it meets any of four alternative tests in subsection 103A(2).

•        There are other provisions which modify the general rules. Closely held companies which meet paragraphs 103A(2)(a) or (b) might be treated as private companies: see subsections 103A(3) and (6). There are special rules for subsidiaries in subsections 103A(4) through (4E). Subsection 103(5) deems a private company to be a public company where the Commissioner forms the opinion that this is reasonable.

We apply the tests in subsection 103A(2) to the Association in Table 12.

Table 12: public company tests in subsection 103A(2)

The condition in paragraph 103A(2)(c) of the ITAA 1936 has two separate elements.[51] First, the company mustn't, at any time since formation, have been carried on for the purpose of profit or gain for its individual members. Second, the company's constituent documents must have prohibited it distributing to its members or their relatives. The High Court of Australia has interpreted the second condition to focus on the constituent's document's legal form, not its practical effect. In Federal Commissioner of Taxation v Cappid Pty Ltd,[52] Barwick CJ (McTiernan, Windeyer and Owen JJ agreeing) said:

it is sufficient that the constituent document should by its terms express the requisite prohibition. It is not necessary, in my opinion, that those terms should be effective in fact and in law to prevent a distribution in breach of them. The situation in point of fact is dealt with by the first condition of the paragraph and in relation to a possibly larger period of time than that with which the second condition is concerned. The second condition is satisfied, in my opinion, by the formality of the constituent document. Therefore it is nothing to the point in this case that the terms of the constituent document which I have quoted would appear to be unenforceable by any person.

The Association will have been carried out for profit or gain for members if it transfers property or distributes sale proceeds to them.

•        The condition (against being carried on for the purpose of profit or gain for members) applies at all relevant times since formation.

•        Since we're testing whether the Association is a private company for the purpose of working out whether Division 7A will apply, the relevant time will be immediately after the proposed payment.

•        If the Association distributes property to members, its members will have profited or gained to the extent the distribution exceeds their loan contribution.

•        Immediately after that distribution, the Association will have been carried on for that purpose.

It follows that the Association will fail the first condition in paragraph 103A(2)(c).

The Association's constituent document is its Rules of Association. It says that the Association's income and capital will be applied exclusively to promote its objects, and won't be paid or distributed to members. There's an exception for bone fide remuneration for services rendered or expenses incurred. There's no suggestion that the Association's Rules of Association have been amended. The Association later entered loan agreements with certain members, which require it to pay the repayment amount to members one year after the lender's request or death, or a resolution to wind up the company.

The Association most likely meets the second condition in paragraph 103A(2)(c). The formal terms of its Rules of Association prohibit it distributing to members. It appears to have counteracted those Rules by entering loan agreements requiring it to make a repayment amount in certain circumstances. While it will breach the rules if it makes those repayment amounts, the second condition is concerned with formal rules, not their practical enforcement. We think this second condition would most likely be met. However, we can see arguments that:

•        the loan agreements are part of the Association's constituent documents, and had the effect of varying the relevant clause in the Rules of Association, or

•        the relevant clause is a sham which had no legal effect, because the Association and its members demonstrated through their conduct (in entering the loan agreements) that it was never intended to operate.

We don't need to determine these arguments because the first condition in paragraph 103A(2)(c) wasn't met.

Since the Association doesn't meet any of the tests in subsection 103A(2), it won't be a public company, unless subsection 103A(5) applies.

Subsection 103A(5) deems a company to be a public company where the Commissioner is of the opinion that this treatment is reasonable. The Commissioner must consider matters including the number of controllers, the market value of shares, and the number of beneficial share owners. The Commissioner may also consider any other matters it considers relevant.

ATO guidance suggests subsection 103A(5) operates where a company, not meeting the standard tests, nevertheless falls within the general concept of a public company. This guidance refers to subsection 103A(5) as a discretion. ATO ID 2004/760,[53] following earlier ATO publications,[54] says that:

•        the discretion might be available for companies which could have been listed on a stock exchange, but has decided not to list for non-tax related reasons

•        generally speaking the bigger the company, the more likely the Commissioner will use the discretion, but there's no specific quantum of shareholders

•        the main question to be considered when exercising the discretion is whether the company reasonably falls within the general concept of a public company.

We don't think subsection 103A(5) should apply to deem the Association to be a public company. We don't see any reason why it falls within the general concept of a public company.

•        The Association has less than 100 members, who would be its controllers and beneficial holders of shares. A public company would normally have more than 100 members or shareholders.

•        The Association's shares wouldn't have similar market value to shares in a listed company. Ordinary membership simply allows members to live in the community. The interests held by some members as lenders may have value, reflecting their share in the Association' real property. However, that value isn't likely to reflect the value of listed shares.

•        As other relevant matters, we have considered whether the Association came close to qualifying under any of the public company tests in subsection 103A(2). Broadly, we think it might be appropriate if the Association came close to qualifying, but didn't, because of a technicality, inadvertent omission, or unusual circumstances.

•        The Association couldn't have qualified under paragraphs 103A(2)(a), (b), or (d). There's no suggestion that the Association could have listed on the stock exchange, was a co-operative, a mutual insurance company, a friendly society dispensary or similar. It's a communal living arrangement and has never run a business.

•        The Association might have qualified as a company not run for the profit or gain of its members under paragraph 103A(2)(c), but for the plan to distribute to members. We think this condition is meant to cover not-for-profit clubs or associations which pass on their surplus assets to similarly minded bodies on winding up. We don't think it was meant to apply to an association which proposes to return surplus assets to members.

•        The Association doesn't have any public accountability in the sense that a larger body might have. It's a private communal living arrangement.

Considering these factors, we don't think it's reasonable to treat the Association as a public company.

The Association will be private company when it makes distributions to members because it won't be a public company. It doesn't meet any of the public company tests in subsection 103A(2). We haven't formed the opinion that it would be reasonable to treat it as a public company under subsection 103A(5).

Since the Association will be a private company when it makes distributions to members, section 109C will apply to those distributions, unless exclusions apply.

Exclusions to Division 7A: the return of capital component is unlikely to be exempt

Division 7A exempts some payments and loans from being treated as dividends. We list some of these provisions in Table 13.

Table 13: exemptions to Division 7A

Section 109L will apply to the extent amounts aren't taxed under another provision.

Broadly, section 109L is an anti-overlap rule excluding amounts from being deemed dividends under Division 7A if they are assessed, or exempted, under other provisions. This rule will operate to exclude dividends from Division 7A to the extent they have already been assessed under section 44. However, it won't apply to exclude the return of share capital component. See Table 14 for our reasoning.

Table 14: applying section 109L to the Association

Section 109J won't apply because the payments are part of a broader communal living arrangement with uncommercial features

Broadly, section 109J excludes amounts if they 1) discharge an obligation, and 2) that obligation is arm's length:

A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment:

(a)  discharges an obligation of the private company to pay money to the entity; and

(b)  is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length.

The ATO view is it that paragraph 109J(b) will only apply if the obligation itself is arm's length. TR 2014/5[55] says:

94. It is not sufficient to test what ought to be paid to discharge the relevant obligation. A test of what the relevant obligation would be, had the parties been dealing at arm's length, is also required....

102. ... the testing in paragraph 109J(b) of the ITAA 1936 requires measuring what has actually occurred against an alternative hypothesis in which the parties are dealing at arm's length.

Here, the Association has an obligation under the loan agreement to pay a repayment amount to lenders, determined under a formula. The repayment amount is the relevant loan balance (starting value plus additional contributions less loan repayments), multiplied by a revaluation factor. The revaluation factor is the Association's net assets, divided by the number of member loans.The effect of that formula is that:

•        the Association's net assets are always equal to the repayment amounts, and

•        each repayment amount is proportionate to the amount that lender has contributed compared to other lenders.

However, the loan agreements aren't directly linked to membership. While all members have made loans at some time, membership rights and residency rights don't depend on the amount they have loaned. While most repayments have been made to departing members, one person remained a member after they were repaid.

We can see an argument that each repayment obligation is arm's length. Each member gets a proportionate share in the Association's net assets, which reflects their share of net loan contributions. Members have invested in collectively held assets, and get shares in the proceeds which are proportionate to their contributions. That could be characterised as an arm's length return on investment.

However, we think that the lending arrangement can't be fairly characterised as arm's length, because it is part of a broader communal living arrangement with uncommercial considerations. We'll give three examples.

•        First, lenders receive equal membership and residency rights despite their loan contributions not necessarily being equal. Each member will have had the same benefit from participating in community activities and living on the land, regardless of how much they lent. Their benefit or enjoyment might be disproportionate to their financial contribution.

•        Second, lenders can be repaid at different times which might disadvantage or inconvenience other members. The Association might need to borrow money or sell assets to pay out a departing member. In doing that, it might incur ongoing borrowing costs which could reduce net assets available to continuing members. Further, any assets sold might reduce the land or amenities available to the remaining members.

•        Third, at least one member has membership rights despite having had the loan repaid. That possibility suggests that members can continue to benefit from community activities and residency benefits after they cease to contribute financially.

We think that parties dealing at arm's length would be unlikely to enter arrangements with these features. Under an arm's length residency arrangement, we think that:

•        membership and residency rights would usually depend on making prescribed contributions (money, property or services)

•        repayment amounts might be adjusted or reduced to compensate continuing members for any ongoing costs or inconvenience repayment might cause

•        membership and residency rights would terminate on repayment.

It follows that section 109J won't apply to exclude loan repayments to members from being deemed dividends.

Section 109Y: the Association's distributable surplus will be nil, bringing any deemed dividend to nil

Broadly, Division 7A limits amounts deemed to be dividends to the company's distributable surplus.

The effect of subsection (1) is that the amount of deemed dividends is worked out under a formula given by subsection (3).

The effect of subsection (3) is that each potential Division 7A dividend is multiplied by a factor determined by the distributable surplus divided by the total of potential Division 7A dividends.

A company's 'distributable surplus' is determined under a formula in subsection 109Y(2):

The elements in the distributable surplus formula are further defined either in subsection 109Y(2). Broadly:

•        'Net assets' means an amount by which the company's assets exceed the sum of its present legal obligations (to persons other than the company), and specified provisions.

•        'Division 7A amounts' means amounts deemed to be dividends under sections 109C or 109F (loans or debt forgiveness).

•        'Non-commercial loans' means amounts deemed to have been dividends in previous years (repayments of non-commercial loans have a corresponding meaning).

•        'Paid-up share value' means the paid-up share capital of the company. Section 995-1 says that 'paid-up share capital' means the amount standing to the credit of the company's share capital account, reduced by any unpaid amounts. Section 975-300 (broadly) says a share capital account is any account that a company keeps of its share capital.

The ATO view is that 'present legal obligation' is immediate legally binding obligation, which doesn't necessarily need to be immediately payable or enforceable. TD 2007/28[56] says that for the purposes of subsection 109Y:

•        a present legal obligation is an 'immediate obligation binding at law, whether payable and enforceable presently or at a future time' [paragraph 1]

•        present legal obligation takes its legal meaning - it must be presently existing, and enforceable by legal action immediately or in the future [paragraph 10]

•        an existing obligation doesn't necessarily require the existence of a debt due and payable [paragraph 10A].

The Association will have no distributable surplus under section 109Y. Its net assets will be nil, and the Division 7A amounts (if any) will be equal to the paid-up share value. We illustrate in Table 15.

Table 15: calculating the Association's distributable surplus

Conclusion: Division 7A won't apply because there's no distributable surplus

It follows that distributions from the Association to its members won't be deemed to be dividends under Division 7A. Section 109C will apply, but the amount of the dividend will be reduced as follows:

•        subsection 109J(1) will apply to the extent that the distributions are already assessed as dividends under section 44

•        the remaining section 109C amount would apply to the return of capital (nominal loan amount) not assessed under section 44[57]

•        section 109NA may apply to the extent (if any) that distributions are made in the course of winding up

•        any remaining potential provisional dividend amount will be worked out under the formula in subsection 109Y(3):

•        since the distributable surplus is nil, the amount of the dividend will also be nil. (As the provisional dividend is multiplied by a factor of 0).

[1] Macmillan Publishers Australia, The Macquarie Dictionary online, www.macquariedictionary.com.au, accessed 2 November 2021.

[2] Rates are set by the Income Tax Rates Act 1986.

[3] A capital loss is worked out as the asset's reduced cost base less capital proceeds.

[4] The Association have suggested a look through treatment should apply, so that the CGT Event happens to the members, rather than the Association. We disagree. See Annexure 1 at paragraphs 80 to 88 for our reasoning.

[5] For example, Division 7A taxes payments, loans and debt forgiveness as dividends. Also, payments from companies could be assessed to the shareholder as ordinary income under section 6-5.

[6] Broadly, a share capital account will become tainted if amounts are transferred to it from other accounts: see generally Division 197 of the ITAA 1997.

[7] Bill Acceptance Corporation Limited v Federal Commissioner of Taxation (1996) 32 ATR 660 at page 665 per Lindgren J.

[8] Taxation Ruling TR 2003/8 Income tax: distributions of property by companies to shareholders - amount to be included as an assessable dividend.

[9] It's possible that a genuine return of share capital wouldn't be a dividend to begin with under the definition in subsection 6(1).

[10] See TR 2003/8 at paragraph 13.

[11] Macmillan Publishers Australia, The Macquarie Dictionary online, www.macquariedictionary.com.au, accessed 20 December 2021.

[12] We realise that this mightn't be possible under the Association's internal rules: for example, the sample loan agreement at clause 13 suggests lenders can't assign their loans. However, compliance with internal rules is a matter for the Association and its members.

[13] CGT Event C2 might also happen if the Association's members received a separate payment (unconnected to the loan agreements) on ceasing membership. Their membership would be effectively cancelled.

[14] See also Taxation Ruling TR 96/23 Income tax: capital gains: implications of a guarantee to pay a debt, at paragraph 54, which says a debt is an asset for the creditor. Paragraph 80 suggests that repayment of the debt would be a disposal and satisfaction of that debt, under repealed provisions in the former ITAA 1936. We think the same reasoning would broadly apply to the current law.

[15] Application, 4.1.

[16] Bohemians Club v Acting Commissioner of Taxation (1918) 24 CLR 334.

[17] Application, 4.1.1 and 4.1.2.

[18] It isn't relevant whether the association is incorporated or not - the same principles apply. See Reversby Credit Union Co-operative Limited v Commissioner of Taxation (1965) 112 CLR 565, page 574 (per McTiernan J). McTiernan J relied on the House of Lords decision in New York Life Insurance Company and Styles (1989) 14 App. Cas. 381: see page 393 per Lord Watson, page 394 per Lord Bramwell, pages 407 and 408 per Lord Herschell,

[19] Bohemians Club v Acting Commissioner of Taxation (1918) 24 CLR 334.

[20] (1918) 24 CLR 334 at page 337 per Griffiths CJ.

[21] See also New York Life Insurance Company and Styles (1989) 14 App. Cas. 381 at page 394 per Lord Watson.

[22] Sydney Water Board Employees' Credit Union Limited v Commissioner of Taxation (1973) 129 CLR 446, at page 450 per Barwick CJ.

[23] See also Parsons, RW (1985) Income Taxation in Australia, Law Book Company Limited, Sydney, [2.114], p.55.

[24] See also Parsons, RW (1985) Income Taxation in Australia, Law Book Company Limited, Sydney, [2.45-2.46], p.38.

[25] (1918) 24 CLR 334 at pages 337-338 (per Griffiths CJ).

[26] See Taxation Ruling TR 2015/3 Income Tax: matters relating to strata title bodies constituted under strata title legislation at paragraph 62; Reversby Credit Union Co-operative Limited v Commissioner of Taxation (1965) 112 CLR 565, page 575 (per McTiernan J).

[27] Social Credit Savings and Loans Society Limited and Commissioner of Taxation (1971) 125 CLR 560, at 574 (per Gibbs J) citing English and Scottish Joint Co-operative Wholesale Society Ltd v Commissioner of Agriculture Income-Tax, Assam [1948) AC 405, at page 417 (per Lord Normand).

[28] Application, 4.2.4(i).

[29] See generally, Heydon, JD and Leeming, MJ (2016) Jacob's Law of Trusts in Australia, 8^th edn, LexisNexis Butterworths Australia, [1.01]-[1.10], accessed online at https://advance.lexis.com on 15 December 2021.

[30] [1989] FCA 432 at [22].

[31] French J's first instance decision was overturned on appeal: see the Full Federal Court decision of Commissioner of Taxation v Harmer [1990] FCA 258, which was affirmed by the High Court in Harmer v Commissioner of Taxation [1991] HCA 51. However, the decision was overturned on trust taxation issues about Division 6 of the ITAA 1936. Nothing in the Full Federal Court or the High Court judgments questions or disturbs French J's statement of the elements of a trust. His conclusion that a trust was established in that case was confirmed by the Full Federal Court, and not contested in the High Court.

[32] See generally, Heydon, JD and Leeming, MJ (2016) Jacob's Law of Trusts in Australia, 8^th edn, LexisNexis Butterworths Australia, 'Chapter 3 The Classification of Trusts' especially sections [3-01], [3-05] to [3-08] accessed online at https://advance.lexis.com on 15 December 2021.

[33] Heydon, JD and Leeming, MJ (2016) Jacob's Law of Trusts in Australia, 8^th edn, LexisNexis Butterworths Australia, [7-02], accessed online at https://advance.lexis.com on 15 December 2021. See, for example, section 23C of the Conveyancing Act 1919 (NSW).

[34] Heydon, JD and Leeming, MJ (2016) Jacob's Law of Trusts in Australia, 8^th edn, LexisNexis Butterworths Australia, [3-07], accessed online at https://advance.lexis.com on 15 December 2021.

[35] Heydon, JD and Leeming, MJ (2016) Jacob's Law of Trusts in Australia, 8^th edn, LexisNexis Butterworths Australia, [13-01] accessed online at https://advance.lexis.com on 15 December 2021.

[36] Application, 4.2.4(ii).

[37] Application, 4.2.4(iii).

[38] Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997.

[39] Taxation Ruling 2010/4 Income Tax: capital gains: when a dividend will be included in the capital proceeds from a disposal of shares that happens under a contract or scheme of arrangement.

[40] TR 2010/4 cites State Government Insurance Office (Qld) v. Crittenden (1966) 117 CLR 412 at page 416 per Taylor J.

[41] An arrangement may not be a financing arrangement for an entity where the entity doesn't need the funds to 'finance' particular activities. For example, ATO ID 2003/664 Income Tax: Financing Arrangement: commitments obtained by cash or letters of credit concluded that a scheme wasn't a 'financing' arrangement where the entity didn't need working capital, but required non-cash commitments for risk/credit management reasons. These considerations don't apply to the Association, which needed the funds to buy land and make capital improvements.

[42] Noting that the 1 year for repayment may be extended if the resolution to wind up happens after a demand or death: see clause 4.5.

[43] Majority voting interest is where an entity or entities can cast, or control, more than 50% of votes that might be cast at a general meeting: paragraph 318(6)(c).

[44] Macmillan Publishers Australia, The Macquarie Dictionary online, www.macquariedictionary.com.au, accessed 25 November 2021.

[45] Macmillan Publishers Australia, The Macquarie Dictionary online, www.macquariedictionary.com.au, accessed 25 November 2021.

[46] Australian National Dictionary Centre (2004) Australian Oxford Dictionary, 2 edn, Oxford University Press, accessed online at www.oxfordreference.com, accessed 25 November 2021.

[47] There is a theoretical possibility that the Association could have non-individual members. We disregard this. We think it would be highly unlikely that a community of this type would admit artificial entities (like companies or trusts) as members. The point of this community is for members to live on communal land.

[48] See Loan Agreement, clause 7.3.

[49] For completeness, we don't think the other crystallising events (death and winding up) can be conceptualised as rights or options. They are independent events which terminate the scheme, and the timing and circumstances would likely be outside an individual members' choice or control.

[50] Section 995-1 says a 'friendly society dispensary' is an approved pharmacist (for the purposes of Part VII of the National Health Act 1953)) that is a friendly society or a body carrying on business for the benefit of a friendly society. A 'friendly society' is a friendly society under the Life Insurance Act 1995, registered or incorporated as a friendly society, or entitled to use that expression under a state or territory law.

[51] See Nadir Pty Ltd v Federal Commissioner of Taxation (1973) CLR 595 at pages 600-601 (per Gibbs J).

[52] Federal Commissioner of Taxation v Cappid Pty Ltd (1971) 127 CLR 140 at page 150. Barwick CJ's comments were followed in Nadir at pages 600-603 (per Gibbs J).

[53] ATO Interpretive Decision ATO ID 2004/760 Income Tax: Private company held as an investment by a superannuation fund: discretion to treat as a public company.

[54]Public Information Bulletin No. 3, April 1965 (PIB No. 3); Canberra Income Tax Circular Memorandum Number 847, 15 December 1967 (CITCM No. 847)

[55] Taxation Ruling TR 2014/5 Income tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate).

[56] Taxation Determination TD 2007/28 Income tax: what is a 'present legal obligation' of a private company for the purposes of subsection 109Y(2) of Division 7A of Part III of the Income Tax Assessment Act 1936?

[57] Section 109NA may apply to the extent (if any) that distributions are made in the course of winding up.