Edited version of private advice

Authorisation Number: 1052288436913

Date of advice: 2 October 2024

Ruling

Subject: Tax integrity measures

Question 1

Is the proposed redeemable preference share (RPS) in Company A an equity interest under Subdivision 974-C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the issue of the RPS to Company B give rise to the direct value shift (DVS) rules under Division 725 of the ITAA 1997 and cause CGT event K8 under section 104-250 of the ITAA 1997 to happen?

Answer

No.

Question 3

Will the payment of fully franked dividends to Company B under the Proposed Scheme be considered dividend streaming under Subdivision 204-D of the ITAA 1997?

Answer

No.

Question 4

Will the payment of fully franked dividends to Company B under the Proposed Scheme constitute a dividend stripping operation under section 207-155 of the ITAA 1997 and/or a dividend stripping scheme within the meaning of section 177E of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 5

Will the payment of fully franked dividends to Company B under the Proposed Scheme give rise to the franking credit benefit trading rules under section 177EA of the ITAA 1936?

Answer

No.

Question 6

Will the payment of fully franked dividends to Company B under the Proposed Scheme constitute a scheme to which sections 177C and 177D of the ITAA 1936 apply such that the Commissioner will make a determination under section 177F of the ITAA 1936?

Answer

No.

This ruling applies for the following periods:

Income year ending 30 June 20YY

Income year ending 30 June 20YY

Income year ending 30 June 20YY

Relevant facts and circumstances

1.     Company A is an Australian proprietary company with one ordinary class share on issue.

2.     Director A is an Australian resident for tax purposes, and the sole director and shareholder of Company A.

3.     Company A is an investment company. It holds an investment portfolio of Australian and international listed shares, managed funds and cash.

4.     As at 30 June 20YY, Company A had significant retained earnings to which Director A is beneficially entitled.

5.     Over the past 5 income years, Company A paid 2 dividends to Director A. These dividends were paid by Company A to Director A to ensure that Director A satisfied thier obligation to make minimum yearly repayments (for Division 7A purposes) on loans made by Company A. All loans have since been repaid in full.

6.     As at 30 June 20YY, Company A's franking account balance was $XXX.

7.     Director A is in a de facto relationship and has 2 children, namely B and C.

8.     Director A and B have had a significant falling out following a costly dispute involving lawyers and on account of this Director A does not wish for B to receive any benefit from Director A's estate (after Director A's death) or from any trusts which Director A controls.

9.     To this end, Director A:

•                     updated their Will to mitigate the risk of B receiving any benefit from Director A's estate;

•                     executed a "letter of wishes" aligned to the updates to their will and estate planning intentions; and

•                     obtained legal advice in relation to potential family provision claims against the estate after Director A's death.

12.     Notably, Director A's share in Company A will form part of Director A's personal estate and would be covered by any such family provision claims.

13.     Acting on the advice, Director A wishes to extract the wealth accumulated in Company A and transfer it to a trust to reduce the value of the estate and to limit the potential family provision claims against it by B (given trust assets will not form part of Director A's estate). Director A considers that it is reasonably likely that B would (against Director A's wishes) make a claim against the estate. Director A also wishes to protect C from having to defend any legal action that B may take against the estate.[1]

14.     To realise that wish, Director A has carried out, and is proposing to carry out, the following steps (constituting the Proposed Scheme):

Step 1

15.     A new company, Company B, was incorporated as an Australian proprietary company and a new trust, Trust Z, was established. Company B is wholly owned by Trust Z.

16.     Director A is the appointor of Trust Z and controls its corporate trustee.

17.     The beneficiaries of Trust Z consist of Director A and the beneficiaries of the testamentary trust. The terms of the trust deed for Trust Z require any distributions of income and capital of the trust during Director A's lifetime to be appointed to Director A.

Step 2

18.     As director of Company A, Director A will issue a RPS in Company A to Company B (as permitted by the Company A constitution).

19.     The RPS:

•                     will be issued at an issue price of $X;

•                     will carry the right to receive dividends from time to time as declared in relation to that share class, before such right being extinguished within 4 years after issue;

•                     will not carry the right to vote; and

•                     will be redeemable at the option of Company A at any time, or on a winding-up of Company A, for its face value of $X.

Step 3

20.     Company A will pay an initial large fully franked dividend (equal to its current retained earnings) on the RPS to Company B, and will pay further dividends to Company B as it realises the remainder of its assets and/or transfers any of those assets in-specie.

Step 4

21.     Company A will be wound up following the realisation of all its assets. Company B will undertake investment activities on its own behalf and/or lend funds to other entities in the family group.

22.     As Director A has access to other sources of income and wealth, it is not expected that Company B will make significant or regular distributions of profits to Director A, via Trust Z, during Director's A lifetime, nor does Director A wish to accumulate personal wealth that would form part of the estate upon death. Any distribution will therefore be limited to fund Director A's living expenses, as required. Company B will consequently retain most of its after tax profits (as has been the case for Company A).

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 paragraph 177C(1)(a)

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 paragraph 177E(1)(a)

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 subsection 177EA(3)

Income Tax Assessment Act 1936 paragraph 177EA(3)(a)

Income Tax Assessment Act 1936 paragraph 177EA(3)(b)

Income Tax Assessment Act 1936 paragraph 177EA(3)(c)

Income Tax Assessment Act 1936 paragraph 177EA(3)(d)

Income Tax Assessment Act 1936 paragraph 177EA(3)(e)

Income Tax Assessment Act 1936 subsection 177EA(17)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 104-250

Income Tax Assessment Act 1997 subsection 104-250(3)

Income Tax Assessment Act 1997 Subdivision 204-D

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(1)(a)

Income Tax Assessment Act 1997 paragraph 204-30(1)(b)

Income Tax Assessment Act 1997 paragraph 204-30(1)(c)

Income Tax Assessment Act 1997 subsection 204-30(6)

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

Income Tax Assessment Act 1997 paragraph 204-30(8)(a)

Income Tax Assessment Act 1997 paragraph 204-30(8)(b)

Income Tax Assessment Act 1997 paragraph 204-30(8)(c)

Income Tax Assessment Act 1997 paragraph 204-30(8)(d)

Income Tax Assessment Act 1997 paragraph 204-30(8)(e)

Income Tax Assessment Act 1997 paragraph 204-30(8)(f)

Income Tax Assessment Act 1997 subsection 204-30(9)

Income Tax Assessment Act 1997 subsection 204-30(10)

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 Subdivision 207-F

Income Tax Assessment Act 1997 paragraph 207-145(1)(d)

Income Tax Assessment Act 1997 section 207-155

Income Tax Assessment Act 1997 section 210-170

Income Tax Assessment Act 1997 Division 725

Income Tax Assessment Act 1997 section 725-50

Income Tax Assessment Act 1997 section 725-55

Income Tax Assessment Act 1997 section 725-65

Income Tax Assessment Act 1997 subsection 725-70(1)

Income Tax Assessment Act 1997 section 725-80

Income Tax Assessment Act 1997 section 725-85

Income Tax Assessment Act 1997 section 725-90

Income Tax Assessment Act 1997 paragraph 725-90(1)(a)

Income Tax Assessment Act 1997 section 725-95

Income Tax Assessment Act 1997 section 725-145

Income Tax Assessment Act 1997 paragraph 725-145(1)(a)

Income Tax Assessment Act 1997 paragraph 725-145(1)(b)

Income Tax Assessment Act 1997 subsection 725-145(2)

Income Tax Assessment Act 1997 subsection 725-145(3)

Income Tax Assessment Act 1997 subsection 725-150(1)

Income Tax Assessment Act 1997 section 725-245

Income Tax Assessment Act 1997 section 974-15

Income Tax Assessment Act 1997 subsection 974-15(1)

Income Tax Assessment Act 1997 section 974-20

Income Tax Assessment Act 1997 subsection 974-20(1)

Income Tax Assessment Act 1997 paragraph 974-20(1)(a)

Income Tax Assessment Act 1997 paragraph 974-20(1)(b)

Income Tax Assessment Act 1997 paragraph 974-20(1)(c)

Income Tax Assessment Act 1997 paragraph 974-20(1)(d)

Income Tax Assessment Act 1997 paragraph 974-20(1)(e)

Income Tax Assessment Act 1997 Subdivision 974-C

Income Tax Assessment Act 1997 subsection 974-70(1)

Income Tax Assessment Act 1997 section 974-75

Income Tax Assessment Act 1997 subsection 974-75(1)

Income Tax Assessment Act 1997 section 974-130

Income Tax Assessment Act 1997 subsection 974-135(1)

Income Tax Assessment Act 1997 subsection 974-135(3)

Income Tax Assessment Act 1997 subsection 974-135(6)

Income Tax Assessment Act 1997 section 974-160

Reasons for decision

All subsequent legislative references are to the ITAA 1997, unless otherwise indicated.

Question 1

Summary

The RPS in Company A is an equity interest under Subdivision 974-C on the basis that it satisfies the equity test under section 974-75, and does not satisfy the debt test under section 974-20.

Detailed reasoning

Is the RPS an equity interest?

Subsection 974-70(1) provides that a scheme gives rise to an equity interest in a company if, when the scheme comes into existence:

•                     the scheme satisfies the equity test in relation to the company; and

•                     the interest is not characterised (and does not form part of a larger interest that is characterised) as a debt interest in the company.

A scheme satisfies the equity test in relation to a company if it gives rise to an interest set out in the table in subsection 974-75(1). Relevantly, item 1 of the table refers to an interest in the company as a member or stockholder of the company and item 3 of the table refers to an interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is at the discretion of the company.

The RPS will grant Company B a membership in Company A, satisfying item 1.

The RPS will also confer a right on Company B to receive dividends from Company A at the discretion of Director A in thier capacity as director of Company A, satisfying item 3.

Therefore, the RPS is characterised as an equity interest unless it is also characterised as a debt interest.

Is the RPS a debt interest?

Section 974-15 provides that a scheme gives rise to a debt interest in an entity if a single scheme, or the combined effect or operation of 2 or more related schemes, when it/they come into existence satisfies the debt test in relation to the entity.

Subsection 974-20(1) sets out the conditions that must be met so as to satisfy the debt test in relation to an entity. They are:

•                     the scheme is a financing arrangement[2] for the entity (paragraph 974-20(1)(a));

•                     the entity (or a connected entity) receives, or will receive, a financial benefit or benefits[3] under the scheme (paragraph 974-20(1)(b));

•                     the entity has (or both the entity and a connected entity both have) an effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities (paragraph 974-20(1)(c));

•                     it is substantially more likely than not that the value provided will be at least equal to the value received (paragraph 974-20(1)(d)); and

•                     the value provided and the value received are not both nil (paragraph 974-20(1)(e)).

Effectively non-contingent obligation

Subsection 974-135(1) explains that there is an 'effectively non-contingent obligation' to take an action under a scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation to take that action.

An obligation is non-contingent if it is not contingent on any event, condition or situation, other than the ability or willingness of the entity (or a connected entity) to meet the obligation (subsection 974-135(3)).

Determining whether there is in substance or effect a non-contingent obligation to take the action, regard must be had to the artificiality or the contrived nature of any contingency (subsection 974-135(6)).

In ATO Interpretative Decision 2003/200 Income Tax: Debt/Equity Interest: Redeemable Preference Share, the Commissioner concluded that where an arrangement involves a company issuing RPS at a specified issue price with terms that provide for payment of dividends at the discretion of the issuing company and payment on redemption of the RPS where redemption is at the discretion of the issuing company, the RPS will not give rise to an effectively non-contingent obligation.

Application to the taxpayer's circumstances

The RPS is not characterised as, and does not from part of a larger interest that is characterised as, a debt interest as defined in subsection 974-15(1) in Company A because there is no effectively non-contingent obligation on the part of Company A to repay the issue price under the RPS or provide any other financial benefit (required by paragraph 974-20(1)(c)) and, as a result, it cannot be said that the requirements of paragraph 974-20(1)(d) will be met (that it is substantially more likely than not that the value of the financial benefit provided will equal or exceed the value of the financial benefit received).

The RPS will not give rise to an effectively non-contingent obligation because Company A does not have an obligation, either in substance or effect, to pay a dividend on the RPS or redeem the RPS and pay an amount equal to its issue price.

Company B's right to receive a dividend is contingent on Company A passing a resolution to distribute dividends on this class of share. Similarly, Company B's right to receive the return of the issue price (i.e. $X) is contingent on Company A either being wound up or passing a resolution to redeem the RPS (and there is no compulsion on Director A as the director of Company A) to redeem the RPS at a specified date or time), such that there is no

established point in time where Company A is under an obligation to redeem the RPS and pay an amount.

Conclusion

The RPS satisfies the equity test under section 974-75 and does not satisfy the debt test under section 974-20. As such, the RPS will be characterised as an equity interest under Subdivision 974-C.

Question 2

Summary

The issue of the RPS to Company B will not enliven the DVS rules in Division 725.

Detailed reasoning

Section 725-145 sets out the circumstances in which a DVS arises under a scheme involving equity interests in an entity (the 'target entity'). They are where:

•                     there is a decrease in the market value of one or more equity interests in the target entity which is reasonably attributable to one or more things done under the scheme, occurring at or after the time when that thing, or the first of those things, is done (a down interest) (paragraphs 725-145(1)(a) and (b)); and

•                     one or more equity interests in the target entity increases in market value and/or is issued at a discount to market value, and the increase and/or issue is reasonably attributable to the thing done, or one or more of those things done, and occurs at or after the time the thing, or the first of those things, is done (an up interest) (subsections 725-145(2) and (3)).

Where a DVS that has consequences under Division 725 occurs, the rules in the Division apply to modify the adjustable values of affected interests to take account of material changes in market value that are attributable to the DVS.

Pursuant to section 725-50, a DVS under a scheme involving equity interests in the target entity only has consequences for a taxpayer under Division 725 if:

•                     the target entity is a company or trust at some time during the scheme period (i.e. the period starting when the scheme is entered into and ending when it has been carried out);

•                     the controlling entity test under section 725-55 is satisfied;

•                     the cause of the value shift is satisfied as per section 725-65;

•                     the taxpayer is an affected owner of a down interest (as per section 725-80) or an up interest (as per section 725-85), or both; and

•                     the value shift is not likely to be reversed as per sections 725-90 or 725-95.

For a down interest of which the taxpayer is an affected owner, the DVS has consequences under Division 725 if (in addition to the requirements listed in the above paragraph) the sum of the decreases in the market value of all down interests because of DVSs under the same scheme is at least $150,000 (subsection 725-70(1)).

The reversal exception provided by section 725-90, such that a DVS will not have any consequences for a taxpayer under Division 725, applies where the 'state of affairs' that is brought about by the one or more things done under the scheme:

•                     will more likely than not cease to exist within 4 years after the time that that thing, or the first of those things, is done, and

•                     does not still exist at the earlier of the end of those 4 years or when a realisation event happens to down or up interests of an affected owner.

The term 'state of affairs' is not defined in the Income Tax Assessment Act, but in the context of section 725-90 is considered to be used to refer to the factual circumstance(s) that is the trigger or cause for the value shift. The state of affairs is one but for which the DVS would not have happened (paragraph 725-90(1)(a)).

The rules in Division 725 may also generate a capital gain on those interests that have decreased in market value as a result of the DVS. Section 104-250 provides that CGT event K8happens if there is a 'taxing event generating a gain' for a down interest under section 725-245. The capital gain that a taxpayer makes under CGT event K8 is equal to the gain generated for that taxing event (subsection 104-250(3)).

Is there a decrease in the market value of equity interests in Company A?

Spencer v Commonwealth[4]is regularly cited as an authority for the meaning of 'market value'. Broadly, the judgements in that case support the proposition that market value means the price at which willing, but not anxious, fully informed parties, would agree to buy or sell, after voluntary, arm's length bargaining.

Under the Proposed Scheme, Company A will declare and pay an initial dividend of approximately $XX on the RPS held by Company B. The payment of the dividend to Company B will significantly reduce Company A's assets and would reasonably impact Company A's ability to distribute dividends to its ordinary class shareholder (Director A).

Therefore, the price for which a fully informed arm's length purchaser would pay for the ordinary share held by Director A in Company A (a target entity for the purposes of section 725-145) will reasonably be reduced as a consequence of a significant decrease of Company A's assets following the payment of the dividend to Company B, and the market value of that share would decrease under the Proposed Scheme.

Has an equity interest been issued at a discount?

Subsection 725-150(1) provides:

An equity or loan interest is issued at a discount if, and only if, the market value of the interest when issued exceeds the amount of the payment that the issuing entity receives. The excess is the amount of the discount.

The RPS carries no right to capital distributions or voting, and only carries a discretionary right to receive dividends (until the extinguishment of that right). Therefore, the RPS would be deemed worthless in a commercial sense, until such time that Company A declares and pays dividends in respect of it to Company B.

The RPS will be of significant value to Company B given the Proposed Scheme will allow a large dividend to be paid to it. However, it is unlikely that a fully informed purchaser, dealing at arm's length, would be induced to purchase the RPS at any point (given it is unlikely that Company A would pay a discretionary dividend to an arm's length third party who acquired the RPS).

Accordingly, the market value of the RPS is no greater than its nominal issue price of $X at all times, and will not be issued at a discount. Therefore, subsection 725-145(2) is not satisfied.

Has there been an increase in the value of the equity interest?

As the market value of the RPS throughout the Proposed Scheme will be no greater than its nominal issue price of $X, there will be no increase in the value of an equity interest in Company A under the Proposed Scheme. Therefore, subsection 725-145(3) is not satisfied.

Since equity interests will not be issued at a discount, or have their market value increase, there will be no DVS under section 725-145 under the Proposed Scheme.

Value shifts that may be reversed

Even if the Proposed Scheme did cause a DVS under section 725-145, the relevant state of affairs under these circumstances is that Company A has accumulated significant profits and there is a new class of share on issue with discretionary dividend rights. It is more likely than not that Company B's right to receive discretionary dividends from Company A will be extinguished within 4 years (as the terms of issue of the RPS stipulate that the discretionary right to dividends will extinguish within 4 years from the date of issue). Therefore, to the extent that there is a DVS brought about by the Proposed Scheme, it will be reversed within 4 years and section 725-90 would apply so that no consequences under Division 725 arise.

CGT event K8

Since no DVS arises under the Proposed Scheme, there will be no taxing event generating a gain for the purposes of section 104-250 and CGT event K8will not happen.

Conclusion

The Proposed Scheme will not satisfy the conditions set out in section 725-145. Therefore, there will be no DVS arising under Division 725, and CGT event K8will not happen.

Question 3

Summary

The payment of dividends to Company B will not be considered dividend streaming under Subdivision 204-D.

Detailed reasoning

Broadly, section 204-30 empowers the Commissioner to make determinations when distributions and other benefits are streamed contrary to the underlying policy intent of the imputation system.

Subsection 204-30(1) sets out the basic conditions that must be satisfied so as to trigger the operation of section 204-30. They are:

•                     an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution(s) (paragraph 204-30(1)(a)); and

•                     the member would derive a greater benefit from the franking credits than another member of the entity (paragraph 204-30(1)(b)); and

•                     the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits (paragraph 204-30(1)(c)).

An imputation benefit received by a member of an entity is defined in subsection 204-30(6) to include a tax offset under Division 207.

For the purposes of paragraph 204-30(1)(b), subsections 204-30(8) to (10) provide a non-exhaustive list of circumstances in which a member of an entity derives a greater benefit from franking credits than another member. They include:

•                     the other member is a foreign resident (paragraph 204-30(8)(a));

•                     the other member would not be entitled to any tax offset under Division 207 (paragraph 204-30(8)(b));

•                     the amount of income tax that, apart from Division 204, would be payable by the other member because of the distribution is less than the tax offset to which the other member would be entitled (paragraph 204-30(8)(c));

•                     the other member is a corporate tax entity at the time the distribution is made, but can't receive nor pass on franking credits to its own members (paragraphs 204-30(8)(d) and (e));

•                     either member is an exempting entity (paragraph 204-30(8)(f) and subsection 204-30(9)); or

•                     the member is entitled to a tax offset under section 210-170 and the other member is not (subsection 204-30(10)).

The payment of fully franked dividends on the RPS will give rise to an imputation benefit for Company B in the form of a tax offset under Division 207 (to the extent permitted by available franking credits), and Director A will not receive any imputation benefits from those distributions. Therefore, both paragraphs 204-30(1)(a) and (c) are satisfied under the Proposed Scheme.

However, paragraph 204-30(1)(b) is not met because Director A and Company B are both Australian residents for tax purposes and there is no suggestion that Director A would have a reduced entitlement to imputation benefits. It is therefore not considered that Company B will derive a greater benefit from franking credits than Director A.

Conclusion

Section 204-30 will not apply to the Proposed Scheme on the basis that Company B would not derive a greater benefit from franking credits than Director A.

Question 4

Summary

Neither section 177E of the ITAA 1936 nor section 207-155 will give rise to a dividend stripping scheme/operation in respect of the payment of dividends on the RPS held by Company B.

Detailed reasoning

Section 177E of the ITAA 1936

Section 177E of the ITAA 1936 is an anti-avoidance provision designed to prevent tax benefits being obtained as part of a dividend stripping scheme or a scheme with substantially the same effect as a dividend stripping scheme.

Section 177E of the ITAA 1936 embraces a scheme which can be said objectively to have the dominant (although not necessarily exclusive) purpose of avoiding tax. Assessing the purpose of the scheme is an objective test having regard to the characteristics of the scheme and the objective circumstances in which the scheme was designed and operated.

While the Proposed Scheme contains some characteristics of dividend stripping, it will not be entered into for the sole or predominant purpose of avoiding tax on the distribution of dividends in respect of the RPS.

Section 207-155

Subdivision 207-F has the effect of cancelling the effect of the gross-up and tax offset rules where the imputation system has been manipulated.Under paragraph 207-145(1)(d) recipients of a franked distribution can be denied the benefits of the franking credits in various situations including where the distribution is made as part of a dividend stripping operation.

'Dividend stripping operation' in this context is defined in section 207-155 which provides:

A distribution made to a member of a corporate tax entity is taken to be made as part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, 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.

The threshold condition for the application of section 177E of the ITAA 1936, found in paragraph 177E(1)(a) of the ITAA 1936, is in substantially the same terms to section 207-155.

As the Proposed Scheme is not a scheme by way of, or in the nature of, dividend stripping, or a scheme that has substantially the effect of a scheme by way of, or in the nature of, dividend stripping for the purpose of section 177E of the ITAA 1936, it is not a dividend stripping operation for the purpose of paragraph 207-145(1)(d).

Question 5

Summary

The payment of dividends to Company B under the Proposed Scheme does not have the effect of streaming imputation benefits to an entity that will derive greater benefit from it than other entities would.

Detailed reasoning

Section 177EA of the ITAA 1936 is a general anti-avoidance provision which supports the operation of the imputation system with the purpose of ensuring that the benefits of the imputation system flow to the economic owner of the share which is the source of the franked distribution. The section is directed at schemes involving the transfer of franking credits on a dividend from entities that cannot fully use them to entities that can. If the section applies, the Commissioner may debit the company's franking account or deny the franking credit benefit to the recipient of the dividend.

Specifically, subsection 177EA(3) of the ITAA 1936 provides that for section 177EA of the ITAA 1936 to apply, the following must be present:

•                     there is a scheme for the disposition of shares, or interest in shares, in a company (paragraph 177EA(3)(a) of the ITAA 1936);

•                     a franked dividend has been paid, or is expected to be paid, directly or indirectly (paragraphs 177EA(3)(b) and (c) of the ITAA 1936);

•                     the relevant taxpayer would, or could reasonably be expected to, receive imputation benefits from the distribution (paragraph 177EA(3)(d) of the ITAA 1936); and

•                     having regard to relevant circumstances of the scheme (as provided for in subsection 177EA(17) of the ITAA 1936), it would be concluded that the scheme was entered into for the non-incidental purpose of enabling the relevant taxpayer to obtain an imputation benefit (paragraph 177EA(3)(e) of the ITAA 1936).

The payment of fully franked dividends to Company B under the Proposed Scheme is not considered to be a scheme entered into for a purpose (other than an incidental purpose) of enabling Company B to obtain imputation benefits.

Question 6

Summary

The Proposed Scheme does not constitute a scheme entered into and carried out for the dominant purpose of obtaining a tax benefit. Therefore, the Commissioner will not make a determination under section 177F of the

ITAA 1936.

Detailed reasoning

Section 177D of the ITAA 1936 provides that Part IVA of that Act applies to a scheme, or any part of the scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA of the ITAA 1936 applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme.

A conclusion about a relevant person's purpose is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the matters outlined in subsection 177D(2) of the ITAA 1936.

Although the Proposed Scheme gives rise to a tax benefit for the purpose of paragraph 177C(1)(a) of the

ITAA 1936[5], on the facts and having consideration of the matters outlined in subsection 177D(2), there is insufficient tax purpose to engage the application of the general anti-avoidance provisions in Part IVA of the

ITAA 1936.

[1] It is understood that applicable State laws do not enable a transaction to be set aside (thereby enlarging a deceased estate) for the purposes of a claim for further provision. Therefore, assets not covered by the terms of Director A's Will cannot be impacted by any claims regarding the validity of the Will or for further provision.

[2] Section 974-130 defines a 'financing arrangement' for an entity to mean, inter alia, a scheme to raise finance for an entity.

[3] Subsection 974-160 defines 'financial benefit' to mean anything of economic value, including property and services.

[4] [1907] HCA 82; (1907) 5 CLR 418.

[5] Broadly, paragraph 177C(1)(a) of the ITAA 1936 provides that a tax benefit exists for the purposes of Part IVA where an amount not included in the assessable income of the taxpayer of a year of income would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out.