Edited version of private advice

Authorisation Number: 1052251744060

Date of advice: 15 May 2024

Ruling

Subject: Partnership restructure

Question 1

Will the conversion of the Land in Step 1 of the Restructure to a non-Partnership asset trigger a CGT event under section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the conversion of the Partnership's depreciating assets to non-partnership assets as part of Step 1 of the Restructure trigger a balancing adjustment event under section 40-295 of the ITAA 1997?

Answer

Yes.

Question 3

If the answer to Question 2 is yes, is the Partnership able to elect to obtain roll-over relief under subsection 40-340(3) of the ITAA 1997 for any balancing adjustment events that occur as a result of Step 1 of the Restructure?

Answer

Yes.

Question 4

Can the relevant parties elect to obtain roll-over relief under Division 122-A of the ITAA 1997 for the interposition of Holding Co between the Trust and the Company in Step 3 of the Restructure?

Answer

Yes.

Question 5

Will the capital gain made when CGT event A1 under subsection 104-10(5) of the ITAA 1997 happens when Partner 1 and Partner 2 transfer their interests in the Partnership to Partner Co 1 (PCo1) and Partner Co 2 (PCo2), in Steps 5 and 7 of the Restructure, be disregarded?

Answer

Yes.

Question 6

Will the first element of PCo1's and PCo2's cost bases in the CGT assets they acquire from Partner 1 and Partner 2 respectively, in Steps 5 and 7 of the Restructure, be the market value consideration they pay to acquire their interests in the Partnership under subsection 110-25(2) of the ITAA 1997?

Answer

Yes.

Question 7

Does the transfer of Partner 1 and Partner 2's interests in the Partnership to PCo1 and PCo2 respectively, in Steps 5 and 7 of the Restructure, trigger a balancing adjustment event under section 40-295 of the ITAA 1997?

Answer

Yes.

Question 8

If the answer to Question 7 is yes, can the parties elect to obtain roll-over relief under subsection 40-340(3) of the ITAA 1997 for the balancing adjustment events that occur as a result of Steps 5 and 7 of the Restructure?

Answer

Yes.

Question 9

Will the step 2 amount of PCo1 and PCo2 allocable cost amount (ACA) worked out under section 705-70 of the ITAA 1997 include:

(a)          their liability to pay the consideration for the acquisition of their Partnership interests through the vendor financing arrangements in Steps 5 and 7 of the Restructure, respectively, and

(b)          the liabilities of the Partnership that are assumed by PCo1 and PCo2 in Steps 5 and 7 of the Restructure, respectively?

Answer

Yes.

Question 10

If the only assets of PCo1 and PCo2 are their interests in the Partnership, will the partnership cost pool for the Partnership for the purposes of section 713-240 equal the sum of PCo1 and PCO2's ACA?

Answer

Yes.

Question 11

Will the balance of the partnership cost pool for the Partnership, after being reduced by the retained cost base assets of the Partnership, be allocated amongst the reset cost base assets (including depreciating assets) of the Partnership in accordance with section 705-35 of the ITAA 1997 and section 705-40 of the ITAA 1997 as modified by subsection 713-240(3) of the ITAA 1997?

Answer

Yes.

Question 12

Will the transactions between the members of the consolidated group in Step 9 of the Restructure be ignored due to the operation of the single entity rule in section 701-1 of the ITAA 1997?

Answer

Yes.

Question 13

Is the Restructure a scheme to which section 177E of Income Tax Assessment Act 1936 (ITAA 1936) applies?

Answer

No.

Question 14

Will the Commissioner apply Part IVA of the ITAA 1936 to any part of the Restructure?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.            Partner 1 and Partner 2 have operated a business (the Business) in partnership (the Partnership) since prior to 20 September 1985.

2.            The Partnership holds significant depreciating assets used in the Business.

3.            The Business currently operates from land (the Land). A business finance agreement loan was used to fund, among other things, the acquisition of the Land.

4.            In 20XX the Partnership sought to separate its assets from the Business. The Company was incorporated to acquire new plant and equipment (P&E) which were to be leased to the Partnership for use in the Business. The Trust owns 100% of the shares in the Company via Partner 2 as trustee of the Trust.

5.            The P&E purchased by the Partnership prior to 20XX remained in the Partnership due to significant transfer duty and income tax consequences that would have arisen.

6.            Partner 1, Partner 2, the Partnership, the Business, the Trust and the Company (collectively, the Group) are considering restructuring to improve asset protection, provide estate planning flexibility and to facilitate the growth of the Business by allowing for the retention of working capital in a corporate environment. The Restructure will take place in a series of steps.

Step 1 - Conversion of Land to a non-Partnership asset

7.            Partner 1 and Partner 2 will execute a deed in which they agree that the Land will cease to be held by them as partners of the Partnership and will instead be held by them as joint tenants separately from the Partnership. That is, the Land will be converted to a non-partnership asset.

8.            For asset protection purposes, the Land will not be transferred with the other Partnership assets. This is to ensure the Land is separate from and does not continue to be exposed to the operating risks of, the Business.

9.            As part of this conversion, any assets fixed to the Land will cease to be held by Partner 1 and Partner 2 as partners of the Partnership and will be held by them as joint tenants separately from the Partnership.

10.          As part of the conversion of the Land to a non-Partnership asset, the Loan (to the extent that it relates to the Land) will be assumed by Partner 1 and Partner 2 in their personal capacities.

Step 2 - Amend the Trust deed (including changing the Trustee)

11.          The terms of the Trust Deed of the Trust will be amended to reflect the estate planning objectives of Partner 1 and Partner 2. There will be no changes to the beneficiaries in the Trust Deed. Partner 2 will be removed as trustee of the Trust and replaced with a corporate trustee. Partner 1 will be the sole shareholder and director of the corporate trustee.

Step 3 - Insert a holding company between the Trust and the Company

12.          A newly incorporated holding company (Hold Co) will be interposed between the Trust and the Company. Partner 2 will be the sole director of Hold Co.

13.          The shares in the Company will be transferred from the Trust in exchange for shares in Hold Co.

14.          Step 3 will be implemented through a Restructure Deed and a Subdivision 122-A rollover will be chosen.

Step 4 - Incorporate 2 new companies to acquire Partner 1 and Partner 2's Partnership interests

15.          Two new companies, Partner Co 1 (PCo1) and Partner Co 2 (PCo2) will be incorporated as wholly owned subsidiaries of Hold Co. Partner 2 will be the sole director of each company.

Step 5 - Transfer of Partner 1's Partnership interest

16.          PCo1 will acquire Partner 1's interest in the Partnership for market value, pursuant to a Sale of Partnership Interest Deed. Partner 1 will provide an at-call loan to PCo1 to fund the transfer. The loan will be for half the enterprise value of the Partnership at the time of the transfer.

17.          After this step, the partners in the Partnership will now be Partner 2 and PCo1.

Step 6 -Transfer of nominated ownership

18.          Partner 2 and PCo1 will lodge a completed form with the relevant Department to change the nominated owner of the Partnership's P&E from Partner 2 to PCo1. After this step, the partners in the Partnership will be Partner 2 and PCo1 and PCo1 will be the nominated owner of the P&E held by the Partnership.

19.          By undertaking this step, the Group considers that no State duty liability should be attracted.

Step 7- Transfer of Partner 2's Partnership interest

20.          PCo2 will acquire Partner 2's interest in the Partnership for market value, pursuant to a Sale of Partnership Interest Deed. Partner 2 will provide an at-call loan to PCo2 to fund the transfer. The loan will be for half the enterprise value of the Partnership at the time of the transfer.

21.          After this step, the partners in the Partnership will be PCo1 and PCo2, with PCo1 continuing to be the nominated owner of the P&E held by the Partnership.

Step 8 - Hold Co chooses to form a tax consolidated group

22.          Hold Co, as the head company, will choose to form a tax consolidated group consisting of Pco1, PCo2 and the Company as its members.

Step 9 - Transfer of P&E to the Company

23.          Once the tax consolidated group has been formed, the Partnership, now consisting of PCo1 and PCo2, will transfer all its P&E to the Company in consideration for the Company taking on all related financing liabilities. The Company will then lease the plant and equipment back to the Partnership and register its interest in them on the Personal Property Securities Register to achieve the desired asset protection outcomes.

24.          Regarding the transfers of partnership interests that will occur at Steps 5 and 7 of the Restructure:

(a)          the nature of the enterprise carried on by the Partnership will continue substantially unchanged following the occurrence of each relevant transfer;

(b)          the client/customer base of the enterprise carried on by the Partnership will continue substantially unchanged following the occurrence of each relevant transfer; and

(c)           the Partnership will continue to use the same business/firm name after the occurrence of each relevant transfer.

25.          The vendor financing liabilities created in Steps 5 and 7 of the Restructure will be treated as accounting liabilities of PCo1 and PCo2 at the joining time in Step 8, in accordance with PCo1 and PCo2's accounting principles.

Additional information provided

26.          You provided a summary of why the Group considers that there will be no State duty implications of Steps 5, 6 and 7 of the Restructure.

27.          You provided a summary as to why the Group considers the interposition of Hold Co between the Trust and the corporate entities (Pco1, PCo2 and the Company) will provide duty relief.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Subsection 177A(5)

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Subsection 177C(1)

Income Tax Assessment Act 1936 Subsection 177C(2)

Income Tax Assessment Act 1936 Section 177CB

Income Tax Assessment Act 1936 Subsection 177CB(2)

Income Tax Assessment Act 1936 Subsection 177CB(3)

Income Tax Assessment Act 1936 Subsection 177CB(4)

Income Tax Assessment Act 1936 Paragraph 177CB(4)(b)

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Subsection 177D(2)

Income Tax Assessment Act 1936 Section 177E

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1997 Section 40-40

Income Tax Assessment Act 1997 Section 40-295

Income Tax Assessment Act 1997 Subsection 40-295(2)

Income Tax Assessment Act 1997 Paragraph 40-295(2)(a)

Income Tax Assessment Act 1997 Paragraph 40-295(2)(b)

Income Tax Assessment Act 1997 Paragraph 40-295(2)(c)

Income Tax Assessment Act 1997 Subsection 40-340(3)

Income Tax Assessment Act 1997 Paragraph 40-340(3)(a)

Income Tax Assessment Act 1997 Paragraph 40-340(3)(b)

Income Tax Assessment Act 1997 Subsection 40-340(4)

Income Tax Assessment Act 1997 Section 104-5

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(5)

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Subsection 108-5(2)

Income Tax Assessment Act 1997 Paragraph 108-5(2)(c)

Income Tax Assessment Act 1997 Subdivision 122-A

Income Tax Assessment Act 1997 Section 122-15

Income Tax Assessment Act 1997 Section 122-20

Income Tax Assessment Act 1997 Subsection 122-20(1)

Income Tax Assessment Act 1997 Subsection 122-20(2)

Income Tax Assessment Act 1997 Subsection 122-20(3)

Income Tax Assessment Act 1997 Section 122-25

Income Tax Assessment Act 1997 Subsection 122-25(1)

Income Tax Assessment Act 1997 Subsection 122-25(2)

Income Tax Assessment Act 1997 Subsection 122-25(3)

Income Tax Assessment Act 1997 Subsection 122-25(4)

Income Tax Assessment Act 1997 Subsection 122-25(5)

Income Tax Assessment Act 1997 Paragraph 122-25(6)(a)

Income Tax Assessment Act 1997 Paragraph 122-25(7)(a)

Income Tax Assessment Act 1997 Section 122-35

Income Tax Assessment Act 1997 Section 701-1

Income Tax Assessment Act 1997 Subsection 701-1(1)

Income Tax Assessment Act 1997 Section 701-10

Income Tax Assessment Act 1997 Division 705

Income Tax Assessment Act 1997 Subdivision 705-A

Income Tax Assessment Act 1997 Section 705-25

Income Tax Assessment Act 1997 Section 705-35

Income Tax Assessment Act 1997 Paragraph 705-35(1)(a)

Income Tax Assessment Act 1997 Section 705-40

Income Tax Assessment Act 1997 Section 705-45

Income Tax Assessment Act 1997 Section 705-47

Income Tax Assessment Act 1997 Section 705-60

Income Tax Assessment Act 1997 Section 705-70

Income Tax Assessment Act 1997 Subsection 705-70(1)

Income Tax Assessment Act 1997 Section 705-75

Income Tax Assessment Act 1997 Section 705-76

Income Tax Assessment Act 1997 Section 705-80

Income Tax Assessment Act 1997 Section 705-85

Income Tax Assessment Act 1997 Subsection 705-125(2)

Income Tax Assessment Act 1997 Subdivision 705-B

Income Tax Assessment Act 1997 Subdivision 713-E

Income Tax Assessment Act 1997 Paragraph 713-205(2)

Income Tax Assessment Act 1997 Paragraph 713-205(3)

Income Tax Assessment Act 1997 Section 713-210

Income Tax Assessment Act 1997 Section 713-220

Income Tax Assessment Act 1997 Section 713-225

Income Tax Assessment Act 1997 Subsection 713-225(2)

Income Tax Assessment Act 1997 Subsection 713-225(4)

Income Tax Assessment Act 1997 Subsection 713-225(6)

Income Tax Assessment Act 1997 Subsection 713-235(2)

Income Tax Assessment Act 1997 Subsection 713-235(3)

Income Tax Assessment Act 1997 Section 713-240

Income Tax Assessment Act 1997 Subsection 713-240(1)

Income Tax Assessment Act 1997 Paragraph 713-240(1)(a)

Income Tax Assessment Act 1997 Paragraph 713-240(1)(c)

Income Tax Assessment Act 1997 Subsection 713-240(2)

Income Tax Assessment Act 1997 Subsection 713-240(3)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Will the conversion of the Land in Step 1 of the Restructure to a non-Partnership asset trigger a CGT event under section 104-5?

Summary

The conversion of the Land in Step 1 of the Restructure to a non-Partnership asset will not trigger a CGT event.

Detailed reasoning

1.            Whilst the Land is in Partner 1 and Partner 2's names, the Land is a partnership asset.

2.            The Land, being property, is considered to be a CGT asset,[1] as it is an interest in an asset of a partnership[2].

3.            Partner 1 and Partner 2 hold interests in the Land as an asset of the Partnership. By converting the Land from being an asset of the Partnership to a non-Partnership asset will not result in any CGT event to happen, as there will be no change in the beneficial ownership of the Land.

4.            As there is no disposal of a CGT asset, CGT event A1 does not happen.[3] Further, no other CGT event listed in section 104-5 will happen in relation to the conversion of the Land in Step 1.

Question 2

Will the conversion of the Partnership's depreciating assets to non-Partnership assets as part of Step 1 of the Restructure trigger a balancing adjustment event under section 40-295?

Summary

A balancing adjustment event occurs in respect of the conversion of the Partnership's depreciating assets to non-Partnership assets.

Detailed reasoning

5.            Item 7 of the table in section 40-40 provides that a partnership, not the individual partners of the partnership, are taken to hold the depreciating assets of the partnership.

6.            As part of the conversion of the Land to a non-Partnership asset, any depreciating assets that are fixed to the Land will cease to be held by Partner 1 and Partner 2 as partners of the Partnership and will instead be held by them as joint tenants in their personal capacities separately from the Partnership.

7.            Subsection 40-295(2) states:

A balancing adjustment event occurs for a *depreciating asset if:

(a)          for any reason, a change will occur in the holding of, or in the interests of entities in, the asset; and

(b)           the entity or one of the entities that had an interest in the asset before the change has an interest in it after the change; and

(c)           the asset was a partnership asset before the change or becomes one as a result of the change.

8.            A change will occur in the holding of the Land, since the Partnership will cease to be the holder for the Land. Therefore, the requirement in paragraph 40-295(2)(a) will be satisfied.

9.            Partner 1 and Partner 2 have an interest in the Partnership's Land before the conversion and will have an interest in the Land as a non-Partnership asset them after the conversion. Therefore, the requirement in paragraph 40-295(2)(b) will be satisfied.

10.          As the Land was a Partnership asset before the conversion, the requirement in paragraph 40-295(2)(c) will be satisfied.

11.          Since all criteria in subsection 40-295(2) will be satisfied, a balancing adjustment event will occur on the conversion of the Land from a Partnership depreciating asset to a non-Partnership depreciating asset.

Question 3

If the answer to Question 3 is yes, is the Partnership able to elect to obtain roll-over relief under subsection 40-340(3) for any balancing adjustment events that occur as a result of Step 1 of the Restructure?

Summary

The Partnership is entitled to elect to obtain roll-over relief under subsection 40-340(3) following Step 1 of the Restructure.

Detailed reasoning

12.          Subsection 40-340(3) provides the following roll-over relief for a balancing adjustment event:

There is also roll-over relief if:

(a)          there is a balancing adjustment event for a depreciating asset because of subsection 40-295(2) (about a change in the holding of, or in interests in, the asset); and

(b)          the entity or entities that had an interest in the asset before the change (also the transferor) and the entity or entities that have an interest in the asset after the change (also the transferee) jointly choose the roll-over relief.

13.          Question 2 determined a balancing adjustment event under section 40-295(2) will happen for the Land that is converted from a Partnership depreciating asset to a non-Partnership depreciating asset. Therefore, the requirement in paragraph 40-340(3)(a) is satisfied.

14.          The choice to apply the roll-over must comply with the requirements set out at subsection 40-340(4). You have stated the Partnership, Partner 1 and Partner 2 will jointly choose to apply roll-over relief. Therefore, the requirement in paragraph 40-340(3)(b) will be satisfied.

15.          As both the requirements in subsection 40-340(3) will be satisfied, the roll-over relief is available for the balancing adjustment event that occurs as a result of Step 1 of the Restructure.

Question 4

Will the trustee of the Trust be eligible to choose roll-over relief under Subdivision 122-A when transferring its shares in the Company to Hold Co in Step 3 of the Restructure?

Summary

The trustee of the Trust will be eligible to choose roll-over relief under Subdivision 122-A when transferring its shares in the Company to Hold Co.

Detailed reasoning

16.          Broadly, Subdivision 122-A allows for the roll-over of a capital gain or loss when an individual or trustee disposes of a CGT asset to a wholly owned company if the conditions in section 122-15 to section 122-35 are met.

17.          In order for an individual or trustee to obtain roll-over relief under Subdivision 122-A the CGT event which triggers the capital gain or loss must be one listed in the table in section 122-15. CGT event A1 is one of the trigger events listed in the table.

18.          CGT event A1 happens if you dispose of a CGT asset[4]. You dispose of a CGT asset if a change of ownership occurs from you to another entity[5]. Shares in a company are CGT assets.[6]

19.          The transfer of the shares in the Company by the trustee of the Trust to Hold Co will trigger CGT event A1, as a change of ownership will occur. Therefore, the requirement in section 122-15 will be satisfied.

20.          Under section 122-20, the consideration received for the disposal of the shares must be only shares in the wholly owned company or, in addition to shares in the wholly owned company, the company undertaking to discharge any liabilities in respect of the shares.[7] In addition, the shares received in the wholly owned company cannot be redeemable shares.[8] The market value of the shares received for the trigger event happening must be substantially the same as the market value of the shares disposed of, less any liabilities the company undertakes to discharge.[9]

21.          In this case the consideration the trustee of the Trust will receive for the disposal of its shares in the Company will be shares in Hold Co. These shares will not be redeemable shares. The market value of the shares in the Company disposed of by the Trust to Hold Co will be substantially the same as the market value of the shares it receives in Hold Co. Therefore, the requirements in section 122-20 will be satisfied.

22.          Section 122-25 lists the following requirements that must also be satisfied for roll-over relief to be available:

(a)          the individual or trustee must own all the shares in the company just after the time of the disposal of their shares to the company - and they must own the shares in the same capacity as they owned the assets that the company now owns[10]

(b)          the disposal of the asset is not one listed in the table in subsection 122-25(2)

(c)           the asset must not be a precluded asset[11]

(d)          if the CGT asset or any of the assets of the business is a right, option, convertible interest or exchangeable interest and the company acquires another CGT asset by exercising the right or option or by converting the convertible interest or in exchange for the disposal or redemption of the exchangeable interest, the other asset cannot become trading stock of the company just after the company acquired it[12]

(e)          the ordinary and statutory income of the recipient company must not be exempt from income tax because it is an exempt entity for the income year the roll-over occurs,[13] and

(f)            the company and individual are Australian residents at the time of the trigger event,[14] or for a trustee, a resident trust for CGT purposes.[15]

23.          In relation to these other requirements:

(a)          the trustee of the Trust will own 100% of the shares in Hold Co just after the share transfer and the Trustee will own those shares in the same capacity as they owned the shares in the Company

(b)          the disposal of the shares is not one listed in the table in subsection 122-25(2)

(c)           the shares are not precluded assets

(d)          shares in the Company are not rights, options, convertible interests or exchangeable interests

(e)          Hold Co will not be an exempt entity

(f)            the Trust is a resident for CGT purposes and Hold Co is an Australian resident at the time of the trigger event.

24.          Therefore, all of the requirements in section 122-25 will be satisfied.

25.          Section 122-35 provides additional requirements if a CGT asset has been disposed of and the company has undertaken to discharge a liability in respect of it.

26.          Section 122-35 will not apply to the Restructure since Hold Co will not undertake to discharge any liabilities in relation to the transfer of the trustee's shares in the Company.

27.          As all the requirements set out in sections 122-20 to 122-35 will be satisfied, the trustee of the Trust is able to choose to obtain roll-relief under section 122-15 for the transfer of its shares in the Company to Hold Co.

Question 5

Will the capital gain made when CGT event A1 under subsection 104-10(5) happens when Partner 1 and Partner 2 transfer their interests in the Partnership to PCo1 and PCo2, in Steps 5 and 7 of the Restructure, be disregarded?

Summary

Any capital gain or loss made when Partner 1 and Partner 2 transfer their interests in the Partnership to PCo1 and PCo2, in Steps 5 and 7 of the Restructure, will be disregarded under subsection 104-10(5), as they acquired their interests in the Partnership before 20 September 1985.

Detailed reasoning

28.          CGT event A1 happens if you dispose of your ownership interest in a CGT asset.[16]

29.          An interest in an asset of a partnership or an interest in a partnership is considered to be a CGT asset.[17]

30.          Under subsection 104-10(5) capital gains or losses from CGT event A1 are disregarded if the taxpayer acquired the asset before 20 September 1985.

31.          Partner 1 and Partner 2 acquired their interests in the Partnership before 20 September 1985, at the same time the Business was established. The only assets of the Partnership after the Land is converted to a non-Partnership asset, are the depreciating assets and the Brand Equity of the Business, which was created at the inception of the Business.

32.          When Partner 1 and Partner 2 transfer their interests in the Partnership to PCo1 and PCo2, in Steps 5 and 7 of the Restructure, CGT event A1 will happen. As Partner 1 and Partner 2 acquired their interests in the Partnership before 20 September 1985, any capital gain or loss that will be made from this transfer will be disregarded.

Question 6

Will the first element of PCo1's and PCo2's cost bases in the CGT assets they acquire from Partner 1 and Partner 2 respectively, in Steps 5 and 7 of the Restructure, be the market value consideration they pay to acquire their interests in the Partnership under subsection 110-25(2)?

Summary

The first element of the cost bases PCo1 and PCo2 acquired in the interests in the Partnership will be the market value consideration they pay to Partner 1 and Partner 2 under subsection 110-25(2).

Detailed reasoning

33.          Section 110-25 sets out the general rules about cost base. Subsection 110-25(2) states:

The first element of the cost base is the total of:

a)            the money you paid, or are required to pay, in respect of *acquiring it; and

b)            the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition).

34.          PCo1 will acquire Partner 1's interest in the Partnership for market value consideration, pursuant to a Sale of Partnership Interest Deed. Partner 1 will provide an at-call loan to PCo1 to fund the transfer. The loan will be for half the enterprise value of the Partnership at the time of the transfer.

35.          PCo2 will acquire Partner 2's interest in the Partnership for market value consideration, pursuant to a Sale of Partnership Interest Deed. Partner 2 will provide an at-call loan to PCo2 to fund the transfer. The loan will be for half the enterprise value of the Partnership at the time of the transfer.

36.          Moreover, you have stated the parties will be dealing with each other at arm's length, therefore the market value substitution rule contained in section 112-20 is not applicable.

37.          The consideration paid to Partner 1 and Partner 2 by PCo1 and PCo2 will be market value consideration for their interests in the Partnership. Consequently, the first element of the cost bases PCo1 and PCo2 acquired in the interests in the Partnership will be the market value consideration they pay to Partner 1 and Partner 2 under subsection 110-25(2).

Question 7

Does the transfer of Partner 1 and Partner 2's interests in the Partnership to PCo1 and PCo2 respectively, in Steps 5 and 7 of the Restructure, trigger a balancing adjustment event under section 40-295?

Summary

When Partner 1 and Partner 2 transfer their interests in the Partnership to PCo1 and PCo2, in Steps 5 and 7 of the Restructure, a balancing adjustment event will occur in relation to the depreciating assets of the Partnership under subsection 40-295(2).

Detailed reasoning

38.          Subsection 40-295(2) states:

A balancing adjustment event occurs for a *depreciating asset if:

(a)          for any reason, a change will occur in the *holding of, or in the interests of entities in, the asset; and

(b)          the entity or one of the entities that had an interest in the asset before the change has an interest in it after the change; and

(c)          the asset was a partnership asset before the change or becomes one as a result of the change.

39.          When Partner 1 transfers their interest in the Partnership to PCo1 in Step 5 of the Restructure, a balancing adjustment event will occur in relation to the depreciating assets of the Partnership, as:

(a)           a change will occur in the holding of the interests in the Partnership (due to Partner 1 ceasing to be a partner and PCo1 becoming a partner)

(b)           Partner 2 had an interest in the depreciating assets before the change and will have an interest in these assets after the change, and

(c)           the depreciating assets were Partnership assets before the change and will remain depreciating assets of the Partnership after the change.

40.          When Partner 2 transfers their interest in the Partnership to PCo2 in Step 7 of the Restructure, a balancing adjustment event will occur in relation to the depreciating assets of the Partnership, as:

(a)          a change will occur in the holding of the interests in the Partnership (due to Partner 2 ceasing to be a partner and PCo2 becoming a partner)

(b)           PCo1 will have an interest in the depreciating assets before the change and will have an interest in these assets after the change, and

(c)           the depreciating assets were Partnership assets before the change and will remain depreciating assets of the Partnership after the change.

Question 8

If the answer to Question 7 is yes, can the parties elect to obtain roll-over relief under subsection 40-340(3) for the balancing adjustment events that occur as a result of Steps 5 and 7 of the Restructure?

Summary

The relevant parties will be entitled to roll-over relief under subsection 40-340(3) following Steps 5 and 7 of the Restructure.

Detailed reasoning

41.          Subsection 40-340(3) states:

There is also roll-over relief if:

(a)          there is a *balancing adjustment event for a *depreciating asset because of subsection 40-295(2) (about a change in the holding of, or in interests in, the asset); and

(b)          the entity or entities that had an interest in the asset before the change (also the transferor) and the entity or entities that have an interest in the asset after the change (also the transferee) jointly choose the roll-over relief.

42.          Subsection 40-340(4) states:

The choice must:

(a)          be in writing; and

(b)          contain enough information about the transferor's holding of the property for the transferee to work out how this Division or Subdivision 328-D applies to the transferee's holding of the *depreciating asset; and

(c)           be made within 6 months after the end of the transferee's income year in which the *balancing adjustment event occurred, or withing a longer period allowed by the Commissioner.

43.          As established earlier, as a balancing adjustment event will occur in relation to the depreciating assets of the Partnership, the first requirement in paragraph 40-340(3)(a) will be satisfied.

44.          You have stated:

(a)          for Step 5 of the Restructure, Partner 1 and Partner 2, PCo1 and the Partnership will jointly choose the roll-over relief and will comply with the other requirements in subsection 40-340(4)

(b)          for Step 7 of the Restructure, Partner 2, Pco1, PCo2 and the Partnership will jointly choose the roll-over relief and will comply with the other requirements in subsection 40-340(4)

45.          Therefore, the second requirement in paragraph 40-340(3)(b) will be satisfied, and the relevant parties will be entitled to choose roll-over relief under subsection 40-340(3) following Steps 5 and 7 of the Restructure.

Question 9

Will the Step 2 amount of PCo1 and PCo2's allocable cost amount (ACA) worked out under section 705-70 include:

(a)          their liability to pay the consideration for the acquisition of their Partnership interests through the vendor financing arrangements in Steps 5 and 7 of the Restructure, respectively, and

(b)          the liabilities of the Partnership that are assumed by PCo1 and PCo2 in Steps 5 and 7 of the Restructure, respectively?

Summary

PCo1 and PCo2's 50% share of the liabilities of the Partnership will be included in Step 2 of their respective ACA calculations.

Detailed reasoning

46.          Section 705-60 sets out how to work out the joined group's ACA for the joining entity, and states 'the step 2 amount worked out under section 705-70, which is about the value of the joining entity's liabilities.'

47.          Subsection 705-70(1) states:

For the purposes of step 2 in the table in section 705-60, the step 2 amount is worked out by adding up the amounts of each thing (an accounting liability) that, in accordance with the joining entity's *accounting principles for tax cost setting, is a liability of the joining entity at the joining time.

48.          The vendor financing liabilities created in Steps 5 and 7 of the Restructure will be treated as accounting liabilities of PCo1 and PCo2 at the joining time in accordance with PCo1 and PCo2's accounting principles. Accordingly, the vendor financing liabilities will be included in the step 2 amount of PCo1 and PCo2's entry ACA.

49.          Where a partner in a partnership joins a consolidated group, the calculation of step 2 of the ACA is modified to include the partner's share of the liabilities of the partnership in accordance with subsection 713-225(6).

50.          Subsection 713-225(6) states:

If:

(a)          in accordance with the *accounting principles that the partnership would use if it were to prepare its financial statements just before the joining time, a thing (the partnership liability) is a liability of the partnership at the joining time; and

(b)          for that reason, the partnership liability is not an accounting liability of the joining entity at the joining time for the purposes of section 705-70;

then sections 705-70, 705-75 and 705-80 operate as if the partnership liability were an accounting liability of the joining entity at the joining time, to the extent of the joining entity's individual share of the partnership liability.

51.          Therefore, PCo1 and PCo2's 50% share of the liabilities of the Partnership will be included in step 2 of their respective ACA calculations.

52.          Further, given Hold Co's decision to form a tax consolidated group at Step 8 of the Restructure will be a group formation case, there are no relevant modifications contained in sections 705-70, 705-75, 705-76, 705-80 or 705-85 or in Subdivision 705-B that will apply.

Question 10

If the only assets of PCo1 and PCo2 are their interests in the Partnership, will the partnership cost pool for the Partnership for the purposes of section 713-240 equal the sum of PCo1 and PCo2's ACA?

Summary

Since PCo1 and PCo2's ACAs will be fully allocated to the tax cost setting amounts of their partnership cost setting interests, with those tax cost setting amounts then added together to calculate the partnership cost pool, the partnership cost pool for the Partnership will equal the sum of PCo1 and PCo2's ACA.

Detailed reasoning

53.          Subdivision 713-E modifies tax cost setting rules to take account of the special characteristics of partnerships.

54.          Paragraph 713-205(2) states:

The second object of this Subdivision is to ensure that where a partnership becomes a subsidiary member of a consolidated group, the provisions mentioned in subsection (3) operate:

(a)             as if the group became the holder of the assets of the partnership; and

(b)          to set the tax cost of the assets of the partnership at an appropriate amount, taking into account the taxation treatment of partnerships.

Note: While the partnership is a subsidiary member of the group, it loses its separate tax identity (under the single entity rule in subsection 701-1(1)). Therefore, in general, the assets of the partnership are treated as assets of the head company of the group and partnership cost setting interests in the partnership are ignored.

55.          The provisions listed at paragraph 713-205(3) are:

(a)  section 701-10 (about setting the tax cost of assets of an entity joining a group);

(b)          Subdivision 705-A; and

(c)           any other provision of this Act giving Subdivision 705-A a modified effect in circumstances other than those covered by that Subdivision.

56.          A partnership cost setting interest in a partnership is the asset that is comprised of an interest in an asset of the partnership or an interest in the partnership that is not otherwise covered but does not include an asset that is comprised of a membership interest in the partnership.[18]

57.          Although the assets of the Partnership will ultimately be treated as being held by Hold Co and will have their tax costs set as part of the ACA process, and the partnership cost setting interests in the Partnership held by PCo1 and PCo2 will ultimately be disregarded, the tax cost setting amounts for each partnership cost setting interest must first be worked out by applying the modifications in sections 713-220 and

58.          713-225.

59.          Section 713-225(2) (Partnership cost setting interest takes character of partnership asset - general) relevantly states:

Work out the tax cost setting amounts for those partnership cost setting interests as if any partnership cost setting interest that relates to an asset (the underlying partnership asset) of the partnership were an asset of the same kind as the underlying partnership asset.

Note: The kinds of assets mentioned in subsection (2) include the following:

(a) retained cost base assets;

(b) reset cost base assets that are held on revenue account (however, if such assets are trading stock or depreciating assets, the special rule in subsection (4) will apply) or on capital account;

(c) excluded assets (see subsection (3));

(d) current assets (within the meaning of subsection 705-125(2)).

60.          Subsection 713-225(4) provides:

Despite subsection (2), if an asset of the partnership is trading stock, a depreciating asset or a registered emissions unit, work out the tax cost setting amounts for those partnership cost setting interests as if:

(a)             a partnership cost setting interest relating to that asset were a retained cost base asset; and

(b)          the tax cost setting amount for that partnership cost setting interest were equal to its terminating value (worked out in accordance with section 713-215).

61.          PCo1 and PCo2's ACA should (assuming the only assets of PCo1 and PCo2 are their interests in the Partnership) be fully allocated to their partnership cost setting interests in the Partnership to determine the respective tax cost setting amounts of the Partnership assets.

62.          The partnership cost setting interests that relate to depreciating assets are treated as retained cost base assets and therefore their tax cost setting amount will be capped at their terminating value.[19] Given that the market value of the depreciating assets of the Partnership exceeds their terminating value (based on the Valuation), and their full market value is reflected in step 2 of the ACA, there will be a skewing of the ACA towards the partnership cost setting interests that represent the brand equity of the Business.

63.          Since the Partnership will join the tax consolidated group, the tax cost setting amounts of PCo1 and PCo2's partnership cost setting interests will be ignored. However, the tax cost setting amounts of the partnership cost setting interests are relevant to calculating the tax cost setting amounts of the assets of the Partnership.

64.          Subsection 713-235(2) provides:

In applying the provisions mentioned in subsection 713-205(3) in relation to the partnership:

(a)  do not work out an allocable cost amount for the partnership; and

(b)          work out the tax cost setting amount for each asset of the partnership covered by subsection (3), in accordance with section 713-240.

Note: If a partner in the partnership becomes a subsidiary member of the group at the joining time, tax cost setting amounts are worked out for the assets of the partner (including partnership cost setting interests) before tax cost setting amounts are worked out for the assets of the partnership.

65.          Section 713-240 contains the rules to work out the tax cost setting amounts for the assets of the Partnership (other than excluded assets). The first step is to add up the subsection 713-240(2) amounts for all the partnership cost setting interests in the partnership at the joining time.[20] The result is the partnership cost pool.

66.          Section 713-240(2) provides that the amount for a partnership cost setting interest that is added to the partnership cost pool is as per the following table:

Table 1: Section 713-240(2) provides that the amount for a partnership cost setting interest that is added to the partnership cost pool is as per the following table:

67.          The amount referred to in subsection 713-240(2) for PCo1 and PCo2's partnership cost setting interests will equal the tax cost setting amounts determined at the joining time by applying the modifications in sections 713-220 and 713-225 (as that will also be the interests' (reduced) cost base).

68.          Since PCo1 and PCo2's ACAs will be fully allocated to the tax cost setting amounts of their partnership cost setting interests, with those tax cost setting amounts then added together to calculate the partnership cost pool, the partnership cost pool for the Partnership will equal the sum of PCo1 and PCo2's ACA.

Question 11

Will the balance of the partnership cost pool for the Partnership, after being reduced by the retained cost base assets of the Partnership, be allocated amongst the reset cost base assets (including depreciating assets) of the Partnership in accordance with section 705-35 and section 705-40 as modified by subsection 713-240(3)?

Summary

The depreciating assets are taken to be reset cost base assets for the purposes of determining the tax cost setting amounts of the Partnership assets.

Detailed reasoning

69.          Subsection 713-240(1) states:

Work out the *tax cost setting amounts for the assets covered by subsection 713-235(3) as follows:

(a)          firstly, add up the subsection (2) amounts for all the partnership cost setting interests in the partnership at the joining time (the result is the partnership cost pool);

Note 1: Partnership cost setting interests held by a partner that becomes a subsidiary member of the group at the joining time are included in the calculation in paragraph (a). The operation of the cost setting rules in relation to that partner at the joining time may affect the subsection (2) amount for those interests.

Note 2: Partnership cost setting interests are included in the calculation in paragraph (a), even if the cost setting rules have not applied in relation to the interests (for example, if the interests were acquired directly by the head company).

(b)          secondly, work out the tax cost setting amounts for the assets covered by subsection 713-235(3) that are retained cost base assets, in accordance with section 705-25;

(c)           thirdly, work out the tax cost setting amounts for the rest of the assets covered by subsection 713-235(3), in accordance with subsection (3).

70.          In allocating partnership cost pool to partnership assets that are not retained cost base assets, subsection 713-240(3) states:

Work out the tax cost setting amounts for the assets mentioned in paragraph (1)(c) by applying sections 705-35, 705-40, 705-45 and 705-47 to those assets, as if:

(a)          the partnership were, at the joining time, the joining entity mentioned in those sections; and

(b)          the assets of the partnership were the assets covered by subsection 713-235(3); and

(c)           the allocable cost amount mentioned in paragraph 705-35(1)(a) were the partnership cost pool.

71.          Subsection 713-235(3) states:

An asset of the partnership at the joining time is covered by this subsection, unless it would be an excluded asset for the purposes of section 705-35 on the assumption that tax cost setting amounts were worked out for the assets of the partnership under Division 705 (instead of section 713-240).

72.          Under subsection 713-240(1), after working out the partnership cost pool you then allocate the tax cost setting amounts for the partnership assets covered by subsection 713-235(3) as follows:

(a)          firstly, to the retained cost base assets of the Partnership, and

(b)          the balance to the reset cost base assets of the Partnership.

73.         In accordance with Division 705-A, depreciating assets do not fall within the meaning of a retained cost base asset in subsection 705-25(5) and are therefore reset cost base assets. The tax cost setting amounts for thes depreciating assets are worked out under the provisions in Division 705 that are referred to in subsection 713-240(3). It should be noted that unlike working out the tax cost setting amounts of the partnership cost setting interests, the depreciating assets are taken to be reset cost base assets for the purposes of determining the tax cost setting amounts of the Partnership assets.

Question 12

Will the transactions between the members of the consolidated group in Step 9 of the Restructure be ignored due to the operation of the single entity rule in section 701-1?

Summary

The operation of the single entity rule is applicable to the transactions between members of the consolidated group as part of the Restructure.

Detailed reasoning

74.          When a consolidated group is formed, the group is treated as a single entity for income tax purposes.[21] Broadly, this means that on joining a consolidated group the subsidiary members lose their individual income tax identities and are treated as parts of the head company of the consolidated group (rather than as separate entities) for the purposes of determining the head company's income tax liability.

75.          In effect, the consolidated group is treated as if it were a single divisional company. Intragroup assets and liabilities and intragroup transactions have no income tax consequences.

76.          In this case, since the Company and the Partnership between PCo1 and PCo2 will be members of the same consolidated group, the transfers of the plant and equipment at Step 9 of the Restructure will have no income tax consequences due to the operation of the single entity rule.

Question 13

Is the Restructure a scheme to which section 177E of the ITAA 1936 applies?

Summary

The proposed scheme is not considered a scheme by way of or in the nature of dividend stripping or having the substantially such effect.

Detailed reasoning

77.          Section 177E of the ITAA 1936 brings dividend stripping within Pt IVA to cancel any tax benefit that arises under a dividend stripping arrangement.

78.          Section 177E of the ITAA 1936 will apply to a scheme that:

(a) was by way of, or in the nature of, 'dividend stripping'; or

(b) had substantially the effect of a scheme by way of, or in the nature of, 'dividend stripping'.

79.          'Dividend stripping' is not a defined term in the ITAA 1936. In FCT v Consolidated Press Pty Ltd [1999] FCA 1199, the court identified the common characteristics of a 'dividend stripping' scheme as follows:

(a) a company with substantial undistributed profits creating a potential tax liability, either for the company or its shareholders;

(b) the sale or allotment of shares to another party;

(c) the payment of a dividend to that party out of the company's profits;

(d) the recipient of the shares escaping Australian income tax on the dividend declared;

(e) the vendor shareholders receiving a capital sum for the shares in an amount the same as or very close to the dividends paid to the purchasers; and

(f) the scheme being carefully planned, with all the parties acting in concert, for the predominant if not the sole purpose of the vendor shareholders, in particular, avoiding tax on a distribution of dividends by the target company.

80.          In the Restructure as proposed:

(a)          the current partners of the Partnership are individuals, not companies

(b)          Hold Co, PCo1 or PCo2 are newly incorporated companies that will not have any undistributed profits

(c)             there will be no sale or allotment of shares in Hold Co, PCo1 or PCo2 to another party as part of the Restructure

(d)            Hold Co is merely being interposed between the Trust and the Company in Step 3 of the Restructure, and any dividends that are paid from the Company to Hold Co will still ultimately flow through to the Trust, and

(e)            the dominant purpose of the Restructure is commercially driven, in particular the expectation that the minimisation of State duty will occur on the corporatisation of the Business and the transfer of plant and equipment between the Partnership and the Company. In your view, the steps that are to be undertaken is to ensure no State duty will apply under the Act. Moreover, the structure facilitates the transfers of plant and equipment by PCo1 and PCo2 to the Company, supporting the segregation of functions within the Group. That is, the parties to the Restructure do not have the dominant purpose of avoiding tax on a distribution of dividends.

81.          Whilst there is potentially an aspect of deferral to distributions, the arrangement lacks the necessary tax avoidance purpose required for dividend stripping. Consequently, the Restructure is not a scheme to which section 177E of the ITAA 1936 applies.

Question 14

Will the Commissioner apply Part IVA of the ITAA 1936 to any part of the Restructure?

Summary

The proposed scheme, as outlined in the facts and assumptions, does not exhibit the necessary tax avoidance purpose for the application of Part IVA of the ITAA 1936.

Detailed reasoning

82.          The general anti-avoidance rules are contained in Pt IVA. These rules apply to deny a tax benefit to a taxpayer or taxpayers in connection with a scheme entered into or carried out for the sole or dominant purpose of enabling that tax benefit. Where Part IVA applies to a scheme, the Commissioner may make a determination cancelling the associated tax benefit(s).[22]

83.          The requirements for the application of Part IVA of the ITAA 1936 to a particular set of circumstances are as follows:

(a)          there is a 'scheme' within the meaning of section 177A of the ITAA 1936

(b)          a taxpayer(s) obtain a 'tax benefit'[23] in connection with the scheme, and

(c)          a participant in the scheme entered into or carried out the scheme, or any part of it, for the sole or dominant purpose of enabling a taxpayer or taxpayers to obtain a tax benefit in connection with the scheme.[24]

First Requirement - Scheme

84.          The threshold element that must be met for Part IVA to apply is the existence of a 'scheme' entered into or carried out after 27 May 1981.[25]

85.          The word 'scheme' is broadly defined in section 177A of the ITAA 1936 to mean:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct.

86.          The potential scheme for Part IVA purposes includes all the steps that comprise the Restructure. Therefore, the first requirement will be satisfied.

Second Requirement - Tax benefit

87.          Requires a taxpayer(s) to obtain a 'tax benefit'[26] in connection with the scheme (i.e. a determination that the Commissioner may make under section 177F of the ITAA 1936 is in respect of a tax benefit).

88.          Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules states at paragraph 75 that:

The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or an 'alternative postulate'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This alternative hypothesis or postulate also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D. The alternative hypothesis(es) or postulate(s) is referred to in this practice statement as the 'counterfactual(s)'.

89.          For schemes entered into on or after 16 November 2012, a tax benefit can arise in a number of ways as set out in subsection 177C(1) of the ITAA 1936 and must be determined with reference to section 177CB of the ITAA 1936. In particular, subsections 177CB(2) and (3) of the ITAA 1936 specify requirements that must be met by a counterfactual under the 'would have' limb and 'reasonable expectation' limb, respectively, of the applicable paragraph(s) in subsection 177C(1) of the ITAA 1936.

90.          Subsection 177CB(2) states:

A decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme).

91.          On the basis that the relevant scheme consists of the arrangements described in the Restructure, a 'postulate that comprises only the events or circumstances that actually happened or existed' results in the maintenance of the existing state of affairs (in respect of which there is no associated tax benefit).

92.          The Commissioner has not, therefore, identified a counterfactual that satisfies subsection 177CB(2) of the ITAA 1936 and in respect of which there is an associated tax benefit.

93.          Subsection 177CB(3) of the ITAA 1936 states:

A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme.

94.          Subsection 177CB(4) of the ITAA 1936 then directs that:

In determining for the purposes of subsection (3) whether a postulate is such a reasonable alternative:

(a) have particular regard to:

(i) the substance of the scheme; and

(ii) any result or consequence for the taxpayer that is or would be achieved by the scheme (other than a result in relation to the operation of this Act); but

(b) disregard any result in relation to the operation of this Act that would be achieved by the postulate for any person (whether or not a party to the scheme).

95.          Four counterfactuals in respect of the Restructure have been identified in correspondence with the Applicant. Those counterfactuals are:

•                     Counterfactual 1: A single company will acquire the respective partnership interests of Partner 1 and Partner 2 for market value. That is, PCo1 and PCo2 are substituted with a single company.

•                     Counterfactual 2: A single company will acquire the business assets of the partnership for market value. That is, PCo1 and PCo2 are substituted with a single new company and it is the business of the partnership, not Partner 1 and Partner 2's respective interests in the partnership, that it acquires.

•                     Counterfactual 3: PCo1 and PCo2 are gifted the respective partnership interests of Partner 1 and Partner 2. That is, the consideration for the transfers is reduced to nil.

•                     Counterfactual 4: No consolidation election is made by Hold Co. That is, the only difference between the proposal and counterfactual is the election made by Hold Co under section 703-50.

96.          An analysis of each of those counterfactuals, in particular regarding whether they satisfy subsections 177CB(3) and (4) of the ITAA 1936 and there is an associated tax benefit, is set out below.

Counterfactual 1

97.          Counterfactual 1 would involve the purported creation of an 'intermediate' partnership between the company and Partner 1, which would dissolve when Partner 1 transfers their interest in the assets to the company. This feature distinguishes counterfactual 1 from counterfactual 2.

98.          You contend that counterfactual 1 would attract duty, whereas the scheme would not. There is significant ambiguity as to whether or not this is the case. However, your contention is a reasonable basis, commercially, on which to proceed with the Restructure, since the alternative is to pursue an arrangement where duty would be payable.

99.          Specifically, it appears that the scheme may not attract duty, since:

•                     no partnership property would be transferred to (or retained by) a partner upon dissolution or retirement,[27] and

•                     there would be no 'partnership acquisition'[28], given the absence of any relevant interests in land.

100.       In contrast, counterfactual 1 would attract duty, as it would involve the transfer of dutiable property to the company upon its retirement from (and the dissolution of) the 'intermediate' partnership.[29]

101.       The Commissioner therefore does not consider counterfactual 1 to be a reasonable alternative to the Restructure.

Counterfactual 2

102.       Counterfactual 2 would involve the immediate dissolution of the Partnership upon transfer of its assets to the company, with no 'intermediate' partnership. This feature distinguishes counterfactual 2 from counterfactual 1.

103.       You contend that counterfactual 2 would attract duty, whereas the scheme would not. Given the significant ambiguity as to whether or not this is the case, your contention is a reasonable basis, commercially, on which to proceed with the Restructure, since the alternative is to pursue an arrangement in which the attraction of duty is a guaranteed outcome.

104.       Specifically, it appears that (unlike the scheme) counterfactual 2 would attract duty, as it would involve the transfer of dutiable property to the company.[30]

105.       The Commissioner therefore does not consider counterfactual 2 to be a reasonable alternative to the Restructure.

Counterfactual 3

106.       Counterfactual 3 involves an identical transaction structure to the Restructure with the only difference being the consideration for the transfer of the partnership interests. Consequently, the duty implications will be the same.

107.       However counterfactual 3 involves Partner 1 and Partner 2 divesting themselves of the value of the Business, while the Restructure involve Partner 1 and Partner 2 acquiring receivables equal to the market value of the partnership interests transferred to PCo1 and PCo2.

108.       That is, counterfactual 3 results in Partner 1 and Partner 2 holding $XX fewer assets than the proposed scheme.

109.       In addition to that difference in assets held personally by Partner 1 and Partner 2, the nature of the assets they will hold under the Restructure (that is, loans to the companies carrying on the Business) produces genuine commercial consequences. These include that, as secured creditors of the Business carried on by PCo1 and PCo2, they will have priority over potential future claimants against the Business. That is, the exposure of the existing value of the business to risks is reduced.

110.       The difference in the financial position of Partner 1 and Partner 2 coupled with the associated greater exposure to risk of the Business, is a result or consequence for the taxpayer that is or would be achieved by the scheme. Having particular regard to the materially different financial and commercial positions, the Commissioner does not consider counterfactual 3 to be a reasonable alternative to the Restructure.

Counterfactual 4

111.       On the basis that counterfactual 4 involves an identical transaction structure to the Restructure, with the difference being limited to the consolidation election by Hold Co, the duty implications should be the same.

112.       Similarly, the effects of an election under section 703-50 to form a consolidated group are confined to the income tax implications of doing so. It is, therefore, within the scope of the direction in paragraph 177CB(4)(b) of the ITAA 1936 to 'disregard any result in relation to the operation of this Act that would be achieved by the postulate for any person (whether or not a party to the scheme)'.

113.       Accordingly, the Commissioner has not identified any impediments to counterfactual 4 being a reasonable alternative to the Restructure.

114.       For the purposes of identifying a tax benefit associated with counterfactual 4, consideration needs to be given to the 'election exclusion' in subsection 177C(2) of the ITAA 1936. Specifically, each of the paragraphs in that provision provides an exclusion from the relevant type of tax benefit (i.e. under the relevant paragraph in subsection 177C(1) of the ITAA 1936) where it:

is attributable to the making of a declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option by any person, being a declaration, agreement, election, selection, choice, notice or option expressly provided for by this Act or the Income Tax Assessment Act 1997; and

the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be.

115.       The Consolidation Reference Manual considers in detail the potential application of Part IVA to elections to consolidate. Relevantly, in scenario 1 of C9-1-220, a material uplift in the tax cost of depreciating assets is identified as a potential tax benefit.

116.       As observed in PS LA 2005/24 at paragraph 70:

the relevant tax benefit [in this case, deductions associated with a tax cost uplift for the plant and equipment] will not be excluded under subsection 177C(2) if it was obtained in connection with a scheme that was entered into or carried out by any person for the sole or dominant purpose of enabling that person or any other person to make the election or choice etcetera.

117.       It is not controversial that steps 3 and 4 of the Restructure, being the interposition of Hold Co between the Trust and the Company, and the incorporation of PCo1 and PCo2 as subsidiaries of Hold Co, facilitate the making of a consolidation election by Hold Co, resulting in the existence of a consolidated group.

118.       However, the implementation of that structure is also commercially desirable and explicable for the following reasons, independently of its eligibility to be a tax consolidated group:

•                     It facilitates the Business (together with the associated risks) being segregated in PCo1 and PCo2, from the key assets used in that business (that is, the plant and equipment held by the Company).

•                     The segregation of different activities into 'sibling' companies under a holding company is both prudent (i.e. to ring-fence the risks associated with the respective activities) and an ordinary commercial structure, as reflected in typical structuring of both private and public corporate groups.

•                     The insertion of a non-operating holding company (Hold Co) between operating companies (PCo1, PCo2 and the Company) and their shareholder(s) facilitates the payment of distributions from those operating companies to the non-operating parent, reducing the exposure of profits to operational risks, while enabling those profits to be reinvested within the corporate group.

•                     The structure facilitates the plant and equipment transfers by PCo1 and PCo2 to the Company (supporting the segregation of functions within the group described above), subject to corporate reconstruction relief for State duty purposes.

119.       Therefore the Commissioner considers that the exception in subsection 177C(2) of the ITAA 1936 should be satisfied in relation to the tax benefit associated with counterfactual 4.

120.       Given there are reasonable commercial drivers that have been provided for undertaking the scheme the Commissioner has not identified any counterfactuals in respect of which there is an associated tax benefit within the scope of section 177C of the ITAA 1936. Consequently, the second requirement 2 has not been satisfied.

121.       As there is no tax benefit to which Part IVA may apply it is not necessary to consider the 8 factors contained in subsection 177D(2) of the ITAA 1936 (the third requirement'). The Commissioner will not seek to make a determination that Part IVA applies to the Restructure.

[1] Subsection 108-5(1).

[2] Paragraph108-5(2)(c).

[3] Subsection 104-10(1).

[4] Subsection 104-10(1).

[5] Subsection 104-10(2.)

[6] Section 108-5.

s Subsection 122-20(1).

[8] Subsection 122-20(2).

[9] Subsection 122-20(3).

[10] Subsection 122-25(1).

[11] Subsection 122-25(3).

[12] Subsection 122-25(4).

[13] Subsection 122-25(5).

[14] Paragraph 122-25(6)(a).

[15] Paragraph 122-25(7)(a).

[16] Subsection 104-10(1).

[17] Subsection 108-5(2).

[18] Section 713-210.

[19] Subsection 713-225(4).

[20] Subsection 713-240(1)(a).

[21] Section 701-1.

[22] Section 177F of the ITAA 1936.

[23] Within the meaning in sections 177C and 177CB of the ITAA 1936.

[24] Subsection 177A(5) and section 177D of the ITAA 1936.

[25] Section 177D of the ITAA 1936.

[26] As defined in section 177C of the ITAA 1936.

[27] Sections 78 and 78A of the DA.

[28] Paragraph 11(1)(i) and section 72 of the DA.

[29] Subsection 70(b) and section 78 of the DA.

[30] Sections 11 and 15 of the DA.