Private ruling: Application of Part IVA of the Income Tax Assessment Act 1936 to a proposed restructure
Published: March 2015
Ruling period: 1 July 2014 - 30 June 2015 | 1 July 2015 - 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the Commissioner conclude that all or one or more of the transaction steps described herein form a scheme or schemes for purposes of the definition contained in subsection 177A(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Would the Commissioner conclude that there is a tax benefit in relation to the scheme or schemes identified that meet the definition of tax benefit in section 177C of the ITAA 1936? | A2: No. | Q3: In relation to any tax benefit identified in answers to Question 2 and in relation to any scheme or schemes identified in answer to Question 1, would the Commissioner make a determination pursuant to section 177F of the ITAA 1936 that the sole or dominant purpose of the scheme or schemes were to secure a tax benefit or tax benefits to one or more of the applicants and to issue a determination to cancel the identified tax benefits or tax benefits pursuant to section 177F of the ITAA 1936? | A3: No. | Q4: Will the Commissioner, in respect to all or one or more of the transaction steps described herein, form an opinion pursuant to paragraph 177E(1)(b) of the ITAA 1936 that the sale of the shares in Company A represents a distribution of profits with the result that the Commissioner makes a determination pursuant to section 177F to include an amount in the assessable income of individual X? | A4: No. | Q5: Will the Commissioner, in respect to all or one or more of the transaction steps described herein, form an opinion that a capital benefit as defined in subsection 45B(5) of the ITAA 1936 arises to one or more of the applicants as a result of the transaction steps? | A5: No.

Relevant facts and circumstances: Individual X owns all the issued shares in Company A. The shares were acquired before 20 September 1985. Company A has assets used in its business activities and investments. X has previously received offers to purchase the business of Company A. These offers did not proceed and there is no current offer. X is reviewing the current structure of asset ownership for the purposes of a potential sale of the business and succession planning due to his age. X has considered a number of restructure options and there is one preferred option. The preferred option involves the separation of the business assets and investments and the sale of the business by way of a sale of shares (Proposed Scheme). The other options are not considered suitable and attractive to a prospective purchaser and to X due to the nature of the business assets, the age of X and succession planning strategy. Under the Proposed Scheme Company B, Company C and a Trust will be established. X will be the trustee of the Trust. The Trust will own 100% issued shares in Company B. Company B establishes Company C, a wholly-owned subsidiary. X will sell his shares in Company A to Company B. Capital gains tax (CGT) event K6 will apply to the sale of the shares by X, which will result in a CGT liability for him. Companies A, B and C will form a tax consolidated group with Company B being the head company. Company B will purchase the investments from Company A. Company C will purchase the business assets from Company A. The purchase of X's shares and purchases of the investments and the business assets in Company A are financed by related party loans. Company A will be liquidated. A future sale of the business will be structured by way of a sale of shares in Company C by Company B. Individual X, Company A, Company B and the Trust are referred to collectively as Applicants.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 Subsection 177A(1) | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 Subsection 177C(1) | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Subsection 177D(1) | Income Tax Assessment Act 1936 Subsection 177D(2) | Income Tax Assessment Act 1936 Section 177E | Income Tax Assessment Act 1936 Subsection 177E(1) | Income Tax Assessment Act 1936 Section 45B | Income Tax Assessment Act 1936 Paragraph 45B(1)(b) | Income Tax Assessment Act 1936 subsection 45B(5)

Reasons for decision: Summary: Subsection 177A(1) of the ITAA 1936 defines 'scheme' as any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct. The Proposed Scheme falls within this definition. It is, therefore, a scheme in accordance with the definition in subsection 177A(1) of the ITAA 1936. In determining whether any of the Applicants will obtain a tax benefit as defined in section 177C of the ITAA 1936 it is necessary to identify what might reasonably be expected to occur if the Proposed Scheme is not entered into or carried out. The expectation of an alternative transaction must be reasonable, as distinct from a mere possibility ( FCT v Peabody 94 ATC 4663 at 4671; Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules at paragraph 71). Paragraph 177C(1)(a) of the ITAA 1936 is relevant for the purpose of this ruling. Paragraph (a) is directed at identifying whether it would be reasonable to expect that any of the Applicants would derive an amount of assessable income if the Proposed Scheme is not entered into or carried out. From an examination of the relevant facts it cannot be concluded that any of the Applicants would derive an amount of assessable income from an alternative scheme. Therefore, there is no tax benefit for the purpose of section 177C of the ITAA 1936. The Commissioner will not make a determination pursuant to section 177F of the ITAA 1936 that the sole or dominant purpose of the scheme is to secure a tax benefit to one or more of the Applicants as there is no tax benefit identified for the purpose of section 177C of the ITAA 1936. Section 177E of the ITAA 1936 applies to dividend stripping schemes, or schemes with substantially the same effect as a dividend stripping scheme. It applies where: • as a result of a dividend stripping scheme, any property of the company is disposed of, • the Commissioner is of the opinion that the disposal of the property represents, wholly or in part, a distribution of profits (whether of the current, a past or a future accounting period) of the company, and • if the profits represented by the disposal of the property had been paid as a dividend immediately before the scheme was entered into, it would be reasonable to expect that this would result in the amount being included in a taxpayer's assessable income. For these purposes, a disposal of property of a company includes the payment of a dividend by the company (paragraph 177E(2)(a) of the ITAA 1936). Section 177E of the ITAA 1936 was intended to apply only to schemes which can be said to have the dominant purpose of tax avoidance. It is not intended to apply to schemes carried out primarily for business purposes unconnected with the avoidance of tax, even if the scheme is implemented in a manner which produces tax advantages (Federal Commissioner of Taxation v. Consolidated Press Holdings Limited [1999] FCA 1199 at 171). The required tax avoidance purpose is usually that of enabling the vendor shareholders to receive profits of the company in a substantially, if not entirely, tax-free form, thus avoiding tax that would be payable if the profits were paid as dividends to shareholders (Federal Commissioner of Taxation v. Consolidated Press Holdings Limited [1999] FCA 1199 at 171). It is concluded from an examination of the facts provided in the ruling application that the proposed scheme would not be entered into for the dominant purpose of avoiding tax. The dominant purpose would be to secure the commercial benefits outlined below. Firstly, all of the assets currently owned by Company A would be owned by the Trust indirectly. This serves estate planning purposes. Secondly, the business assets of Company A would be transferred to a 'clean company'. It is reasonable to assume that this would improve the prospects of selling the business at a higher price than might be achieved if individual X attempted to sell Company A. Thirdly, the business assets and investments would be owned separately, by the 'clean company' and Company B respectively. Section 177E of the ITAA 1936, therefore, has no application. Subsection 45B(5) of the ITAA 1936 states that a person is provided with a 'capital benefit' if: • the person is provided with an ownership interest in a company, • the person receives distributions of share capital or share premium, or • something is done that increases the value of an ownership interest that is held by the person. Generally a company can provide a capital benefit to a shareholder (or a non-shareholder) by issuing ownership interests, distributing share capital or share premium, or altering the character of an ownership interest in a way which increases its value in the hands of the owner, for example by adding preferential rights (paragraph 43 of Law Administration Practice Statement PSLA 2008/10 Application of section 45B of the Income Tax Assessment Act 1936 to share capital reductions). Section 45B of the ITAA 1936 does not have any application in the proposed scheme as none of the Applicants will be provided with a capital benefit as defined in subsection 45B(5).