Private ruling: Taxation of Financial Arrangements (TOFA)
Published: December 2012

Ruling: A1: No. | Q1: Will the RPS issued by B Co and held by A Trust be subject to the TOFA rules in Division 230 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: 1. The trustee of A Trust acquired RPS issued by B Co. The RPS were acquired prior to the application of the TOFA rules. 2. A Trust holds both RPS and ordinary shares in B Co. 3. There have been no amendments to the RPS since A Trust acquired the RPS. 4. The TOFA rules in Division 230 of the ITAA 1997 apply to A Trust. 5. A Trust has not made the transitional election available under subitem 104(2) of Schedule 1 Part 3 to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (transitional provisions) for their existing financial arrangements to come within TOFA. 6. B Co proposed changes to the terms of the RPS. 7. RPS issued by B Co is a debt interest in accordance with Division 974 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 230 | Income Tax Assessment Act 1997 section 230-45 | Income Tax Assessment Act 1997 section 230-50 | Income Tax Assessment Act 1997 section 230-55 | Income Tax Assessment Act 1997 subsection 230-55(4) | Income Tax Assessment Act 1997 subsection 995-1(1) | Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 subitem 104(1) Schedule 1 Part 3 | Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 subitem 104(2) Schedule 1 Part 3

Reasons for decision: Summary: In accordance with subitem 104(1) of the transitional provisions, Division 230 of the ITAA 1997 applies to a financial arrangement you start to have for the first time post-TOFA. Although not stated explicitly, it stands to reason and is consistent with section 11B of the Acts Interpretation Act 1901 that the reference to financial arrangement in subitem 104(1) of the transitional provisions takes its meaning from sections 230-45 and 230-50 of Division 230 of the ITAA 1997. Because the RPS does not constitute an equity interest, or part of an equity interest, it will not be a financial arrangement as defined in section 230-50 of the ITAA 1997. The relevant provision for the definition of financial arrangement will therefore be section 230-45 of the ITAA 1997. Subsection 230-45(1) of the ITAA 1997 states: You have a financial arrangement if you have, under an *arrangement: (a) a *cash settlable legal or equitable right to receive a *financial benefit; or (b) a cash settlable legal or equitable obligation to provide a financial benefit; or (c) a combination of one or more such rights and/or one or more such obligations; unless: (d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and (e) for one or more of the rights and/or obligations covered by paragraph (d): (i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or (ii) the right or obligation is not cash settlable; and (f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c). The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement. An arrangement is defined broadly in subsection 995-1(1) of the ITAA 1997 as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable. The arrangement for the purposes of Division 230 of the ITAA 1997 is determined by reference to the factors in subsection 230-55(4) of the ITAA 1997. Under section 230-55 of the ITAA 1997, the rights and obligations that comprise the ordinary shares and RPS may constitute one arrangement or more than one arrangement. Based on the facts provided, the factors in subsection 230-55(4) of the ITAA 1997 point towards the rights and obligations comprising the RPS not being aggregated with rights and obligations relating to other interests in B Co. The RPS currently held by A Trust satisfies the definition of financial arrangement in section 230-45 of the ITAA 1997 on the basis that there is a cash settlable legal or equitable right or obligation or a combination of such rights and/or obligations to receive or provide a financial benefit. However, as the RPS is a pre-TOFA arrangement and A Trust has not elected to have Division 230 of the ITAA 1997 apply to such financial arrangements Division 230 of the ITAA 1997 does not currently apply to the RPS. As the issuer is proposing to amend the terms of the RPS, the question arises as to whether Division 230 of the ITAA 1997 applies to the amended arrangement. The amended terms of the RPS have the effect of bringing new cash settlable rights and/or obligations into existence. Subsection 230-55(4) of the ITAA 1997 may aggregate them with the existing arrangement, the RPS, to form one single arrangement. Taxation Ruling TR 2012/4 states that in considering whether rights and obligations comprise one or multiple arrangements, the factors in section 230-55 of the ITAA 1997 must be considered. Based on the facts provided, it is considered that the existing rights and obligations that make up the RPS and the new rights and obligations created by the amendments forms one arrangement. When the new cash settlable rights or obligations are created as a result of the amendments, these are aggregated as part of the existing arrangement pursuant to subsection 230-55(4) of the ITAA 1997. Based on the facts provided, the amendments do not result in the conclusion that the existing arrangement has come to an end and a different arrangement exists in its place. The financial arrangement A Trust will have under section 230-45 of the ITAA 1997 following the amendments to the terms of the RPS will consist of the combination of cash settlable rights to receive and/or obligations to provide financial benefits which A Trust has under the arrangement. A Trust will not start to have a financial arrangement for the first time post-TOFA under subitem 104(1) of the transitional provisions. Subitem 104(1) of the transitional provisions states that the financial arrangement amendments apply to financial arrangements that you start to have in the first applicable income year or a later income year. A Trust has not made the election under subitem 104(2) of the transitional provisions, and therefore, TOFA will only apply to financial arrangements that it starts to have after 1 July 2010. Since the RPS were acquired by A Trust prior to the application of the TOFA rules, and the proposed amendments to the terms of the RPS have not resulted in A Trust starting to have a financial arrangement for TOFA purposes, TOFA will not apply to the RPS held by A Trust.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Will the proposed amendments to the terms of the redeemable preference shares (RPS) issued by B Co and held by the trustee for a trust (A Trust) result in the creation of a new financial arrangement for the purposes of the TOFA rules in Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 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. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.