Private ruling: Donation of art works and a franked distribution flowing indirectly to a beneficiary of a discretionary trust

Ruling: Q1: Is the Taxpayer entitled to claim a deduction under subsection 30-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for donating art works under the Cultural Gifts Program? | A1: Yes | Q2: Is the tax deduction to which the Taxpayer is entitled to, the GST inclusive market value of the works of art in accordance with section 30-215 of the ITAA 1997? | A2: Yes | Q3: Will section 30-220 of the ITAA 1997 have application to reduce the size of the deduction? | A3: No | Q4: Will the gains arising to the Taxpayer from donating the art works be disregarded in full for Capital Gains Tax (CGT) purposes under section 118-60 of the ITAA 1997? | A4: Yes | Q5: Will the gift anti-avoidance provisions of Section 78A of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement? | A5: No Issue 2 | Q6: Will the Taxpayer, being a beneficiary of a discretionary trust and presently entitled to income from the trust, be entitled to tax offsets under Division 207 of the ITAA 1997 with regards to franked distributions flowing indirectly through the discretionary trust to the Taxpayer? | A6: Yes | Q7: Will the Commissioner be satisfied that the circumstances listed in section 207-150 of the ITAA 1997 do not apply to this case. As such, section 207-150 would not operate to deny a tax offset entitlement. | A7: Yes | Q8: Will the Taxpayer be a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of ITAA 1936? | A8: Yes | Q9: Will the Commissioner make a determination under section 204-30 of the ITAA 1997 in relation to the proposed arrangement? | A9: No | Q10: Will the Commissioner make a determination under section 177EA of the ITAA 1936 in relation to the proposed arrangement? | A10: No | Q11: Is the distribution part of a dividend stripping operation under section 207-155 of the ITAA 1997? | A11: No | Q12: Will section 100A of the ITAA 1936 apply to the distribution to the ultimate beneficiary, or at any other stage of the planned arrangement? | A12: No


Relevant legislative provisions: Income Tax Assessment Act 1997 section 30-15 | Income Tax Assessment Act 1997 section 30-17 | Income Tax Assessment Act 1997 section 30-200 | Income Tax Assessment Act 1997 subsection 30-210(1) | Income Tax Assessment Act 1997 subsection 30-215(2) | Income Tax Assessment Act 1997 section 30-220 | Income Tax Assessment Act 1997 section 44-1 | Income Tax Assessment Act 1997 subsection 108-10(2) | Income Tax Assessment Act 1997 subsection 118-60(2) | Income Tax Assessment Act 1997 section 202-5 | Income Tax Assessment Act 1997 section 202-40 | Income Tax Assessment Act 1997 section 204-30 | Income Tax Assessment Act 1997 section 207-35 | Income Tax Assessment Act 1997 subsection 207-35(1) | Income Tax Assessment Act 1997 subsection 207-35(3) | Income Tax Assessment Act 1997 section 207-45 | Income Tax Assessment Act 1997 section 207-50 | Income Tax Assessment Act 1997 subsection 207-50(3) | Income Tax Assessment Act 1997 subsection 207-50(5) | Income Tax Assessment Act 1997 subsection 207-55(1) | Income Tax Assessment Act 1997 subsection 207-55(2) | Income Tax Assessment Act 1997 subsection 207-55(3) | Income Tax Assessment Act 1997 section 207-55 | Income Tax Assessment Act 1997 subsection 207-57(1) | Income Tax Assessment Act 1997 section 207-145 | Income Tax Assessment Act 1997 section 207-150 | Income Tax Assessment Act 1997 section 207-155 | Income Tax Assessment Act 1997 section 4-10 | Income Tax Assessment Act 1936 section 78A | Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1936 section 100A | Income Tax Assessment Act 1936 subsection 100A(1) | Income Tax Assessment Act 1936 subsection 100A(7) | Income Tax Assessment Act 1936 subsection 100A(13) | Income Tax Assessment Act 1936 subsection 100A(8) | Income Tax Assessment Act 1936 subsection 100A(9) | Income Tax Assessment Act 1936 section 160APHO | Income Tax Assessment Act 1936 section 160APHM | Income Tax Assessment Act 1936 section 160APHG | Income Tax Assessment Act 1936 section 160APHL | Income Tax Assessment Act 1936 section 177E | Income Tax Assessment Act 1936 section 177EA | Income Tax Assessment Act 1936 schedule 2F section 272-75 | Income Tax Assessment Act 1936 schedule 2F section 272-80

Reasons for decision: Summary: All references are to the Income Tax Assessment Act (ITAA 1997) unless otherwise stated. | Summary: The Taxpayer is entitled to claim a deduction under subsection 30-15(1) of the ITAA 1997 for donating the works of art under the Cultural Gifts Program. | Detailed Reasoning - Detailed reasoning: Under the Cultural Gifts Program (formerly the Taxation Incentives for the Arts Scheme), certain gifts of works of art qualify for a deduction. Section 30-15 contains a table which specifies the type of gift or contribution a taxpayer may make, who may be the recipient, how much may be deducted and any special conditions that apply. In accordance with item 4 to the table in section 30-15, a gift of property to a public art gallery in Australia is deductible if the following special conditions are satisfied: (a) the property must be accepted by the recipient for inclusion in a collection it is maintaining or establishing; and (b) the value of the gift must be $2 or more; and (ba) the institution must meet the requirements of section 30-17, unless it is the Australiana Fund; and (c) you must satisfy the valuation requirements in section 30-200, unless section 30-205 (about the proceeds of the same being assessable) applies. As the meaning of the term 'gift' or 'contribution' is not defined in income tax legislation, it is necessary to consider the relevant case law pertaining to these terms. In the case of FC of T v McPhail (1968) 117 CLR 111; (1968) 10 AITR 552; (1968) 15 ATD 16 ( McPhail's case ), it was established that to constitute a gift or contribution: 'it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and no advantage of a material character was received by the transferor by way of return.' Generally, it is considered that a taxpayer is entitled to a deduction for a gift or contribution that they make to an endorsed gift recipient (i.e. a fund, authority or institution that satisfies the requirements of Division 30) where: · it is a monetary gift or contribution of $2 or more (section 30-15 and the Explanatory Memorandum to the Tax Law Improvement Act 1997 (EM)); · it is a voluntary gift or contribution (it did not arise from a contractual obligation); and · the donor does not receive any material advantage in respect of their gift or contribution. Further guidance on the meaning of the term gift is provided in Taxation Ruling TR 2005/13. Paragraph 13 of TR 2005/13 provides that rather than attempting a definition of 'gift', the courts have described a gift as having the following characteristics and features: · there is a transfer of the beneficial interest in property; · the transfer is made voluntarily; · the transfer arises by way of benefaction; and · no material benefit or advantage is received by the giver by way of return. Therefore, in determining whether a transfer of property amounts to a gift, it is necessary to consider the whole set of circumstances surrounding the transfer. This may include consideration of parties other than the giver and the deductible gift recipient. In doing so, it is the substance and reality of the transfer that is required to be ascertained, as such it is necessary to take into account those acts, transactions, arrangements and circumstances that provide the context and the explanation for the transfer (paragraph 15 of TR 2005/13). | Detailed Reasoning - Transfer of beneficial interest in property: In applying the guidelines provided by TR 2005/13 to the present circumstances, it is considered that the donation of the works of art by the Taxpayer involves the transfer of property from the Taxpayer to the Recipient. As noted by Turner LG in Milroy v Lord 13 (1862) 45 ER 1185, for a gift to be valid and effectual: 'the giver must have done everything which was necessary to be done in order to transfer the property and render the settlement binding upon him.' The Taxpayer and the Recipient entered into a loan agreement whereby the Taxpayer agreed to loan a number of pieces of art work. The Taxpayer, after some time, donated these pieces and by doing so, the Recipient has received immediate and unconditional full title and unconditional right of custody and control of the pieces donated. | Detailed Reasoning - Transfer is made voluntarily: In order to be a gift, the transfer of the property must be made voluntarily. As noted in Cyprus Mines Corporation v FCT (1978) 9 ATR 33, a transfer will be voluntary if: 'it is the act and will of the disponor and there was nothing to interfere with or control the exercise of that will.' The Taxpayer has made a number of donations to the Recipient in the past. In this and those instances, the Taxpayer has voluntarily agreed to donate the pieces by their own accord and freewill. | Detailed Reasoning - Transfer arises by way of benefaction: The transfer of the property must also be a conferral of benefaction on the Recipient. Deane J in Leary v FCT (1980) 11 ATR 145 explained: 'the recipient should be advantaged in a material sense and without any countervailing material detriment arising from the circumstances of the transfer, to the extent of the property transferred.' The Recipient has accepted the works of art in keeping with their collecting interests and it is understood that the pieces will be installed in prominent positions within the Recipient's premises. | Detailed Reasoning - No material benefit or advantage is received by the giver in return: As noted in McPhail's case, the receipt of any material benefit by way of return to the giver will disqualify the transfer as a gift. The Applicant has advised that the Taxpayer will not receive any naming rights, tickets or any other type of benefit apart from an acknowledgement in return for donating the works of art. Therefore, in accordance with TR 2005/13, it is considered that the donation made by the Taxpayer satisfies the required attributes of a gift. However, for the gift to be deductible, the special conditions outlined in item 4 to the table in section 30-15 must also be satisfied. | Detailed Reasoning - Special conditions of section 30-15: It is considered that special conditions (a) and (b) of item 4 will be satisfied as the works of art have been accepted by the Recipient for inclusion in a collection it is maintaining or establishing and the value of the gift is more than $2. Special condition (ba) requires that the institution receiving the gift must meet the requirements of section 30-17, unless it is the Australiana Fund. Section 30-17 provides that the gift must be made to an institution that is endorsed as a deductible gift recipient. It is considered that the Recipient is a deductible gift recipient (DGR) in accordance with Taxation Ruling TR 2000/10. Special condition (c) provides that section 30-200 must also be satisfied before a gift can be deductible. Under section 30-200, a taxpayer will satisfy the valuation requirements if they acquire two or more written valuations of the gift made. The Applicant has advised that the Taxpayer is currently in the process of obtaining two written valuations from approved valuers as per the requirements of subsection 30-200(2). Provided the Taxpayer obtains the valuations within the required time period, it is considered that the special conditions to item 4 in the table to subsection 30-15 will be satisfied and the Taxpayer will be entitled to a tax deduction under section 30-15 for donating the works of art. | Summary: The deduction to which the Taxpayer is entitled to under subsection 30-15(1) of the ITAA 1997 is the GST inclusive market value of the works of art in accordance with section 30-215 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Within certain limits, the Cultural Gifts Program allows a deduction for a qualifying gift to be based on the GST inclusive market value of the gift rather than its cost. To determine the amount of the deduction, the taxpayer must obtain two or more written valuations by different individual's who are 'approved valuers' in accordance with section 30-210. For the purposes of subsection 30-200(2) the Secretary to the Department of Communications and Arts may approve an individual as a valuer of a particular kind of property (subsection 30-210(1)). The general rule provided in subsection 30-215(2) states that the amount a taxpayer can deduct for a gift of this kind is the average of the GST inclusive market values (as reduced under subsection 30-15(3) if that subsection applies) specified in the written valuation obtained from the approved valuers. It is also a condition that the valuations be in writing and state the estimated GST inclusive market value of the property at the time the gift was made or, provided the valuation is made within 90 days before or after the time the gift is made, the GST inclusive value of the property at the time of valuation (section 30-200). Taxation Ruling TR 96/1 provides that the valuation method should determine what price a willing, but not anxious, vendor and a willing, but not anxious, purchaser could reasonably be expected to agree on for the transfer of the property. The Applicant has advised that the Taxpayer is in the process of obtaining two written valuations for the works of art by approved valuers. As such, provided the Taxpayer acquires these valuations within the required timeframes, they will be entitled to deduct the GST inclusive market value of the works of art. | Summary: Section 30-220 of the ITAA 1997 will not operate to reduce the size of the deduction allowable to the Taxpayer. | Detailed Reasoning - Detailed reasoning: Section 30-220 provides that the amount a taxpayer can deduct under section 30-215 may be reduced by a reasonable amount if: (a) the terms and conditions on which the gift is made are such that the recipient: (i) does not receive immediate custody and control of the property; or (ii) does not have the unconditional right to retain custody and control of the property in perpetuity; or (iii) does not obtain an immediate, indefeasible and unencumbered legal and equitable title to the property; or (b) the custody, control or use of the property by the recipient is affected by an arrangement entered into in respect of the making of the gift. Upon receipt of the donated pieces, the Recipient obtained immediate and unconditional full title, right of custody and control of the property transferred. Further, the control of the property is not affected by any arrangement entered into in respect of the making of the gift. Therefore it is considered that section 30-220 has no application and the Taxpayer is entitled to a tax deduction equal to the average of the GST inclusive market values of the works of art donated. | Summary: The gain arising to the Taxpayer as a result of the donation will be disregarded in full under subsection 118-60(2) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: A collectable is defined in subsection 108-10(2) to include artwork (acquired for more than $500) that is used or kept mainly for personal use or enjoyment and as such, is generally subject to capital gains tax on disposal. However, subsection 118-60(2) provides: 'a capital gain or capital loss made from a gift of property that is deductible under section 30-15 because of item 4 or 5 in the table in that section is disregarded.' As the art works donated are deductible under item 4 to the table in section 30-15, the Taxpayer is exempt from any capital gain arising from the transfer of the property by virtue of subsection 118-60(2). | Summary: The gift anti-avoidance provisions outlined in section 78A of the ITAA 1936 will not apply to the arrangement. | Detailed Reasoning - Detailed reasoning: In certain circumstances the gift anti-avoidance provisions of section 78A of the ITAA 1936 may operate to deny an income tax deduction ordinarily allowable under Division 30 of the ITAA 1997. Section 78A of the ITAA 1936 applies if: · the amount or value of the benefit derived by the DGR as a consequence of the gift is, or will be, or may reasonably be expected to be, diminished subsequent to the receipt of the gift (paragraph 78A(2)(a) of the ITAA 1936); · another fund, authority or institution, other than the recipient DGR makes, or becomes liable to make, or may reasonably be expected to make a payment, or transfer property to any person or incur any other detriment, disadvantage, liability or obligation (paragraph 78A(2)(b) of the ITAA 1936); · the giver or the giver's associate obtains, or will obtain, or may reasonably be expected to obtain any benefit, advantage, right or privilege apart from the benefit of a tax saving associated with the gift deduction (paragraph 78A(2)(c) of the ITAA 1936); or · the recipient DGR or another fund, authority or institution acquires property, directly or indirectly, from the giver or the giver's associate (paragraph 78A(2)(d) of the ITAA 1936). In the present case it is considered that section 78A of the ITAA 1936 has no application to the arrangement as: · the value of the benefit derived by the Recipient will not be diminished upon receipt of the gift; · the Recipient nor its associate will become liable to make a payment or transfer property to another person as a result of acquiring the gift; · the Taxpayer (or their associate) receives no benefit in return; and · the Recipient acquires no other property apart from the donated works of art. | Summary: The Taxpayer is entitled to tax offsets available under Division 207 of the ITAA 1997 in regards to franked distributions that will flow indirectly to the Taxpayer through a discretionary trust. | Detailed Reasoning - Detailed reasoning: Division 207 sets out the effects of receiving a franked distribution. As a general rule under section 207-10, if a member of an entity receives a franked distribution: · an amount equal to the franking credit on the distribution is included in the member's assessable income; and · the member is entitled to a tax offset equal to the franking credit on the distribution. However, in instances where a distribution flows indirectly to an entity through an interposed trust or partnership the general rule does not apply and the appropriate provisions are detailed in subdivision 207-B. Subsection 207-35(1) provides that if a franked distribution is made in an income year to an entity that is a trustee of a trust and the entity is not a corporate tax entity nor the trustee of a complying superannuation fund, the assessable income of the trust for that income year includes the amount of the franking credit on the distribution. By virtue of subsection 207-35(3), this amount is in addition to any other amount included in that assessable income in relation to the distribution under any other provision of the ITAA 1936 or ITAA 1997. If all or part of the amount of assessable income is then distributed, or flows indirectly, to an entity that is a beneficiary or the trustee of a trust and this entity has an amount of assessable income for that year that is attributable to all, or a part of the distribution, then in accordance with subsection 207-35(3), the entity's assessable income for that year also includes so much of the franking credit that is equal to its share of the franking credit on the distribution. Subsection 207-50(3) provides that a franked distribution flows indirectly to a beneficiary of a trust in an income year if, and only if: (a) during that income year, the distribution is made to the trustee of the trust, or flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or this subsection; and (b) the beneficiary has this amount for that income year (the share amount): (i) a share of the trust's net income for that income year that is covered by paragraph 97(1)(a) of the ITAA 1936; or (ii) an individual interest in the trust's net income for that income year that is covered by section 98A or 100 of that Act. (whether or not the share amount becomes assessable income in the hands of the beneficiary); and (c) the beneficiary's share of the distribution under section 207-55 is a positive amount (whether or not the beneficiary actually receives any of that share). In calculating a beneficiary's share of the franked distribution it is necessary to consider the circumstances where a franked distribution flows indirectly to the beneficiary through an entity. Subsection 207-50(5) provides that this occurs where there is an entity (the intermediary entity) and the franked distribution flows through that entity to another entity (the focal entity). In such circumstances subsection 207-55(1) provides: 'an entity's share of the franked distribution is an amount notionally allocated to the entity as its share of the distribution, whether or not the entity actually receives any of that distribution.' Further, subsection 207-55(2) states: 'that amount is equal to the entity's share of the distribution as the focal entity in column 3 of an item of the table.' The table referred to in subsection 207-55(2) is that contained in subsection 207-55(3) and is used to determine the entity's share of the franking credit on a franked distribution in situations where the distribution flows indirectly. Column 2 to the table in subsection 207-55(3) sets out the intermediary entity's share of the franked distribution and column 3 provides the focal entity's share of the franked distribution. In the case of trusts, item 3 to the table, the intermediary entity's share of the franked distribution is: (a) if the trust has a positive amount of net income for that year - the amount of the franked distribution; or (b) otherwise - nil In accordance with column 3, the focal entity's share of the franked distribution is so much of the amount worked out under column 2 as is taken into account in working out that share amount. The table operates in such a way that if deductions exceed assessable income (i.e. a loss situation) there can be no amount which flows indirectly through it to another entity. To calculate an entity's share of a franking credit (on a franked distribution), subsection 207-57(1) provides that this is an amount notionally allocated to the entity as its share of that credit (whether or not the entity actually receives any of that credit or distribution). The amount of the credit is calculated using the following formula: In circumstances where a franked distribution flows indirectly, section 207-45 provides that the entity is entitled to a tax offset for that income year equal to its share of the franking credit attached to the distribution. Entity's entitled to use the tax offset include individuals, corporate tax entities, trustees of a trust that is liable to be assessed under section 98, 99 or 99A of the ITAA 1936, the trustee of an FHSA trust or trustees of eligible entities within the meaning of Part IX of the ITAA 1936. It is proposed that Company A will pay a dividend (with franking credits attached) to Trust X. The distribution will be sourced from the accumulated retained earnings of the company and are sufficient in size to allow the making of the payment. On receipt of the franked distribution, Trust X will include the amount of the franking credit on the distribution (representing the gross-up) in its assessable income for that year in accordance with subsection 207-35(1). This amount will be in addition to the amount of the franked distribution received. Trust X will then distribute all of its net income to the Taxpayer as a beneficiary of Trust X. Pursuant to subsection 207-35(3), the Taxpayer will include in their assessable income, for that year, an amount equal to their share of the franking credit on the distribution. This amount will be in addition to the amount of the franked distribution received from Trust X. This is on the basis that, in accordance with subsections 207-50(3) and 207-50(5), a franked distribution will flow indirectly to the Taxpayer (as a beneficiary of Trust X) as: (a) the trustee of Trust X (the intermediary entity) receives a franked distribution; and (b) the Taxpayer (the focal entity) has a share of Trust X's net income for that income year (the share amount) that is covered by paragraph 97(1)(a) of the ITAA 1936; and (c) the Taxpayer's share of the distribution under item 3, column 3 to the table in subsection 207-55(3) is a positive amount. It is proposed that Company C by Majority Decision, will distribute 100% of Trust X's net income to the Taxpayer. Consequently, in accordance with item 3 to the table in subsection 207-55(3), the Taxpayer (being the focal entity) will be allocated 100% of the franked distribution. As such, pursuant to section 207-45, the Taxpayer is entitled to a tax offset, for that income year, equal to their share of the franking credit. | Summary: Section 207-150 of the ITAA 1997 will not operate to deny a tax offset entitlement. | Detailed Reasoning - Detailed reasoning: Section 207-150 provides that the gross-up and tax offset treatment does not apply where a franked distribution flows indirectly to an entity in one or more of the following circumstances: (a) the entity is not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the ITAA 1936; (b) the Commissioner has made a determination under paragraph 177EA(5)(b) of the ITAA 1936 that no imputation benefit is to arise in respect f the distribution for the entity; (c) the Commissioner has made a determination under paragraph 204-30(3)(c) that no imputation benefit is to arise in respect of the distribution for the entity; (d) the distribution is treated as an interest payment for the entity under section 207-160; and (e) the distribution is made as part of a dividend stripping operation. The analysis provided in questions 3, 4, 5 and 6 of this Ruling confirms that section 207-150 will not operate to deny a tax offset to the Taxpayer based on the following: · the Taxpayer is a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIA of the ITAA 1936; · the Commissioner will not make a determination under paragraph 177EA(5)(b); · the Commissioner will not make a determination under paragraph 204-30(3)(c); · the distribution is not made as part of a dividend stripping operation; and · the distribution is not treated as an interest payment under section 207-160. | Summary: The Taxpayer will be a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of ITAA 1936. | Detailed Reasoning - Qualified person: Division 1A of former Part IIIAA of the ITAA 1936 sets out the legislative framework for determining whether a Taxpayer is a qualified person in relation to a franked distribution. One of the underlying principles of the imputation system is that imputation benefits should only be available to the true economic owner of the shares giving rise to the benefit. Paragraphs 207-145(1)(a) and 207-150(1)(a) provide that in circumstances where a franked dividend flows either directly or indirectly to an entity, only a qualified person in relation to that distribution is entitled to a franking credit or tax offset. In accordance with paragraph 160APHO(1)(a) and subparagraph 160APHO(2)(b)(i) of the ITAA 1936, where the taxpayer holds an interest in shares (not being preference shares) on which a dividend has been paid, and neither the taxpayer nor the associate of the taxpayer has made, is under an obligation to make, or is likely to make a related payment in respect to the dividend, the taxpayer will be a qualified person in respect of the dividend if, during the primary qualification period, they held their interest in the shares for a continuous period of not less than 45 days (holding period rule). In determining whether a taxpayer has satisfied the holding period rule, any days during which there is a 'materially diminished' risk in relation to the relevant shares are not included (subsection 160APHO(3) of the ITAA 1936). Under subsection 160APHM(2) of the ITAA 1936, a taxpayer is taken to have materially diminished the risks of loss or opportunities for gain in respect of shares or an interest in shares if their net position on that day results in the taxpayer having less than 30% of the risks and opportunities in relation to those shares or interest in shares. The beneficiaries of a non-widely held trust under subsection 160APHG(3) of the ITAA 1936 are deemed to have acquired, held or disposed of an interest in shares when the trustee acquires, holds or disposes of those shares. Pursuant to former subsection 160APHG(4) of the ITAA 1936, a taxpayer is taken to acquire an interest in the shares of the trust estate when the taxpayer becomes a beneficiary. As such, what happens to the trustee will also happen to the beneficiary. Therefore, if a trustee is considered to be a qualified person, the beneficiary will also be a qualified person provided that they too satisfy the at-risk requirement of the qualified person rule. Former subsection 160APHL of the ITAA 1936 sets out how a beneficiary's interest in the trust estate is calculated and looks at how the level of risk the beneficiary has in relation to its share of the trust estate is determined. Under former subsection 160APHL(5) of the ITAA 1936, a beneficiary's interest in shares held by the trustee of a non-widely held trust is determined in proportion to the beneficiary's share of the dividend income derived by the trust. Subsection 160APHL(7) of the ITAA 1936 provides that the beneficiary's interest in the relevant share is taken to have a long position with a delta of +1 in relation to itself. However, former subsection 160APHL(10) of the ITAA 1936 provides that where the trust is not a family trust within the meaning of Schedule 2F of the ITAA 1936, the beneficiaries will be taken to have a short position equal to the long position that arose under former subsection 160APHL(7) of the ITAA 1936 (that is, a position with a delta of -1) and a long position equal to so much of the beneficiary's interest in the trust holding as is a fixed interest. Section 272-75 of the ITAA 1936 provides: 'a trust is a family trust at any time when a family trust election (see subsection 272-80(1)) in respect of the trust is in force.' As trustee of Trust X, Company C has made a family trust election in accordance with subsection 272-80 of the ITAA 1936. Therefore it is considered that former subsection 160APHL(10) has no application to the arrangement and the Taxpayer's interest in the relevant share is taken to have a long position with a delta of +1. Company C has held all shares in Company A since the company's incorporation. There has been no purchase or sale of any shares and no change to Company A's share structure in any way since its incorporation. Therefore, Trust X will be taken to have held its shares in Company A at risk and the sole position in respect of the shares has been a long position with a delta of +1 in relation to itself (as required under former subsection 160APHL(7)). Further, at no time has Company C, as trustee, had a materially diminished risk of loss or opportunities pertaining to the shares. Accordingly, it is considered that the shares have been held for a continuous period of at least 45 days. As provided under former subsection 160APHG(4), when a taxpayer becomes a beneficiary of a non-widely held trust, the taxpayer is taken to acquire an interest in the shares at that time. As the Taxpayer has been a beneficiary of Trust X since incorporation, they will satisfy the at-risk requirement of the qualified person rule. Accordingly, the Taxpayer will be deemed to have held an interest in the shares of Company A for a continuous period of more than 45 days. Therefore the Taxpayer will be a qualified person for the purposes of Division 1A of Former Part IIIAA of the ITAA1936. | Summary: The Commissioner will not make a determination under section 204-30 of the ITAA 1997 in relation to the proposed arrangement. | Detailed Reasoning - Detailed reasoning: Subdivision 204-D contains provisions which aim to prevent the streaming of franking credits to one member of a corporate tax entity in preference to another by either imposing a franking debit or denying an imputation benefit where there is streaming. Section 204-30 applies where an entity streams one or more distributions, whether in a single franking period or in a number of franking periods, in such a way that the franking credits attaching to the distribution are received by those members of the entity who derive a greater benefit from them, and other members receive lesser imputation benefits, or no imputation benefits. If section 204-30 applies, the Commissioner may make a determination pursuant to subsection 204-30(3) to debit the entity's franking account (paragraph 204-30(3)(a)), debit the entity's exempting account (paragraph 204-30(3)(b)) or to deny imputation benefits that arise in respect of the distribution that is made to those members who derive a greater benefit (paragraph 204-30(3)(c)). In order for section 204-30 to apply, members to whom distributions are streamed must be in a position to derive a greater benefit from franking credits than other members. Subsection 204-30(8) details examples of when a member of an entity will be taken to have derived a greater benefit from franking credits than another member. These are where the other member: (a) is not an Australian resident; (b) would not be entitled to use the tax offset under Division 207; (c) incurs a tax liability as a result of the distribution that is less than the benefit associated with the tax offset attributable to the distribution; (d) is a corporate tax entity at the time the distribution is made, but no franking credit arises for the entity as a result of the distribution; (e) is a corporate tax entity at the time the distribution is made, but cannot use the franking credits to frank a distribution to its own members because it is not a franking entity or is unable to make a frankable distribution; (f) is an exempting entity. Although streaming is not defined in the legislative provisions, the Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002 (EM) at paragraph 3.28 describes streaming as selectively directing the flow of franked distributions to those members who can most benefit from imputation credits. As such, paragraph 3.35 of the EM provides that it is necessary to distinguish cases where individual members have no effective interest in the profits of a corporate tax entity from single distribution streaming. Paragraph 3.36 goes on to state that some corporate tax entities have membership interests where the rights of the members holding those interests are effectively discretionary, since the entity can make distributions to some members to the exclusion of other members at its discretion. In these entities, which are usually family companies or trusts, the members do not have anything, in a sense relevant for streaming purposes, resembling a definite interest in the profits of the corporate tax entity, they have only a possibility of being considered as a possible recipient of distributions. In these cases, paragraph 3.36 provides that the recipient of a franked distribution by one class of members does not imply that the other classes who have not received a franked distribution have a deferred distribution of their share in the profits. More commonly, it is reasonable to assume that they have simply missed out on any share in the profits. This is not streaming; all members with an actual share of the profits have appropriately received franked distributions. On this basis, it is generally considered that the distribution of franked and unfranked distributions by a closely-held company or trust among family members is unlikely to be streaming (paragraph 3.38 of the EM). In the present circumstances it is proposed that Company A will pay a dividend to Company C sourced from its accumulated retained earnings. Upon receipt of the distribution, Company C as trustee of Trust X, will exercise its discretion and distribute all of the trust's net income to the Taxpayer, a resident individual and a beneficiary of the trust. As a result of the distribution, the Taxpayer, in accordance with paragraph 204-30(6)(a), will receive an imputation benefit due to their entitlement to a tax offset under Division 207. An imputation benefit also arises under paragraph 204-30(6)(b), as an amount would also be included in the Trust X's assessable income by virtue of section 207-35. Although the dividend is to be fully franked and paid to Trust X, it cannot be inferred that Company A has directed the flow of distributions in such a manner as to ensure that imputation benefits are derived by members who derive greater benefit from franking credits, while other members receive lesser or no imputation benefits as Company C is the sole shareholder of Company A. Consequently, the Commissioner will not make a determination under section 204-30. | Summary: The Commissioner will not make a determination under section 177EA of the ITAA 1936 in relation to the proposed arrangement. | Detailed Reasoning - Detailed reasoning: Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to a wide range of schemes involving the obtaining of a tax advantage through franking benefits or tax offsets. Broadly, it applies to schemes for the disposition of shares or an interest in shares, where a franked distribution is paid or payable in respect of membership interests either directly or indirectly to a person in respect of membership interests. Subsection 177EA(13) of the ITAA 1936 states that a person has an interest in membership interests where: (a) the person has any legal or equitable interests in the membership interests; or (c) the person is a beneficiary of a trust (including a potential beneficiary of a discretionary trust); and (ii) the trust derives, or will derive, income indirectly through interposed companies, trusts or partnerships, from distributions made on the membership interests. Subsection 177EA(3) of the ITAA 1936 provides that section 177EA applies if: (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. If section 177EA of the ITAA 1936 applies, the Commissioner may make a determination under subsection 177EA(5) of the ITAA 1936 that either a franking debit arises to the company in respect of each dividend paid to the relevant taxpayer or, in the alternative, that no franking credit benefit arises in respect of a dividend paid to the relevant taxpayer (paragraphs 177EA(5)(a) and (b) of the ITAA 1936). Subsection 177EA(14) of the ITAA 1936 provides a scheme for a disposition of membership interests involves, but is not limited to, any of the following: (a) issuing the membership interest or creating the interest in membership interests; (b) entering into any contract, arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the membership interest or interest in membership interests; (c) creating, varying or revoking a trust in relation to the membership interests or interest in membership interests; (d) creating, altering or extinguishing a right, power or liability attaching to, or otherwise relating to, the membership interests or interest in membership interests; (e) substantially altering any of the risks of loss, or opportunities for profit or gain, involved in holding or owning the membership interests or having the interest in membership interests; (f) the membership interests or interest in membership interests beginning to be included, or ceasing to be included, in any of the insurance funds of a life assurance company. In the present circumstances, the dividend distribution represents a distribution from the retained earnings of Company A to Trust X and the subsequent distribution of the Trust's net income to the Taxpayer, for that year. The dividend does not contain any capital component and there will be no change in the membership interests held in Company A. Therefore it is considered that the distribution is not a scheme for a disposition of membership interests within that meaning under subsection 177EA(14) of the ITAA 1936. As such, the Commissioner will not make a determination under section 177EA(5) of the ITAA 1936. | Summary: The distribution is not part of a dividend stripping operation under section 207-155 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 207-155 states that 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. Whilst the term dividend stripping is not defined in the legislative provisions, its context can be mirrored to that in subsection 177E(1) of the ITAA 1936 in terms of the stripping of company profits. Taxation Ruling IT 2627 provides general guidelines on the application of section 177E of the ITAA 1936 and thus is also relevant to the operation of section 207-155. As noted in paragraph 8 of IT 2627 the term 'dividend stripping' has no precise legal meaning. However, paragraph 9 provides 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. Paragraph 10 of IT 2627 goes on to state that, having regard to the overall scope and purpose of section 177E of the ITAA 1936, an important element to be looked at will be any release of profits of a company to its shareholders in a non-taxable form, regardless of the different methods that might be used to achieve this result. In the case of FC T v Consolidated Press Holdings Ltd (No 1) 91 FCR 524 ( CPH case ), which dealt with the stripping of company profits under section 177E of the ITAA 1936, the Full Federal Court stated that the central characteristics of a dividend stripping scheme, as identified by reference to established case law decisions, was: (a) a target company with substantial accumulated profits; (b) the sale of the shares in the target company to another party; (c) the payment of dividends to the purchaser out of the target company's profits; (d) the purchaser escaping Australian tax on the dividends so declared; (e) the vendor shareholders receiving a capital sum approximating the dividend paid by the target; and (f) a scheme carefully planned and carried through by the stripper and a number of other persons acting in concert. There is no evidence to suggest that the proposed dividend distribution to be made by Company A is part of a dividend stripping operation. Trust X will include in their assessable income under subsection 44(1) of the ITAA 1936, the amount of the distribution it receives and by virtue of 207-55, the Taxpayer will also include their share of the franked distribution (received from Trust X) in their assessable income under subsection 44(1) of the ITAA 1936 as well. As such, it is considered that there is no release of profits from Company A in a non-taxable form. Rather, the distribution represents an amount of retained earnings which will be wholly sourced from their accumulated profits. Further, the distribution does not represent a sale of any shares or result in a change to the share structure of the company. As such subsection 207-155 will not apply to deny the franking credit benefit. | Summary: Section 100A of the ITAA 1936 will not apply to the proposed arrangement. | Detailed Reasoning - Detailed reasoning: Subsection 100A(1) of the ITAA 1936 states that where a beneficiary of a trust (who is not under a legal disability), is presently entitled to income of the trust and the present entitlement is linked either directly or indirectly to a reimbursement agreement, the beneficiary shall be deemed not to be, and never to have been, presently entitled to the trust income. Under subsections 100A(7) and (13) of the ITAA 1936, a reimbursement agreement is an arrangement entered into otherwise than in the course of ordinary family or commercial dealings that provides for the payment of money (including the payment of money by way of loan) or the transfer of property to a person or persons other than the beneficiary. The terms provided in subsections 100A(8) and (9) of the ITAA 1936 state that if the agreement was entered into with a purpose to secure a lesser income tax liability, the agreement would meet the definition of a reimbursement agreement for the purposes of section 100A of the ITAA 1936. In the proposed arrangement Company A will pay a franked dividend to Trust X which will ultimately flow through to the Taxpayer as a beneficiary of that Trust. Both Company A and Trust X are members of the same family group and under the proposed transaction no new entities will be created. Further, there will be no alteration to the trust deed, no creation or issue of new shares and no introduction of additional beneficiaries. The distribution will flow directly to the Taxpayer upon Company C exercising their discretion to distribute the income of the Trust to the Taxpayer; therefore no payment of money or provision of services will be made to persons other than the ultimate beneficiary. As it is considered that there is no reimbursement agreement, section 100A of the ITAAA 1936 has no application to the arrangement. | Detailed Reasoning - Does Part IVA, or any other anti-avoidance provision, apply to this ruling?: Part IVA is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | 1. The Taxpayer has made a number of charitable donations. | 2. The Taxpayer does not hold their collection as trading stock; rather, the pieces have been collected over a number of years as a hobby. The Taxpayer purchased each piece of art for more than $500 and is the sole beneficial and legal owner of the pieces. | 3. The Taxpayer purchased the works of art for private use. | 4. The Taxpayer donated a number of pieces of art from their collection to the Recipient. | 5. In donating the pieces, the Taxpayer did not receive any naming rights, tickets or any other benefit apart from an acknowledgement in return. | 6. The Recipient of the donation has obtained immediate and unconditional full title, unconditional right of custody and control of the property transferred. | 7. The Recipient accepted the works of art in keeping with their collecting interests. It is understood that the works of art will be installed in prominent positions within the Recipient's premises. | 8. The Taxpayer has not obtained a valuation on the pieces of art donated; however, the Taxpayer has organised to obtain two GST inclusive independent valuations by approved valuers in accordance with section 30-200 of the ITAA 1997 within 90 days of the Taxpayer's donation being accepted. The Taxpayer will receive 'valuation certificates' valuing the art donated at more than $2 and listing the Taxpayer as the donor. | 9. The works of art were purchased before 20 September 1985 and have been held by the Taxpayer for more than 12 months. | 10. Company A is the head company of the Taxpayer's group of consolidated companies. All shares in Company A are held by Company C as trustee for Trust X. | 11. Company C has held the shares in Company A since its date of incorporation. | 12. The Taxpayer has been a director and shareholder of Company C since its incorporation. | 13. Since incorporation, the shares in Company A have been held by Company C. Company C has not purchased or sold any shares nor has Company A changed its share structure in any way since its incorporation. Company A has no current intention or expectation of issuing new shares to any other entity. There is also no intention to either reduce the capital in respect of the existing shareholding or vary the rights attached to the shares held by the existing shareholder. | 14. Company C currently has no intention or expectation of disposing, redeeming or changing its interests in Company A. | 15. Trust X is a discretionary family trust. | 16. The beneficiaries of Trust X include the Taxpayer, who by virtue of Trust X's trust deed is a primary and general beneficiary. | 17. Under the trust deed, Company C, as trustee of Trust X, can by 'majority decision'…..pay, apply, allocate or set aside all or any part of the income or net income of the trust. | 18. The expressions income and net income is defined in the trust deed and includes franked dividend income received from Company A. | 19. The beneficiaries entitled to receive an income distribution under the power of appointment contained in the amended and rectified trust deed are general beneficiaries. | 20. Company A proposes to pay a cash dividend with attached imputation credits (franking credits) to Trust X. | 21. The dividend will be sourced from accumulated retained earnings of Company A. The company has sufficient retained earnings available to make the distribution. | 22. Trust X has no prior year or current year losses to recoup in the income year in which the distribution is to be made to the Taxpayer. | 23. Company A will not debit the dividend amount to its share capital account. The dividend will be the only dividend declared or paid in the proposed year of the transaction. | 24. The dividend will be 100% franked. There are sufficient franking credits available in the franking account of Company A. | 25. During the year in question, Trust X will distribute all of its income to the Taxpayer. | 26. Trust X will not have any income from any other sources in the 2010-11 income year. Company C, as trustee of Trust X, has made a family trust election. | 27. The total of the franking credits that the Taxpayer will receive from all sources in the income year in question will be $X. | 28. The Taxpayer's net taxable income and tax payable in the year of income, before credits and tax offsets, will be a positive amount.