Edited version of private advice

Authorisation Number: 1051991410615

Date of advice: 15 June 2022

Ruling

Subject: Scheme of arrangement and special dividend payment

Question 1

Is the Special Dividend a dividend as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is the Special Dividend a frankable distribution pursuant to section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Is the Special Dividend assessable income under subparagraph 44(1)(a)(i) of the ITAA 1936?

Answer

Yes.

Question 4

Can you include the franking credits attached to the Special Dividend in your assessable income pursuant to section 207-20?

Answer

Yes.

Question 5

Are you entitled to a tax offset equal to the amount of the franking credits attached to the Special Dividend included in your assessable income?

Answer

Yes.

Question 6

Was XXXX Co an 'exempting entity' when the special dividend was paid, or was it a 'former exempting entity' at that time (under Division 208 of the ITAA 1997)?

Answer

No.

Question 7

Will the Commissioner make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefit received in relation to the Special Dividend?

Answer

No.

Question 8

Will the Commissioner make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefit received in relation to the Special Dividend?

Answer

No.

Question 9

Did CGT event A1 happen to you upon implementation of the scheme?

Answer

Yes.

Question 10

Did the capital proceeds for the CGT event constitute $4.50 per share?

Answer

Yes.

Question 11

Did the Special Dividend form part of the capital proceeds in relation to the CGT event?

Answer

No.

This ruling applies for the following period

1 July 20XX to 30 June 20XX

The scheme commences on:

August 20XX

Relevant facts and circumstances

Background

You are an Australian resident. You held your shares in XXXX Co for at least 45 days during the period from October 20XX to November 20XX in which you did not have materially diminished risks of loss or opportunities for gain.

XXXX Co overview

XXXX Co is an Australian-resident company incorporated in 20XX and was listed on the ASX since 20XX. It was delisted in 20XX following completion of the Scheme of Arrangement. In August 20XX, XXXX Co announced it had entered into a Scheme Implementation Deed with XXX. XXXX Co had a single class share capital structure consisting of ordinary shares. At no time during the period from incorporation to implementation of the Scheme of Arrangement did non-resident XXXX Co shareholders own 95% or more of the shares in XXXX Co (section 208-50 & paragraph 208-25(1)(a)).

Scheme of Arrangement

XXX proposed to acquire up to 90% of the issued shares of XXXX Co by way of a Scheme of Arrangement under Part 5.1 of the Corporations Act 2001 by purchasing 100% of the shares from Non-Founder Shareholders and purchasing shares from you for consideration equivalent to $5.50 less the amount of any special dividend for each XXXX Co share. Your Scheme Consideration was made up of $5.00 in cash less the actual amount of any Special Dividend and a Contingent Note worth $0.50 for each share.

Under the Scheme of Arrangement, each person registered as a holder of XXXX Co shares on the Scheme Record Date (a scheme shareholder) was entitled to participate in the Scheme of Arrangement.

XXX overview

XXX is wholly owned by non-residents.

Retention and Co-Investment Deed

As part of the Scheme of Arrangement, you also had the right to make an election to retain 30% of your share holdings. You elected to exercise this right. As a condition of the Scheme of Arrangement, you entered into a Retention and Co-Investment Deed with XXX. Under this Deed, XXX was granted an option to call for your retained shares within 24 months after the Scheme Implementation Date. The exercise price for the call option is Class A shares issued to you, in XXX, in consideration for all of your retained XXXX Co shares. Your Class A shares added together will amount to approximately a 7% interest in XXX.

Special Dividend

In November 20XX, XXXX Co declared a Special Dividend of $1.00 per share which was fully franked and payable to XXXX Co shareholders who held their shares at 7:00pm (AEDT) 21 November 20XX (Special Dividend Record Date). The Special Dividend was subject to the Scheme of Arrangement becoming effective and was payable by XXXX Co in its absolute discretion. XXXX Co paid the Special Dividend on 26 November 20XX. Neither XXX nor any of its associates had any influence or control over the declaration and payment of the Special Dividend.

The Special Dividend complied with the requirements of the Corporations Act 2001, including section 254T of that Act. XXXX Co paid the Special Dividend on 27 November 20XX and franking credits were attached to the Special Dividend. The Special Dividend was entirely debited against XXXX Co's retained earnings and not against an amount standing to the credit of XXXX Co's share capital account. It was funded from XXXX Co's existing cash reserves and debt facility.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subparagraph 44(1)(a)(i)

Income Tax Assessment Act 1936 Division 1A of former Part IIIAA

Income Tax Assessment Act 1936 former subsection 160APHO(1)

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 paragraph 177EA(5)(b)

Income Tax Assessment Act 1997 section 104-10

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

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 paragraph 104-10(3)(b)

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 section 204-30

Income Tax Assessment Act 1997 subsection 204-30(1)

Income Tax Assessment Act 1997 paragraph 204-30(3)(c)

Income Tax Assessment Act 1997 subsection 204-30(8)

Income Tax Assessment Act 1997 subsection 207-20(1)

Income Tax Assessment Act 1997 subsection 207-35(1)

Income Tax Assessment Act 1997 subsection 207-145(1)

Income Tax Assessment Act 1997 Division 208

Income Tax Assessment Act 1997 section 208-20

Income Tax Assessment Act 1997 paragraph 208-25(1)(b)

Income Tax Assessment Act 1997 section 208-40

Income Tax Assessment Act 1997 subsection 208-45(1)

Income Tax Assessment Act 1997 subsection 208-45(2)

Income Tax Assessment Act 1997 section 208-50

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Summary

The Special Dividend is a dividend as defined in subsection 6(1) of the ITAA 1936.

Detailed reasoning

The term 'dividend' is defined in subsection 6(1) to include any distribution of money made by a company to any of its shareholders which is not debited against an amount standing to the credit of the company's share capital account. The Special Dividend is a distribution that was not debited against an amount standing to the credit of XXXX Co's share capital account. Accordingly, the Special Dividend is a dividend for the purposes of subsection 6(1).

Question 2

Summary

The Special Dividend is a frankable distribution pursuant to section 202-40 of the ITAA 1997.

Detailed reasoning

A distribution is a frankable distribution to the extent it is not unfrankable (section 202-40). Section 202-45 sets out the circumstances under which an amount or distribution is taken to be unfrankable. The Special Dividend is a frankable distribution as none of the circumstances listed in section 202-45 apply to the Special Dividend.

Question 3

Summary

The Special Dividend is assessable income under subparagraph 44(1)(a)(i) of the ITAA 1936.

Detailed reasoning

As the Special Dividend was paid by XXXX Co to you out of profits derived by XXXX Co, you are required to include the Special Dividend in your assessable income under subparagraph 44(1)(a)(i).

Question 4

Summary

You can include the franking credits attached to the Special Dividend in your assessable income pursuant to subsection 207-20(1).

Detailed reasoning

As you were a qualified person in relation to the Special Dividend, your assessable income includes the amount of the franking credit (subsection 207-20(1) and paragraph 207-145(1)(e)). This applies to both resident shareholders and non-resident shareholders that carry on business in Australia at or through a permanent establishment in Australia (where the dividend is attributable to the permanent establishment).

The assessable income of a trustee of a trust also includes the amount of the franking credit attached to the Special Dividend (subsection 207-35(1)).

The test of what constitutes a qualified person is provided in former subsection 160APHO(1). Broadly, as you were under an obligation to make a related payment in relation to the dividend, you will have to satisfy the holding period rule in relation to the secondary qualification period.

Since you held your shares in XXXX Co for at least 45 days during the period from October 20XX to November 20XX in which you did not have materially diminished risks of loss or opportunities for gain, you were a qualified person for the purposes of section 207-145.

Question 5

Summary

You are entitled to a tax offset equal to the amount of the franking credits included in your assessable income, as you were a 'qualified person' (as defined in Division 1A of former Part IIIA of ITAA 1936).

Detailed reasoning

The assessable income of a trustee of a trust includes the amount of the franking credit attached to the Special Dividend (subsection 207-35(1)).

An entity must be a qualified person in relation to the dividend in order to be entitled to a tax offset in respect of the franking credit on the dividend (subsection 207-145(1), (noting paragraph 207-145(1)(a) refers to former Division 1A of Part IIIAA).

The test of what constitutes a qualified person is provided in former subsection 160APHO(1). Broadly, as you were under an obligation to make a related payment in relation to the dividend, you will have to satisfy the holding period rule in relation to the secondary qualification period.

Since you held your shares in XXXX Co for at least 45 days during the period from October 20XX to November 20XX in which you did not have materially diminished risks of loss or opportunities for gain, you were a qualified person for the purposes of section 207-145.

As you were a qualified person in relation to the Special Dividend, and the amount of the franking credit on the distribution is included in your assessable income, you will be entitled to a tax offset equal to the franking credit on the distribution (subsection 207-20(2)).

Question 6

Summary

XXXX Co was not an 'exempting entity' when the Special Dividend was paid, nor was it a 'former exempting entity' at that time (under Division 208 of the ITAA 1997).

Detailed reasoning

XXXX Co would be an exempting entity when it paid the Special Dividend if, at that time, it was effectively owned by prescribed persons (section 208-20).

A company or individual will be a prescribed person if they are a foreign resident (section 208-40).

Paragraph 208-25(1)(b) provides that XXXX Co would be effectively owned by prescribed persons at a particular time if it is reasonable to conclude that, at that time, the risks involved in, and opportunities resulting from, the membership interests in XXXX Co not held by prescribed persons were nevertheless substantially borne by, or accrued to, prescribed persons.

As the risks and opportunities associated with those membership interests will be retained by Australian residents, XXXX Co was not effectively owned by prescribed persons at the time the Special Dividend was paid.

Therefore, XXXX Co was not an exempting entity nor was it a former exempting entity at the time the Special Dividend was paid to you, pursuant to Division 208.

Therefore, section 208-195 does not apply to deny the gross-up of your assessable income by the amount of the franking credit attached to the Special Dividend you received, nor deny the tax offset to which you are otherwise entitled pursuant to Division 207 at the time when the Special Dividend was paid.

Question 7

Summary

The Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefit received in relation to the Special Dividend.

Detailed reasoning

Section 177EA is a general anti-avoidance provision that applies where one of the purposes (other than an incidental purpose) of a particular scheme is to enable a taxpayer to obtain an imputation benefit.

XXXX Co shareholders have different tax and residency profiles. The fully franked Special Dividend was paid to all existing shareholders of XXXX Co in proportion to the number of shares that each shareholder held on the Record Date and irrespective of their ability to use the relevant franking credits. The Special Dividend allowed XXXX Co shareholders to share in the accumulated profits of XXXX Co.

As the conditions for applying section 177EA are not satisfied in relation to the payment of the Special Dividend, the Commissioner will not make a determination under paragraph 177EA(5)(b) to deny the whole, or part, of the imputation benefits received in relation to the Special Dividend.

Question 8

Summary

The Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefit received in relation to the Special Dividend.

Detailed reasoning

Section 204-30 applies where a corporate tax entity streams the payment of dividends to its members in such a way that certain shareholders, referred to as favoured members, obtain imputation benefits, and other shareholders, referred to as disadvantaged members, obtain lesser or no imputation benefits, whether or not they receive other benefits. The favoured members are those that derive a greater benefit from imputation benefits than disadvantaged members.

For section 204-30 to apply, members to whom distributions are streamed must derive a greater benefit from franking credits than another member entity. The term 'derive a greater benefit from franking credits' is defined in subsection 204-30(8) by reference to the ability of the members to fully use imputation benefits.

Under the Scheme of Arrangement, each shareholder received imputation benefits when the Special Dividend was paid. The Special Dividend was paid to all XXXX Co shareholders and was fully franked regardless of the tax profiles of XXXX Co's shareholders. Accordingly, it cannot be said that XXXX Co selectively directed the flow of franked dividends to certain members.

As the conditions in subsection 204-30(1) were not met, the Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefits received by you in relation to the Special Dividend.

Question 9

Summary

CGT event A1 happened for you upon implementation of the scheme.

Detailed reasoning

CGT event A1 happens if there is a change in the ownership of a CGT asset (section 104-10). The event happens when you enter into a contract to dispose of the asset or, if you have not entered into a contract, when the change of ownership occurs (subsection 104-10(3)).

The disposal of XXXX Co shares under a court approved Scheme of Arrangement results in a disposal of shares, but not because you entered into a contract for disposal. Therefore, CGT event A1 happened on the Scheme Implementation Date when there was a change of ownership in a XXXX Co share from you to XXX under the Scheme of Arrangement (subsections 104-10(1) and (2) and paragraph 104-10(3)(b)).

Question 10

Summary

The capital proceeds for the CGT event will constitute $4.50 per share.

Detailed reasoning

The capital proceeds you receive from a CGT event is the amount of money and the market value of any property you received or are entitled to receive (worked out at the time the event happened) in respect of the event happening (subsection 116-20(1)).

The capital proceeds for CGT event A1 were $4.00 in cash consideration and one Contingent Note per XXXX Co share. The market value of the Contingent Note is dependent on factors agreed to in the Scheme Implementation Agreement. For this Ruling, it is assumed to be $0.50.

Therefore, the capital proceeds for CGT event A1 happening on disposal of each XXXX Co share is $4.50.

Question 11

Summary

The Special Dividend will not be taken to form part of the capital proceeds in relation to the CGT event.

Detailed reasoning

As explained above, the capital proceeds you receive from a CGT event is the amount of money and the market value of any property you received or are entitled to receive (worked out at the time the event happened) in respect of the event happening (subsection 116-20(1)).

The term 'in respect of the event happening' in subsection 116-20(1) requires the relationship between the event and the receipt of the money, or the entitlement to receive the money, to be more than coincidental. An amount is not capital proceeds received or entitled to be received in respect of a CGT event merely because it is received in association with the CGT event.

The Scheme of Arrangement was not conditional on declaration of the Special Dividend, XXX or a third party financing or facilitating payment of the Special Dividend, or XXX or a third party being obliged to bring about the result that the Special Dividend would be paid to XXXX Co shareholders.

The Commissioner considers that the Special Dividend was not received in respect of the disposal of XXXX Co shares under the Scheme of Arrangement, having regard to all of the relevant circumstances. Accordingly, the Special Dividend does not form part of the capital proceeds in relation to CGT event A1.