Private ruling: Proposed exchange of shares in Company Y for shares in Company Z
Date of advice: 18 September 2015
Published: September 2015
Ruling period: 1 July 2015 to 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the Company Y consolidated group continue to exist with Company Z as the new head company at and after the completion time, pursuant to subsection 703-70(1) of the ITAA 1997? | A1: Yes | Q2: As the new head company of the Company Y consolidated group, will Company Z inherit Company Y's existing tax identity and history pursuant to subsection 703-75(1) of the ITAA 1997? | A2: Yes | Q3: Will the Company Z ordinary shares be characterised as 'equity interests' for the purposes of the debt/equity rules in Division 974 of the ITAA 1997? | A3: Yes | Q4: Will dividends payable in respect of the Company Z ordinary shares constitute frankable distributions under section 202-40 of the ITAA 1997 and not be unfrankable under section 202-45 of the ITAA 1997? | A4: Yes | Q5: Will section 204-30 of the ITAA 1997 apply to the Scheme consisting of the issue of the shares? | A5: No | Q6: Will the Commissioner make a determination pursuant to Part IVA of the ITAA 1936 to cancel any tax benefit obtained by Company Y or Company Z under subsection 177C(1)(a) of the ITAA 1936? | A6: No

Relevant facts and circumstances: Company Y Company Y is a privately owned manufacturer and distributor in Australia. The current Company Y consolidated group of companies consist of the operating company (Company Y) and its subsidiaries. Company Y is the head company of an income tax consolidated group (the Company Y consolidated group). All current shareholders in Company Y own ordinary shares and there are no other categories of shares on issue. The reorganisation The arrangement that is the subject of this Private Ruling application involves interposing a new holding company (Company Z) between Company Y and its existing shareholders. The proposed reorganisation of Company Y is part of a broader simplification of the Company Y Group that is aimed at improving the consistency of the distribution of profits to the company's existing shareholders, and allowing the Company Y consolidated group better access to funding for future projects which are separate to the existing business. The Scheme of Arrangement The steps required to complete the proposed restructure include: (a) Company Z will issue new ordinary shares to each existing shareholder of Company Y. Each existing shareholder of Company Y will be issued one ordinary share in exchange for one ordinary share held in Company Y. (a) Company Z will acquire 100% of the issued share capital in Company Y from its existing shareholders. The proposed restructure will be implemented by a Court approved scheme of arrangement with shareholders under the Corporations Act 2001 (Corporations Act). Confirmation will first be sought from the Federal Court of Australia that Company Y is justified in convening a meeting of its members to approve the Scheme. Subject to Court approval, existing shareholders of Company Y will vote on the Scheme resolution at a special general meeting convened to approve the Scheme. The Scheme must be approved at the Scheme meeting by a majority of shareholders voting (either in person or by proxy), and by at least 75% of the votes cast on the Scheme resolution. The individuals with overall responsibility for governance and management of the Company Y consolidated group will remain the same following the proposed restructure. The composition of the board of directors of Company Z will be identical to the current membership of the Company Y board and those directors will continue to have carriage of the same issues. It is intended that the Scheme become effective on or before 30 June 2016. The timing for implementation of the Scheme may vary depending on the timeframe in which approval relating to the Scheme is obtained. No dividends payable in respect of the Company Z ordinary shares will be sourced, directly or indirectly, from Company Z's share capital account.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-125 | 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 section 215-10 | Income Tax Assessment Act 1997 section 215-15 | Income Tax Assessment Act 1997 section 220-30 | Income Tax Assessment Act 1997 Division 615 | Income Tax Assessment Act 1997 subsection 615-5(2) | Income Tax Assessment Act 1997 subsection 615-30(2) | Income Tax Assessment Act 1997 subsection 703-5(2) | Income Tax Assessment Act 1997 section 703-70(1) | Income Tax Assessment Act 1997 section 703-70(2) | Income Tax Assessment Act 1997 section 703-75(1) | Income Tax Assessment Act 1997 Division 974 | Income Tax Assessment Act 1997 Subdivision 974-C | Income Tax Assessment Act 1997 section 974-20 | Income Tax Assessment Act 1997 section 974-70 | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1936 subsection 24J(2)(a) | Income Tax Assessment Act 1936 section 45 | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1936 section 47A | Income Tax Assessment Act 1936 section 109 | Income Tax Assessment Act 1936 section 109C | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 section 177B | Income Tax Assessment Act 1936 section 177C | Income Tax Assessment Act 1936 section 177D

Reasons for decision: Summary: The Company Y consolidated group will continue to exist with Company Z as the new head company at and after the completion time, pursuant to subsection 703-70(1). | Detailed Reasoning - Detailed reasoning: 1. Subsection 703-70(1) requires that certain conditions in Division 615 must be satisfied before a company can make a choice under subsection 615-30(2) for a consolidated group to continue to exist 2. In this case, Scheme Participants who are Australian tax residents or foreign residents whose ownership interests in Company Y and Company Z are taxable Australian property, will be taken to have chosen to obtain Division 615 roll-over in relation to the exchange of each ordinary share in Company Y for an ordinary share in Company Z under the Scheme (subsection 615-5(2)). Therefore, the conditions in Division 615 will be satisfied for the purposes of subsection 703-70(1). 3. Company Z will choose that the former Company Y consolidated group will continue to exist at and after the completion time (subsection 615-30(2)). The completion time will be the Implementation Date under the Scheme, which will be the date on which the shareholders of Company Y exchange their ordinary shares for the Stapled Securities in Company Z. 4. Under subsection 703-5(2), in the absence of the Division 615 roll-over, the Company Y consolidated group would cease to exist when Company Y ceases to be head company of the Company Y consolidated group. 5. However, subsection 703-70(1) provides a consolidated group is taken not to have ceased to exist because the company referred to in subsection 615-30(2) as the original entity ceases to be the head company of an income tax consolidated group. The interposed company is taken to have become the head company of the consolidated group at the completion time, and the original entity is taken to have ceased to be the head company at that time (subsection 703-70(2)). 6. Therefore, the Company Y consolidated group will continue to exist with Company Z as the new head company at and after the Implementation Date. | Summary: As the new head company of the Company Y consolidated group, Company Z will inherit Company Y's existing tax identity and history pursuant to subsection 703-75(1). | Detailed Reasoning - Detailed reasoning: 7. Immediately before the completion time, Company Y (the original entity), will be head company of the Company Y consolidated group and immediately after the completion time, Company Z (the interposed company), will become the head company of the former Company Y consolidated group (subsection 615-30(2)). 8. Subsection 703-75(1) provides that everything that happened in relation to the original entity before the completion time is taken to have happened in relation to the interposed company instead of in relation to the original entity and instead of what would be taken to have happened in relation to the interposed company before that time. 9. The existing tax profile and identity of Company Y (the original entity) before the Implementation Date will therefore be inherited by Company Z (the interposed company). | Summary: The Company Z ordinary shares will be characterised as 'equity interests' for the purposes of the debt/equity rules in Division 974. | Detailed Reasoning - Equity test: 10. Section 974-75 sets out the requirements for a scheme to satisfy the equity test in relation to a company. 11. The term 'scheme' is defined broadly in subsection 995-1(1) to mean any arrangement, scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The issue of the Notes would fall within the definition of a scheme. 12. A scheme gives rise to an equity interest in the company under section 974-70 if the scheme satisfies the equity test in section 974-75 and the interest is not a debt interest under section 974-20. 13. A scheme satisfies the equity test in relation to a company if it gives rise to an interest of the kind listed in subsection 974-75(1) which are: (a) An interest in the company as a member or stockholder. (b) An interest that carries a right to a variable or fixed return from the company where the right or the amount of the return is in substance or effect contingent on the economic performance (whether past, current or future) of the company or a "connected entity". (c) An interest that carries a right to a variable or fixed return from the company where the right or the amount of the return is at the discretion of the company or a connected entity. (d) An interest issued by the company that: • gives its holder (or a connected entity of the holder) a right to be issued with an equity interest in the company or a connected entity of the company; or • • is an interest that will or may convert into an equity interest in the company or a connected entity of the company. 14. The ordinary shares will qualify as 'equity interests' under item 1 of the table in subsection 974-75(1) because they are membership interests in a company. The ordinary shares also carry a right to a variable return from Company Z that is contingent upon the future economic performance of the company. 15. Accordingly, the ordinary shares will be 'equity interests' as defined in subsection 974-75(1), provided that they are not also characterised as debt interests. | Detailed Reasoning - Debt test: 16. Subsection 974-15(1) defines the meaning of a 'debt interest' as follows: A scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1). 17. Subsection 974-20(1) states that a scheme satisfies the debt test if: (a) the scheme is a financing arrangement for the entity; and (b) the entity, or a connected entity of the entity, receives, or will receive, a financial benefit or benefits under the scheme; and (c) the entity has, or the entity and a connected entity of the entity each has, an effectively non- contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when: • the financial benefit referred to in paragraph (b) is receives if there is only one; or • the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and (d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and (e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil. 18. In order to satisfy the debt test, the scheme must satisfy all 5 limbs in subsection 974-20(1). 19. In this case, having regard to paragraph (c) above, there is no effectively non-contingent obligation for Company Z to pay dividends, or any other amount, to holders of the ordinary shares. 20. In particular, the payment of dividends in respect of the ordinary shares is subject to the absolute discretion of the directors of Company Z, and is contingent upon the future economic performance of the Company Y Group. The obligation for Company Z to pay such dividends is therefore not effectively non-contingent. 21. In summary, the ordinary shares will not be debt interests as defined in subsection 974-20(1). | Detailed Reasoning - Conclusion: 22. Having regard to the above, the ordinary shares will constitute 'equity interests' in Company Z for the purposes of Subdivision 974-C. | Summary: Dividends payable in respect of the Company Z ordinary shares will constitute frankable distributions under section 202-40 and not be unfrankable under section 202-45. | Detailed Reasoning - Detailed reasoning: 22. The term 'frankable distribution' is defined pursuant to section 202-40. It provides that a non-share dividend is a frankable distribution to the extent that is not unfrankable under section 202-45. 23. Section 202-45 sets out the circumstances under which an amount or distribution is taken to be unfrankable. Based on the facts above, none of circumstances outlined in paragraphs 202-45(b) to 202-45(j) should be taken to apply to a dividend that is declared and paid on either share that forms the Stapled Securities. In particular: (a) Paragraph (b) will not apply because Company Z is not a Territory company for the purpose of subsection 24J(2)(a) of the ITAA 1936. (a) Paragraph (c) is not applicable as it applies to certain share buy-backs. (b) Paragraph (d) will not apply because the ordinary shares will not be 'non-equity shares' as defined in subsection 995-1(1) as they will constitute 'equity interests' for the purposes of Subdivision 974-C. (c) Paragraph (e) will not apply on the basis that no dividends will be sourced, directly or indirectly, from Company Z's share capital account. (d) Paragraph (f) is not applicable because sections 215-10 and 215-15 apply only to 'non-share equity'. They do not apply to dividends on the ordinary shares because the shares are not non-share equity. (e) For the purpose of paragraph (g), no part of the distributions will be taken to be dividends under the following provisions: • Division 7A of Part III of the ITAA 1936: the payments will not be treated as a 'deemed dividend' under section 109C of the ITAA 1936 because they will be treated as assessable income other than by operation of Division 7A; or • Section 109 of the ITAA 1936: the payments will not be made in connection with the employment of, or any services rendered by, the holder; or • Section 47A of the ITAA 1936: Company Z is not a CFC. (f) Paragraph (h) should not apply because: • there will be no distribution or transfer of shares or the payment of minimally franked dividends by Company Z to its shareholders for the purpose of section 45 of the ITAA 1936; and • the Commissioner will not make a determination under section 45C of the ITAA 1936 in relation to the Stapled Securities. (g) Paragraph (i) is not applicable as it applies to demerger dividends. (h) Paragraph (j) does not apply because Company Z does not satisfy the conditions to receive small business relief pursuant to section 152-125 nor is it a 'NZ franking company' as defined in section 220-30. 24. Having regard to the above, dividends payable in respect of the shares will be 'frankable distributions' under section 202-40 and will not be unfrankable under section 202-45. | Summary: Section 204-30 will not apply to the Scheme consisting of the issue of the ordinary shares. | Detailed Reasoning - Detailed reasoning: 25. Subdivision 204-D enables the Commissioner to make a determination where distributions with attached imputation benefits are streamed to a member of a corporate tax entity in preference to another member. 26. Section 204-30 prescribes the circumstances that are required to exist before the Commissioner may make such a determination. Section 204-30 applies where an entity 'streams' the payment of distributions in such a way that: • an 'imputation benefit' is, or apart from section 204-30 would be, received by a member of the entity as a result of the distribution or distributions (paragraph 204-30(1)(a)) • the member (favoured member) would derive a greater benefit from franking credits than another member of the entity (paragraph 204-30(1)(b)), and • the other member (disadvantaged member) of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits (paragraph 204-30(1)(c)). 27. Streaming is not defined for the purposes of Subdivision 204-D. However, the Commissioner understands it to refer to a company 'selectively directing the flow of franked distributions to those members who can most benefit from the imputation credits' (paragraph 3.28 of the Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002). 28. In this case, Company Z could only be said to be 'streaming' in this context to a favoured member in relation to the ordinary shares if it were to take some action which discriminated between its members in terms of payments of distributions and the provision of other benefits. 29. Company Z will not undertake any relevant discriminatory action in issuing the ordinary shares because they will be issued to the existing shareholders of Company Y in satisfaction of the roll-over conditions contained in Division 615. 30. There will be no different treatment of investors by Company Z according to their status as residents or non-residents, or any other relevant characteristics of investors (for example their tax profile). It should not therefore be concluded that the issue of the ordinary shares would be directing the flow of franked distributions to members who can most benefit from imputation credits. 31. Based on the information provided, the Commissioner has concluded that the requisite element of streaming does not exist in relation to any franked distributions to be paid by Company Z to the shareholders. Accordingly, the Commissioner will not make a determination under paragraph 204-30(3)(c) to deny imputation benefits to the shareholders. | Summary: The Commissioner will not make a determination pursuant to Part IVA of the ITAA 1936 to cancel any tax benefit obtained by Company Y or Company Z under subsection 177C(1)(a) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: 32. Part IVA of the ITAA 1936 was amended by the Tax Laws Amendment (Countering Tax Avoidance and Multination Profit Shifting) Act 2013 , and applies to schemes that were entered into on or after 16 November 2012. Despite the amendments made to Part IVA, the operative provision remains subsection 177D(1), which requires the following to be satisfied in order for Part IVA to apply: i. There must be a 'scheme' within the meaning of section 177A of the ITAA 1936, entered into by a person or persons; ii. There is a 'tax benefit' that satisfies the requirements under sections 177C and 177CB of the ITAA 1936; and iii. One of the persons who entered into or carried out the scheme or any part of the scheme did so for the sole or dominant purpose of enabling a taxpayer to obtain a tax benefit, having regard to the matters contained in subsection 177D(2) of the ITAA 1936. 33. Part IVA of the ITAA 1936 does not apply to the arrangement proposed under the Scheme. There is no tax benefit that will be derived by the relevant taxpayer, being the head company of the Company Y Group (i.e., Company Y or subsequently, Company Z). Even if a tax benefit is identified, it cannot be concluded that the sole or dominant purpose of any person entering into or carrying out the proposed scheme is to enable the relevant taxpayer to obtain a tax benefit. 34. The application of Part IVA to the scheme is considered below. Scheme 35. Having regard to the definition of 'scheme' under subsection 177A(1) of the ITAA 1936, the whole of the arrangement proposed under the scheme is likely to be identified as the relevant scheme by the Commissioner. Tax Benefit 36. Subsection 177C(1) of the ITAA 1936 includes the following within the definition of a 'tax benefit': • an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or • a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out. 37. The identification of a tax benefit will require a comparison between the state of affairs as they are proposed to occur under the scheme, and what would or might reasonably be expected to occur if the scheme is not entered into or carried out. The assessment of what would or might reasonably be expected to occur is commonly referred to as the 'alternative postulate'. 38. In this case, the current tax position of the existing Company Y consolidated group entities involved in the reorganisation (including the current shareholders of Company Y), will be identical to the tax position of those entities under the scheme. Therefore, no tax benefits will flow from the scheme to the relevant taxpayers. Purpose 39. A consideration of whether a person participated in the scheme for the sole or dominant purpose of securing for the taxpayer a particular tax benefit in connection with the scheme, is the 'fulcrum' or 'pivot' around which Part IVA operates (The Explanatory Memorandum to the Tax Laws Amendment (Countering Tax Avoidance and Multination Profit Shifting) Bill 2013) . The assessment of whether there exists a sole or dominant purpose of securing a particular tax benefit for a taxpayer must be undertaken having regard to the eight factors identified in subsection 177D(2) of the ITAA 1936. 40. Having regard to those factors, it should not be concluded that the sole or dominant purpose of any party entering into the scheme was to derive a tax benefit. As stated above, the proposed reorganisation of Company Y is part of a broader simplification of the Company Y consolidated group that is aimed at: • improving the consistency of the distribution of profits to the company's existing shareholders; and • allowing the Company Y consolidated group better access to funding for future projects which are separate to the existing business. 41. As the scheme is aimed at achieving these non-tax commercial objectives, the sole or dominant purpose of the scheme is not to obtain any tax benefit for any particular entity. Conclusion 42. Part IVA of the ITAA 1936 will not apply in relation to the proposed reorganisation.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for Company Y and Company Z. | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.