Edited version of private advice

Authorisation Number: 1052341978261

Date of advice: 11 December 2024

Ruling

Subject: Return of capital by way of in-specie distribution

Question 1

Will Company A trigger CGT event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) upon disposing of its shares in Company C to Company B in return for new shares in Company B?

Answer

Yes.

Question 2

Will Company A trigger CGT event A1 under section 104-10 of the ITAA 1997 upon distributing all of its shares in Company B to Company A shareholders?

Answer

Yes.

Question 3

Will the distribution of Company B shares to Company A shareholders be a "demerger" under section 125-70 of the ITAA 1997?

Answer

No.

Question 4

Will the amount of the distribution of Company B shares to Company A shareholders that is debited to Company A's retained earnings account (Dividend Component) be a frankable distribution under section 202-40 of ITAA 1997?

Answer

Yes.

Question 5

Will the Commissioner seek to make a determination under subsection 45C(3) of the Income Tax Assessment Act 1936 (ITAA 1936) that a franking debit will arise in Company A's franking account in relation to any part of the distribution of Company B shares to Company A shareholders?

Answer

No.

Question 6

Will section 177E of the ITAA 1936 apply in relation to the Dividend Component of the distribution of Company B shares to Company A shareholders?

Answer

No.

Question 7

Will section 177EA of the ITAA 1936 apply in relation to the Dividend Component of the distribution of Company B shares to Company A shareholders?

Answer

No.

Question 8

Will section 204-30 of the ITAA 1997 apply to empower the Commissioner to make a determination prescribed in subsection 204-30(3) of the ITAA 1997 in relation to the distribution of Company B shares to Company A shareholders?

Answer

No.

This ruling applies for the following period:

XX XX 202X to XX XX 202X

The scheme commenced on:

XX XX 202X

Relevant facts and circumstances

Company A

1.         Company A is an Australian company listed on the Australian Securities Exchange (ASX).

2.         As at XX XX 20XX, Company A holds approximately XX% of the issued shares in Company B.

Company A Shareholders

3.         All the shares in Company A are fully paid ordinary shares.

4.         Company A has a diverse group of shareholders, with differing tax profiles. However, Company D owns, either alone or together with another company or trust that would be a member of the demerger group, more than 20% but less than 80% of the shares in Company A.

5.         Company D does not have any capital loss for the year ended XX XX 20XX.

6.         Company A is not aware of the tax residency of all of its shareholders but expects the proportion of Company A shares held by foreign resident shareholders to be very low.

7.         Company A is not aware whether any of its other shareholders had a capital loss for the year ended XX XX 20XX or have carried forward capital losses as at XX XX 20XX.

Company C

8.         Company C became a wholly-owned subsidiary of Company A in 20XX. It is the holding company of a group of companies that carry on a number of businesses.

Proposal from Company B

9.         Company B is an ASX listed company.

10.      On XX XX 20XX, Company B and Company A announced that they had entered into an agreement, under which, Company B will acquire Company C from Company A in exchange for shares in Company B.

Transaction steps

11.      Prior to the acquisition of Company C by Company B, Company C will transfer some of its business to either Company A or its subsidiaries. These businesses will no longer be held by Company C when it is acquired by Company B.

Transaction

12.      Step 1 of the transaction will be undertaken as follows:

•                on XX XX 20XX, Company B will acquire all the shares in Company C in exchange for new Company B shares being issued to Company A.

13.      Step 2 involves the following:

•                on XX XX 20XX, Company A will distribute all of its shares in Company B to Company A Shareholders on a proportionate basis; and

•                Company A will account for the distribution to the Company A Shareholders by:

o      debiting its share capital account by the capital reduction amount (Capital Component); and

o      debiting the residual amount of the distribution to its retained earnings account (Dividend Component).

14.      Following the completion of Step 2:

•                Company A shareholders will continue to hold their Company A shares;

•                almost all of Company A's shareholders will receive Company B shares (on a proportionate basis) and become Company B shareholders directly; and

•                Company A will not own any shares in Company B.

Other matters

15.      Company A will apply the 'slice approach', as set out in Practice Statement Law Administration PS LA 2008/10 Application of section 45B of the Income Tax Assessment Act 1936 to share capital reductions, to determine the Capital Component.

16.      Company A will frank some or all of the Dividend Component.

17.      All shareholdings in Company A are post-CGT interests.

18.      Company A has a history of paying fully franked dividends.

19.      If available, Company A would not be choosing CGT rollover.

20.      Pursuant to subsection 125-65(5) of the ITAA 1997, Company A will not make the choice that Company D is not a member of the demerger group.

21.      Company A's share capital account was not and will not be tainted within the meaning of Division 197 of the ITAA 1997.

22.      Company A does not intend to undertake capital raising at or around the time of the Step 1 or Step 2 of the transaction.

23.      Company A has not entered into any discussions with any party regarding the potential disposal of its shares or the shares in Company B, other than entering into the scheme as described above.

24.      Company A is generally not aware of any Company A shareholders who have entered into an arrangement to dispose of their Company B shares following the distribution of Company B shares.

Relevant legislative provisions

Corporations Act 2001 section 256B

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 paragraph 45B(2)(a)

Income Tax Assessment Act 1936 paragraph 45B(2)(b)

Income Tax Assessment Act 1936 paragraph 45B(2)(c)

Income Tax Assessment Act 1936 subsection 45B(3)

Income Tax Assessment Act 1936 paragraph 45B(3)(b)

Income Tax Assessment Act 1936 subsection 45B(4)

Income Tax Assessment Act 1936 subsection 45B(5)

Income Tax Assessment Act 1936 subsection 45B(8)

Income Tax Assessment Act 1936 subsection 45B(10)

Income Tax Assessment Act 1936 subsection 45C(3)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177E

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

Income Tax Assessment Act 1936 subparagraph 177E(1)(a)(i)

Income Tax Assessment Act 1936 subparagraph 177E(1)(a)(ii)

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 subsection 177EA(3)

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

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

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

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

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 subsection 104-10(6)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 116-10

Income Tax Assessment Act 1997 subsection 116-10(2)

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

Income Tax Assessment Act 1997 subsection 116-30(1)

Income Tax Assessment Act 1997 subsection 125-65(1)

Income Tax Assessment Act 1997 subsection 125-65(3)

Income Tax Assessment Act 1997 subsection 125-65(4)

Income Tax Assessment Act 1997 subsection 125-65(5)

Income Tax Assessment Act 1997 subsection 125-65(6)

Income Tax Assessment Act 1997 section 125-70

Income Tax Assessment Act 1997 subsection 125-70(1)

Income Tax Assessment Act 1997 Division 197

Income Tax Assessment Act 1997 section 202-40

Income Tax Assessment Act 1997 section 202-45

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 subsection 204-30(3)

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

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

Reasons for decision

All legislative references below are to provisions of the ITAA 1936 or the ITAA 1997 (as detailed in the "Relevant legislative provisions" section above), unless otherwise stated.

Question 1

Will Company A trigger CGT event A1 under section 104-10 of the ITAA 1997 upon disposing of its shares in Company C to Company B in return for new shares in Company B?

Summary

Yes. Company A will trigger CGT event A1 under section 104-10 of the ITAA 1997 upon disposing of its shares in Company C to Company B in return for new shares in Company B.

Detailed reasoning

25.      Section 102-20 provides that a capital gain or capital loss is made only if a CGT event happens.

26.      Subsections 104-10(1) to (4) provide:

(1) CGT event A1 happens if you dispose of a CGT asset.

(2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

...

(3) The time of the event is:

(a)  when you enter into the contract for the disposal; or

(b)  if there is no contract--when the change of ownership occurs.

...

(4) You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

27.      For completeness, subsections 104-10(5) and (6) are not relevant.

28.      Company A's shares in Company C are CGT assets (section 108-5).

29.      CGT event A1 will happen when Company A disposes of all of its shares in Company C to Company B (subsections 104-10(1) and (2)). The time of the event is when Company A entered into the agreement with Company B (subsection 104-10(3)).

30.      Company A will make a capital gain if the capital proceeds from the disposal are more than the cost base of the Company C shares. Company A will make a capital loss if those capital proceeds are less than the reduced cost base of the Company C shares (subsection 104-10(4)).

31.      Subsection 116-20(1) provides:

(1) The capital proceeds from a CGT event are the total of:

(a)  the money you have received, or are entitled to receive, in respect of the event happening; and

(b)  the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

32.      Hence, the capital proceeds will be equal to the market value of the Company B shares received by Company A in respect of CGT event A1 happening, worked out at the time of the event (subsection 116-20(1)).

Question 2

Will Company A trigger CGT event A1 under section 104-10 of the ITAA 1997 upon distributing all of its shares in Company B to Company A shareholders?

Summary

Yes. Company A will trigger CGT event A1 under section 104-10 of the ITAA 1997 upon distributing all of its shares in Company B to Company A shareholders.

Detailed reasoning

33.      Company A's shares in Company B will be CGT assets (section 108-5).

34.      CGT event A1 will happen when Company A distributes of all of its shares in Company B to Company A shareholders (subsections 104-10(1) and (2)).

35.      As no contract was entered into for the disposal, the time of the event is when the change of ownership occurs (subsection 104-10(3)).

36.      Company A will make a capital gain if the capital proceeds from the disposal are more than the cost base of the Company B shares. Company A will make a capital loss if those capital proceeds are less than the reduced cost base of the Company B shares (subsection 104-10(4)).

37.      As there are no capital proceeds from the CGT event, the modifications to the general rules about capital proceeds contained in section 116-10 are relevant.

38.      Subsection 116-10(2) provides:

The first is a market value substitution rule. It is relevant if:

•         you receive no capital proceeds from a CGT event; or

•         you receive no capital proceeds from a CGT event; or

•         some or all of the capital proceeds cannot be valued; or

•         you did not deal at arm's length with another entity in connection with the event.

39.      Subsection 116-30(1) provides:

If you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. (The market value is worked out as at the time of the event.)

Example:

You give a CGT asset to another entity. You are taken to have received the market value of the CGT asset.

40.      Consequently, Company A will be taken to have received the market value of the Company B shares, worked out at the time of the event (subsection 116-30(1)).

Question 3

Will the distribution of Company B shares to Company A shareholders be a "demerger" under section 125-70 of the ITAA 1997?

Summary

No. The distribution of Company B shares to Company A shareholders will not be a "demerger" under section 125-70 of the ITAA 1997.

Detailed reasoning

41.      The term "demerger" is relevantly defined in subsection 125-70(1) as follows:

A demerger happens to a demerger group if:

(a)       there is a restructuring of the demerger group; and

(b)       under the restructuring:

(i)         members of the demerger group dispose of at least 80% of their total ownership interests in another member of the demerger group to owners of original interests in the head entity of the demerger group; ... and

(c)       under the restructuring:

(i)         a CGT event happens to an original interest owned by an entity in the head entity of the group and the entity acquires a new interest and nothing else; or

(ii)        no CGT event happens to an original interest owned by an entity in the head entity of the group and the entity acquires a new interest and nothing else; and

(d)       the acquisition by entities of new interests happens only because those entities own or owned original interests; and

(e)       the new interests acquired are:

(i)         if the head entity is a company - ownership interests in a company; or

(ii)        if the head entity is a trust - ownership interests in a trust; and

(f)        (Repealed by No 168 of 2006)

(g)       neither the original interests nor the new interests are in a trust that is a non-complying superannuation fund; and

(h)       the requirements of subsection (2) are met.

42.      The term "demerger group" is defined in subsection 125-65(1) as follows:

A demerger group comprises the head entity of the group and one or more demerger subsidiaries.

43.      The term "head entity" is defined in section 125-65(3) as follows:

A company or trust is the head entity of a demerger group if no other member of the group owns ownership interests in the company or trust.

44.      Subsections 125-65(4) and (5) provide the following exceptions to the meanings of "head entity" and "demerger group" respectively:

125-65(4)

If apart from this subsection, a company or trust would be the head entity of a demerger group and the company or trust, and all of its demerger subsidiaries, are also demerger subsidiaries of another company or trust in another demerger group, the first-mentioned company or trust is not the head entity of a demerger group.

125-65(5)

A company or trust (the first company or trust) that would, apart from this subsection, be a member of a demerger group is not a member of the demerger group if:

(a)       the first company or trust owns, either alone or together with another company or trust that would, apart from this subsection, be a member of the demerger group, more than 20% but less than 80% of the ownership interests in a listed public company or listed widely held trust; and

(b)       the listed public company or listed widely held trust chooses that the first company or trust not be a member of the demerger group.

45.      The term "demerger subsidiary" is defined in subsection 125-65(6) as follows:

A company is a demerger subsidiary of another company or a trust that is a member of a demerger group if the other company or the trust, either alone or together with other members of the group, owns, or has the right to acquire, ownership interests in the company that carry between them:

(a)       the right to receive more than 20% of any distribution of income or capital by the company; or

(b)       the right to exercise, or control the exercise of, more than 20% of the voting power of the company.

46.      Company D owns, either alone or together with another company or trust that would be a member of the demerger group, more than 20% but less than 80% of the shares in Company A. Further, no other member of the demerger group owns ownership interests in Company D. Hence, prima facie, Company D is the head entity of the demerger group.

47.      Pursuant to subsection 125-65(5), Company A will not make the choice that Company D is not a member of the demerger group.

48.      Consequently, Company D will remain the head entity of the demerger group.

49.      As the distribution of Company B shares to Company A shareholders does not result in owners of original interests in the head entity (i.e. Company D) of the demerger group receiving ownership interests in a demerger subsidiary, the conditions in subsection 125-70(1) are not satisfied.

50.      Accordingly, the distribution of Company B shares to Company A shareholders will not be a demerger under section 125-70.

Question 4

Will the Dividend Component be a frankable distribution under section 202-40 of ITAA 1997?

Summary

Yes. The Dividend Component is a frankable distribution under section 202-40 of the ITAA 1997.

Detailed reasoning

51.      Section 202-40 provides that:

(1) A distribution is a frankable distribution, to the extent that it is not unfrankableunder section 202-45.

...

52.      Hence, it is necessary to consider whether the Dividend Component would be taken to be unfrankable under section 202-45.

53.      Pursuant to section 202-45, the following are unfrankable:

(a)  (Repealed by No 101 of 2003)

(b)  (Repealed by No 53 of 2015)

(c)   where the purchase price on the buy-back of a share by a company from one of its members is taken to be a dividend under section 159GZZZP of the Income Tax Assessment Act 1936 - so much of that purchase price as exceeds what would be the market value (as normally understood) of the share at the time of the buy-back if the buy-back did not take place and were never proposed to take place;

(d)  a distribution in respect of a non-equity share;

(e)  a distribution that is sourced, directly or indirectly, from a company's share capital account;

(ea) a distribution or part of a distribution to which subsection 207-159(1) of this Act applies (distributions funded by capital raising);

(f)    an amount that is taken to be an unfrankable distribution under section 215-10 or 215-15 of this Act;

(g)  an amount that is taken to be a dividend for any purpose under any of the following provisions:

(i)    unless subsection 109RB(6) or 109RC(2) of the Income Tax Assessment Act 1936 applies in relation to the amount - Division 7A of Part III of that Act (distributions to entities connected with a private company);

(ii)   (Repealed by No 79 of 2007)

(iii)  section 109 of that Act (excessive payments to shareholders, directors and associates);

(iv)  section 47A of that Act (distribution benefits - CFCs);

(h)  an amount that is taken to be an unfranked dividend for any purpose:

(i)    under section 45 of the Income Tax Assessment Act 1936 (streaming bonus shares and unfranked dividends);

(ii)   because of a determination of the Commissioner under section 45C of that Act (streaming dividends and capital benefits);

(i)    a demerger dividend;

(j)    a distribution that section 152-125 or 220-105 of this Act says is unfrankable;

(k)   a distribution by a listed public company that is consideration for the cancellation of a membership interest in the company as part of a selective reduction of capital, including a selective reduction within the meaning of section 256B of the Corporations Act 2001.

54.      It is considered that none of the circumstances in section 202-45 will apply to the Dividend Component paid to Company A shareholders, and accordingly, the Dividend Component will not be an unfrankable distribution.

55.      Hence, the Dividend Component will be a frankable distribution under section 202-40.

Question 5

Will the Commissioner seek to make a determination under subsection 45C(3) of the ITAA 1936 that a franking debit will arise in Company A's franking account in relation to any part of the distribution of Company B shares to Company A shareholders?

Summary

No. The Commissioner will not seek to make a determination under subsection 45C(3) of the ITAA 1936 that a franking debit will arise in Company A's franking account in relation to any part of the distribution of Company B shares to Company A shareholders.

Detailed reasoning

56.      Subsection 45C(3) states:

If the Commissioner has made a determination under section 45B in respect of the whole or a part of a capital benefit and the Commissioner makes a further written determination that the capital benefit, or the part of the capital benefit, was paid under a scheme for which a purpose, other than an incidental purpose, was to avoid franking debits arising in relation to the distribution from the company:

(a)       on the day on which notice of the determination is served in writing on the company, a franking debit of the company arises in respect of the capital benefit; and

(b)       the amount of the franking debit is the amount that, if the company had:

(i)    paid a dividend of an amount equal to the amount of the capital benefit, or the part of the capital benefit, at the time when it was provided; and

(ii)   fully franked the dividend;

would have been the amount of the franking credit of the company that would have arisen as a result of the dividend.

57.      Hence, before subsection 45C(3) can apply, the Commissioner must firstly make a determination under section 45B in respect of the whole or a part of a capital benefit.

58.      Relevantly, section 45B applies if:

•                there is a scheme under which a person is provided with a demerger benefit or capital benefit by a company (paragraph 45B(2)(a));

•                under the scheme a taxpayer (the relevant taxpayer), who may or may not be the person provided with the demerger benefit or capital benefit, obtains a tax benefit (paragraph 45B(2)(b)); and

•                having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit (paragraph 45B(2)(c)).

Application of paragraph 45B(2)(a) - scheme and capital benefit

Scheme

59.      Subsection 45B(10) states that, in section 45B, 'scheme' has the meaning given by subsection 995-1(1).

60.      Consequently, a 'scheme' for the purposes of section 45B is defined in subsection 995-1(1) to include any agreement, arrangement, understanding, promise, undertaking, scheme, plan, or proposal.

61.      In the present circumstances, there was a scheme.

Demerger benefit or capital benefit

62.      Pursuant to subsection 45B(4), a person is provided with a demerger benefit if certain benefits are provided in relation to a demerger. The scheme does not give rise to a demerger pursuant to section 125-70(1), therefore there can be no provision of a demerger benefit.

63.      The phrase 'provided with a capital benefit' is defined in subsection 45B(5). It states:

A reference to a person being provided with a capital benefit is a reference to any of the following:

(a)       the provision of ownership interests in a company to the person;

(b)       the distribution to the person of share capital or share premium;

(c)       something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person.

64.      Company A Shareholders will be provided with a capital benefit.

Application of paragraph 45B(2)(b) - relevant taxpayer and tax benefit

65.      A relevant taxpayer must obtain a tax benefit to satisfy paragraph 45B(2)(b).

66.      The requirements of paragraph 45B(2)(b) will be satisfied.

Application of paragraph 45B(2)(c) - more than incidental purpose

67.      Given the first two conditions of section 45B will be satisfied, paragraph 45B(2)(c) next requires the Commissioner to have regard to the 'relevant circumstances' of the scheme as set out in subsection 45B(8).

68.      Having regard to the relevant circumstances of the scheme, as set out in subsection 45B(8), it cannot be concluded that the distribution of Company B shares to Company A shareholders will be entered into for a more than incidental purpose of enabling the Company A shareholders to obtain a tax benefit. Accordingly, the Commissioner will not seek to make a determination under paragraph 45B(3)(b) that section 45C applies in relation to the whole, or a part, of the capital benefit.

Conclusion

69.      As the Commissioner will not seek to make a determination under subsection 45B(3) that section 45C applies to the capital benefit, the Commissioner will not seek to make a further determination under subsection 45C(3).

Question 6

Will section 177E of the ITAA 1936 apply in relation to the Dividend Component of the distribution of Company B shares to Company A shareholders?

Summary

No. Section 177E of the ITAA 1936 will not apply in relation to the Dividend Component of the distribution of Company B shares to Company A shareholders.

Detailed reasoning

70.      The first step in the determination of whether section 177E applies is to consider the first pre-condition in paragraph 177E(1)(a), which provides:

(1) Where:

(a) as a result of a scheme that is, in relation to a company:

(i) a scheme by way of or in the nature of dividend stripping; or

(ii) a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping;

any property of the company is disposed of;

71.      Paragraph 177E(1)(a) sets out the initial and key test that there must be a scheme that is either one by way of or in the nature of,dividend stripping; or is one having substantially the effect of a scheme by way of or in the nature of a dividend stripping.

Scheme

72.      In Part IVA, the term "scheme" is defined in section 177A as:

(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.

73.      The distribution of the Company B shares would constitute a scheme for the purpose of Part IVA.

Dividend stripping

74.      The term "dividend stripping" is not defined in the Tax Acts. However, Taxation Ruling IT 2627 (IT 2627) states that:

...it can be said that in its traditional sense a dividend stripping scheme would include one where a vehicle entity (the stripper) purchases shares in a target company that has accumulated or current years' profits that are represented by cash or other readily-realisable assets. The stripper pays the vendor shareholders a capital sum that reflects those profits and then draws off the profits by having paid to it a dividend (or a liquidation distribution) from the target company.

75.      Subparagraphs 177E(1)(a)(i) and (ii) were considered by the High Court in FC of T v Consolidated Press Holdings 2001 ATC 4343 (Consolidated Press). In Consolidated Press, the High Court noted that there was no statutory or technical legal meaning of 'dividend stripping', but agreed with the definition of dividend stripping adopted by the Full Federal Court. The Full Federal Court referred to earlier dividend stripping cases in concluding that dividend stripping entailed the following central characteristics:

(a) the target company had substantial distributable profits that created a potential tax liability for either the target company or its shareholders (referred to as 'vendor shareholders');

(b) the sale or allotment of shares in the target company to another party (referred to as 'purchaser');

(c) the payment of a dividend to the purchaser of the shares out of the target company's profits;

(d) the purchaser escaped Australian income tax on the dividend so declared (whether by reason of rebate, losses or residence);

(e) the vendor shareholders received a capital sum for their shares approximating the dividend paid to the purchaser; and

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

76.      In the present circumstances, section 177E will not apply in relation to the Dividend Component of the distribution of Company B shares to Company A shareholders.

Question 7

Will section 177EA of the ITAA 1936 apply in relation to the Dividend Component of the distribution of Company B shares to Company A shareholders?

Summary

No. Section 177EA of the ITAA 1936 will not apply in relation to the Dividend Component of the distribution of Company B shares to Company A shareholders.

Detailed reasoning

77.      Pursuant to subsection 177EA(3), section 177EA applies if the following conditions are satisfied:

(a)  there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity, and

(b)  either:

(i)    a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests, or

(ii)   a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be, and

(c)   the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit, and

(d)  except for this section, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution, and

(e)  having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

78.      In the present circumstances, section 177EA will not apply in relation to the Dividend Component of the distribution of Company B shares to Company A shareholders.

Question 8

Will section 204-30 of the ITAA 1997 apply to empower the Commissioner to make a determination prescribed in subsection 204-30(3) of the ITAA 1997 in relation to the distribution of Company B shares to Company A shareholders?

Summary

No. Section 204-30 of the ITAA 1997 will not apply to empower the Commissioner to make a determination prescribed in subsection 204-30(3) of the ITAA 1997 in relation to the distribution of Company B shares to Company A shareholders.

Detailed reasoning

79.      Subsection 204-30(1) provides:

This section empowers the Commissioner to make determinations if an entity streams one or more distributions (or one or more distributions and the giving of other benefits), whether in a single franking period or in a number of franking periods, in such a way that:

(a) an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions; and

(b) the member would derive a greater benefit from franking credits than another member of the entity; and

(c) 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.

The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member.

80.      The term 'streaming' is not defined in the Tax Acts. The Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002, which introduced Subdivision 204-D, states at paragraph 3.28 that:

3.28 Streaming is selectively directing the flow of franked distributions to those members who can most benefit from imputation credits.

81.      It is anticipated that Company A will frank some or all of the Dividend Component. As such, Company A shareholders may receive an imputation benefit (subsection 204-30(6)).

82.      The shares in Company A are held by a wide range of shareholders and the Dividend Component will be paid to all Company A shareholders on a proportionate basis. Accordingly, Company A will not selectively direct the flow of franked distributions to those Company A shareholders who can most benefit from imputation credits.

83.      As the distribution of the Dividend Component does not involve streaming, subsection 204-30(1) will not be satisfied and the Commissioner will not be empowered to make a determination under subsection 204-30(3).