Private ruling: Permitted Special Dividend
Published: April 2013
Ruling period: 1 July 2012 to 30 June 2013
Date scheme commenced: During the 2012 income year.

Ruling: Q1: Will the Commissioner make any determination under paragraph 204-30(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) that a franking debit should arise for Company 1 in its franking account in relation to the Permitted Special Dividend? | A1: No. | Q2: Will the Commissioner make a determination under paragraph 177EA(5)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) that a franking debit should arise for Company 1 in its franking account in relation to the Permitted Special Dividend? | A2: No.

Relevant facts and circumstances: Company 1 is an Australian unlisted public company and is a holding company of a group. Company 2 is an Australian resident unlisted public company which owned approximately X% of the shares in Company 1. In 2012 Company 1 entered into a Bid Implementation Agreement with Company 2 (BIA). The BIA provided for Company 2 to make an offer for all of the issued capital of Company 1 that it did not currently own. The bid offer consideration under the BIA was an amount of cash for each Company 1 ordinary share. The takeover offer by Company 2 for the ordinary shares in Company 1 was conditional upon it achieving a relevant interest in at least Y% of the Company 1 shares on issue. The BIA provided that Company 1 could at its discretion pay a special dividend of an amount up to a particular limit per ordinary Company 1 share (Permitted Special Dividend) prior to the takeover offer becoming unconditional. Under a separate Loan Agreement Company 2 also provided a loan to Company 1. The Loan Agreement stated that the loan was to be used by Company 1 solely for the purpose of paying part of the Permitted Special Dividend to its shareholders in accordance with the terms of the BIA. The total loan amount with any accrued but unpaid interest was to be repaid by Company 1 to Company 2 two years after it was lent. The loan from Company 2 to Company 1 was subject to a Financial Assistance Resolution being passed at the annual general meeting of Company 1 by the requisite majority of shareholders. The financial assistance resolution was duly approved by the shareholders. The bid offer consideration payable by Company 2 to a Company 1 shareholder for their ordinary shares was not reduced by the amount of the Permitted Special Dividend. The board of Company 1 declared that the Permitted Special Dividend per each Company 1 ordinary share would be paid and was paid on the day following the Permitted Special Dividend Record Date. The terms of the BIA stated that excepting the Permitted Special Dividend, the cash consideration amount per share would be reduced by any rights to receive dividends, to receive or subscribe for shares, notes or other securities and all other distributions or entitlements declared, paid made or issued to Company 1 shareholders after the date of the BIA. The take over offer by Company 2 for shares in Company 1 was conditional upon achieving a minimum acceptance of Y%. Company 2 would compulsorily acquire any shares in Company 1 that it did not own upon achieving the minimum acceptance of Y% of the issued shares. Company 2 did acquire more than Y% of Company 1 ordinary shares and it served notice to Company 1 shareholders that it intended to proceed with a compulsory acquisition of the remaining ordinary shares on the same terms as the BIA as provided for under the Corporations Act 2001 . The compulsory acquisition of the remaining ordinary shares has taken place. Company 1 had franking credits available to fully frank the Permitted Special Dividend.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 204-30. | Income Tax Assessment Act 1936 section 177EA

Reasons for decision: Detailed Reasoning - Section 204-30: Section 204-30 of the ITAA 1997 applies where a corporate tax entity streams the payment of dividends, or the payment of dividends and the giving of other benefits, to its members in such a way that as set out in subsection 204-30(1) of the ITAA 1997: 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 (a) the member would derive a greater benefit from franking credits than another member of the entity; and (b) 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 (paragraph 204-30(1)(c)). If section 204-30 of the ITAA 1997 applies, the Commissioner may make a determination in writing: (a) that a specified franking debit arises in the franking account of the entity, for a specified distribution or other benefit to a disadvantaged member (paragraph 204-30(3)(a) of the ITAA 1997); or (b) that no imputation benefit is to arise in respect of any distributions made to a favoured member and specified in the determination (paragraph 204-30(3)(c) of the ITAA 1997). For section 204-30 of the ITAA 1997 to apply, members to whom distributions are streamed must derive a greater benefit from franking credits than the members who consequently do not receive franking credits, or do not receive the same amount of franking credits as they would have had streaming not occurred. Pursuant to the payment of the Permitted Special Dividend, all Company 1 shareholders received an imputation benefit as a result of the Permitted Special Dividend. Subject to being 'qualified persons', Australian resident Company 1 shareholders received an imputation benefit in the form of a tax offset (paragraph 204-30(6)(a) of the ITAA 1997). Non-resident shareholders received an imputation benefit in the form of an exemption from dividend withholding tax (paragraph 204-30(6)(e) of the ITAA 1997). Resident shareholders derived a greater benefit from franking credits than the non-resident shareholders. However, the Permitted Special Dividend was paid to all Company 1 shareholders identified at the Permitted Special Dividend Record Date and was fully franked. Accordingly, it cannot be concluded that the company intended to direct the flow of distributions in such a manner as to stream the imputation benefits to members that derive a greater benefit from the franking credits attached to the Permitted Special Dividend, while other members received lesser or no imputation benefits. As the conditions in subsection 204-30(1) of the ITAA 1997 are not met in respect of the Permitted Special Dividend, the Commissioner will not make a determination under paragraph 204-30(3)(a) of the ITAA 1997, that a franking debit should arise for Company 1 in its franking account in relation to the Permitted Special Dividend. | Detailed Reasoning - Question 2: Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to a wide range of schemes seeking to obtain a tax advantage in relation to imputation benefits. In essence, 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 the shares or an interest in shares. Subsection 177EA(3) of the ITAA 1936 provides that section 177EA of the ITAA 1936 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 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, a 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. 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 distribution paid to the relevant taxpayer (paragraph 177EA(5)(a) of the ITAA 1936) or, in the alternative, that no franking credit benefit arises in respect of a distribution paid to the relevant taxpayer (paragraph 177EA(5)(b) of the ITAA 1936). Company 1 is a corporate tax entity. The disposal of the ordinary shares in Company 1 pursuant to the BIA is a scheme for the disposition of membership interests. The fully franked Permitted Special Dividend is a frankable distribution that was paid to the Company 1 shareholders as a part of this scheme and who could, therefore, reasonably be expected to receive imputation benefits. In the present case, the conditions of paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied. Accordingly, the issue is whether, having regard to the relevant circumstances of the scheme (as provided for in subsection 177EA(17) of the ITAA 1936), it would be concluded that, on the part of Company 1, its shareholders or any other relevant party, there is a purpose, more than merely an incidental purpose, of conferring an imputation benefit under the scheme. In arriving at a conclusion the Commissioner must have regard to the relevant circumstances of the scheme which include, but are not limited to, the circumstances set out in subsection 177EA(17) of the ITAA 1936. The relevant circumstances listed there encompass a range of circumstances which taken individually or collectively could indicate the requisite purpose. Due to the diverse nature of these circumstances, some may not be present at any one time in any one scheme. The relevant circumstances of the scheme include the fact that the disposition of the ordinary shares in Company 1 was made pursuant to the passing of a Financial Assistance Resolution under the Corporations Act 2001 voted upon by Company 1's existing shareholders. The Permitted Special Dividend was fully franked and was paid to the existing shareholders of Company 1 in proportion to their shareholding and irrespective of their ability to utilise the relevant franking credits. The Permitted Special Dividend allowed the shareholders to share in the accumulated profits of Company 1. In considering the manner, form and substance of the Scheme, it is considered that the Scheme was not entered into by Company 1 or its shareholders for more than an incidental purpose of enabling participating shareholders to obtain imputation benefits. The goal of providing imputation benefits to Company 1 shareholders remained incidental, in the sense of being subservient to, the purpose of transferring their shares to Company 2. Therefore, the Commissioner will not make any determination under paragraph 177EA(5)(a) of the ITAA 1936 that a franking debit should arise for Company 1 in its franking account in relation to the Permitted Special Dividend.