ATO ID 2003/203: Part IVA and disposal of trading stock where an election is made
Date of decision: 24 July 2002
Year of income: Year ended 30 June 2002 Year ending 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply where a taxpayer is undergoing a corporate restructure which involves the interposition of a partnership and makes an election under subsection 70-100(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. Where the taxpayer is undergoing a corporate restructure which involves the interposition of a partnership and makes an election under subsection 70-100(4) of the ITAA 1997, Part IVA of the ITAA 1936 will not apply as a 'tax benefit' will not be obtained.

Facts
The taxpayer proposes to undergo a corporate restructure and simplification process in relation to particular assets that it owns, which will result in one company holding all assets. The restructure will involve the transfer of trading stock from the taxpayer to a partnership. The partnership will comprise of the taxpayer and a subsidiary, in which each partner will hold a 50% interest in the partnership. The transfer of assets will involve a 2-stage process, in which the trading stock will be transferred to the partnership, followed by the partnership transferring the trading stock to the subsidiary. The subsidiary will ultimately own 100% of the taxpayer's trading stock. An election will be made under subsection 70-100(4) of the ITAA 1997 to treat the assets having been disposed of for what would have been their value as trading stock of the transferor on hand at the date of transfer.

Reasons for decision
Summary: Part IVA of the ITAA 1936 contains general anti-avoidance provisions designed to prevent the avoidance of tax. Part IVA of the ITAA 1936 will only apply where a scheme has been entered into or carried out to obtain a tax benefit and it can be concluded the dominant purpose of entering the scheme was to obtain a tax benefit. In such situations, the Commissioner can apply the provisions to deny the tax benefit obtained. Paragraph 177C(2)(a) of the ITAA 1936 provides for an exclusion to obtaining a tax benefit where it relates to the non-inclusion of an amount in assessable income where it is attributable to an election being made as provided for under the ITAA 1936 or ITAA 1997. The exclusion will only apply where the scheme was not entered into or carried out for the purpose of creating any circumstance or state of affairs to enable such an election being made. Taxation Determination TD 96/3 clearly enables an election to be made where there is a transfer of trading stock from a sole trader to a partnership and from the partnership to a trustee of a discretionary trust, on the basis that at least a 25% ownership interest in the assets is maintained and where all parties sign an agreement. Therefore, TD 96/3 allows the interposition of a partnership as part of a 2-stage transfer and a subsequent election being made, without a determination ultimately being made that Part IVA of the ITAA 1936 applies to the transaction. However, TD 96/3 does not consider the potential application of Part IVA of the ITAA 1936 to this, directly comparable, arrangement. It is reasonable to conclude, therefore, that the Commissioner does not consider that Part IVA of the ITAA 1936 should apply to this arrangement, on the basis that the creation of the 2-stage transfer, with elections, did not prevent the application of the exclusion provided for by paragraph 177C(2)(a) of the ITAA 1936. The interposition of the partnership to enable the election to be made will not prevent the operation of the exclusion in paragraph 177C(2)(a) of the ITAA 1936. As there is no 'tax benefit', Part IVA of the ITAA 1936 will not apply.

Legislative references: Income Tax Assessment Act 1936 Part IVA paragraph 177C(2)(a)
Related public rulings and determinations: Taxation Determination TD 96/3
Subject references: Interposed partnerships Disposal of trading stock Election Part IVA