Edited version of private advice

Authorisation Number: 1051952085218

Date of advice: 3 March 2022

Ruling

Subject: CGT - liquidation

Question 1

Does the Commissioner consider that the provisions of Part IVA of the ITAA 1936 would apply to the distributions received from the Liquidator?

Answer

No.

Question 2

Will each Capital Distribution received from the Liquidator of the balance in each pre-CGT profits sub account be a dividend distributed by the Liquidator pursuant to section 955-1 of the ITAA 1997 and section 6 of the ITAAA 1936?

Answer

No.

Question 3

Will each Capital Distribution received from the Liquidator of the balance in each pre-CGT profits sub account be regarded as a distribution of ordinary income by the Liquidator?

Answer

No.

Question 4

Will each Capital Distribution received from the Liquidator of the balance in each pre-CGT profits sub account be considered as a capital distribution by the Liquidator of capital profit arising from the disposal of assets acquired before 20 September 1985?

Answer

Yes.

This private ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The minutes of a director's meeting of Investments held in 19XX records that several blocks of land were purchased 'for the purpose of construction of a multi-story building'.

The directors of Investments at the relevant time, have confirmed that none of land was developed as originally intended for long term rental.

The properties were sold undeveloped to one buyer (a third party) in 19XX

A capital profit was made on this disposal of more than $XXX.

A further property was purchased in 19XX which was also sold to a third party. A capital profit of almost $XXX was made on the disposal of this property.

A further 2 properties were acquired in 19XX from a deceased estate.

Additional property was acquired in 19XX and 19XX.

In 20XX several properties were sold leaving a capital profit of $XXX.

The company's bankers effectively required that a significant amount was required to be transferred from the Capital Profits Reserve in Investments to Unappropriated Profits to offset a large debit balance representing accumulated revenue losses incurred by Investments.

The amount transferred in the books of Investments is estimated to be in the order of $XXX. It appears the transfer took place somewhere between 19XX and 20XX.

The liquidator proposes to transfer approximately $XXX from the unappropriated profits to the capital profits reserve (the transfer reversal)

The liquidator then proposes to separate the capital profits reserve (the accounts sub-division).

The liquidator will then make a capital distribution to the Trust out of each of the pre CGT profits sub account for each pre CGT property.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1936 subsection 47(1)

Income Tax Assessment Act 1936 subsection 47(1A)

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Question 1

Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Paragraph 45 of PS LA 2005/24 provides that, before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met:

1. There must be a 'scheme' within the meaning of section 177A of the ITAA 1936.
2. A tax benefit (as defined in section 177C of the ITAA 1936) must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out.
3. Having regard to the eight factors in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

Having regard to each of these requirements, the Commissioner has not identified any relevant tax benefits being obtained by the Trust under the proposed arrangement compared to the arrangement not being entered into. On this basis, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to cancel any tax benefits obtained by the Trust.

Question 2, 3 and 4

Subsection 47(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides:

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

Subsection 47(1A) of the ITAA 1936 explains the phrase 'income derived by the company' in subsection (1) as follows:

a)    an amount (except a net capital gain) included in the company's assessable income for a year of income; or

b)    a net capital gain that would be included in the company's assessable income for a year of income if the Income Tax Assessment Act 1997 (ITAA 1997) applied.

The effect of subsection 47(1A) is that a dividend paid to a shareholder that represents company profit will be taxed in the hands of the shareholder in the same manner in which that profit was taxed in the hands of the company. For example, the distribution of a non-taxable capital gain made by the company to a shareholder would be non-taxable to the shareholder (under subsection 47(1A)).

In addition to subsection 47(1) above, Taxation Determination TD 2001/27 explains the full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company (which is CGT event C2 in section 104-25 of the ITAA 1997). However, the anti-overlap provision in section 118-20 of the ITAA 1997 reduces any capital gain by amounts that are otherwise assessable as a result of the event. Where the relevant shares are pre-CGT assets, any capital gain made is disregarded.

Taxation Determination TD 95/10 explains the Commissioner's view on the Archer Brothers principle in the context of liquidation distributions. The Archer Brothers principle is if a liquidator appropriates a particular fund of profit or income in making a distribution, that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 and other provisions of the Act. TD 95/10 provides the Commissioner will accept that a liquidator may rely on the Archer Brothers principle if:

(i)    a specific provision in the Act does not produce a different result;

(ii)   the company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and

(iii)  it is clear from either the accounts or statement of distribution that the liquidator has appropriated the specific profit or fund in making the distribution.

Application to your circumstances

In this case it is accepted that the capital distribution received from the liquidator will be made in accordance with the Archer Bros Principle.

Therefore, the capital distribution will not be considered the receipt of a dividend or ordinary income. The capital distribution will be the distribution of a capital profit associated with the disposal of assets acquired by the company prior to 20 September 1985 and non-taxable.