Private ruling: Fixed trusts - dividend stripping - Part IVA
Date of advice: 21 June 2023
Published: 14 August 2023
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: XX XX XX

Ruling: Q1: Is the Unit Trust a fixed trust within the meaning of section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: If the Unit Trust is not a fixed trust for the purposes of section 272-65 of Schedule 2F to the ITAA 1936, will the Commissioner exercise the discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the Unit Holders of the Unit Trust as having fixed entitlements to all of the income and capital of the Unit Trust for purposes of the Proposed Transaction? | A2: Yes. | Q3: Will Family Trust Distributions Tax (FTDT), pursuant to Division 271 of Schedule 2F to the ITAA 1936, apply to a dividend declared by the Company under Step 3 of the Proposed Transaction? | A3: No. | Q4: Will the A Class and B Class shares issued by the Company under the Proposed Transaction to Company B and the Unit Trust be equity interests in a company under subsection 974-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A4: Yes. | Q5: Will subsection 725-90(1) of the ITAA 1997 apply to Step 2 of the Proposed Transaction such that the value shifting consequences (if any) will be disregarded under Division 725? | A5: Yes. | Q6: Will the Proposed Transaction be considered a scheme for the stripping of company profits within the meaning of subsection 177E(1) of the ITAA 1936 either: • by way of or in the nature of dividend stripping within the meaning of subparagraph 177E(1)(a)(i) (the first limb); or • having substantially the effect of a scheme by way of or in the nature of a dividend stripping (the second limb)? | A6: No. | Q7: Will the Commissioner make a determination to deny the Unit Trust a tax offset in relation to a franked distribution paid to the A Class shareholder in Step 3 of the Proposed Transaction pursuant to subsection 204-30(3) of the ITAA 1997? | A7: Yes. | Q8: Will paragraph 207-145(1)(f) of the ITAA 1997 operate to deny a tax offset in relation to a franked distribution paid to the A Class shareholder in Step 3 of the Proposed Transaction? | A8: It is unnecessary to consider paragraph 207-145(1)(f) of the ITAA 1997 as section 204-30 of the ITAA 1997 operates to deny the tax offset. | Q9: Will the Commissioner make a determination that a franking debit arises or that no imputation benefit arises on a franked distribution paid to the A Class shareholder in Step 3 of the Proposed Transaction pursuant to section 177EA of the ITAA 1936? | A9: No. | Q10: Will the Proposed Transaction result in 'the obtaining by a taxpayer of a tax benefit in connection with a scheme' for the purposes of subsection 177C(1) or 177C(2) of the ITAA 1936 with respect to the avoidance or non-incidence of FTDT, as provided for in Division 271 of Schedule 2F to the ITAA 1936? | A10: No. | Q11: Will Part IVA apply to the Proposed Transaction in relation to a taxpayer obtaining a tax benefit in connection with a scheme in respect of: • the non-inclusion of an amount in assessable income by way of non-inclusion of a dividend by Company B (Scheme One); or • avoiding the consequences of a value shift resulting in non-inclusion of an amount such as a net capital gain in the assessable income of a taxpayer (Scheme Two)? | A11: No.

Relevant facts and circumstances: The Company 1. The Company was incorporated on XX XXX XXXX. 2. The Company has a total of X ordinary shares on issue held equally by Company B and beneficially owned by the Unit Trust. 3. The main business of the Company was X and its assets as at XX included freehold land, buildings and plant and equipment. 4. The Company had accounting losses of approximately $X at XX. It had tax losses carried forward to the year ended XX of $X and net capital losses carried forward of $X. 5. The Company made an Interposed Entity Election (IEE) on XX XXX XXXX in respect of the Family Trust, with the Specified Individual with effect from XX XXX XXXX. 6. The Specified Individual passed away on XX XXX XXXX. The Unit Trust 7. The Unit Trust was established on XX XXX XXXX with Company C as the trustee company. 8. Company C was incorporated on XX XXX XXXX. It has X ordinary shares on issue and all these shares are held by the Family Trust. 9. The original unit holders were: • the Family Trust • Family Trust B. 10. On XX XXX XXXX: • Family Trust C reduced its interest the Unit Trust from X% to X% • Family Trust D reduced its interests the Unit Trust from X% to X%. 11. On XX XXX XXXX: • Family Trust C ceased to be a unitholder of the Unit Trust • Family Trust D reduced its interest in units of the Unit Trust to X%. 12. On XX XXX XXXX, Family Trust D and Company D disposed of their remaining interests and ceased by a unitholder of the Unit Trust. 13. The Family Trust became the sole unit holder (the Unit Holder) on XX XXX XXXX. 14. The Trust Deed of the Unit Trust has been amended by deed of variations on the following occasions: • XX XXX XXXX to additional powers to the trustee including the power to provide indemnity and the power to enter into foreign exchange transactions and agreements. • XX XXX XXXX to give additional powers to the trustee to appoint an attorney and the power to enter into derivatives, interest rate and foreign currency contracts. 15. The Trustee of the Unit Trust has not exercised its powers to issue additional units, reclassify units or redeem any units since the establishment of the Unit Trust. 16. The Unit Trust conducts business in X. 17. The Unit Trust has not made a Family Trust Election (FTE) or an IEE. The Family Trust 18. The Family Trust was established by a trust deed dated XX XXX XXXX and the Specified Individual was the appointer. 19. The Family Trust made an FTE on XX XXX XXXX, naming the Specified Individual with effect from XX XXX XXXX. The sons of the Specified Individual 20. The four sons of the Specified Individual (the Sons) are: • Person A • Person B • Person C • Person D 21. On XX XXX XXXX, the following trusts were settled (the Sons' Family Trusts): • Person A Family Trust • Person B Family Trust • Person C Family Trust • Person D Family Trust 22. All of the Sons' Family Trusts has made an FTE naming the relevant son as the specified individual, as follows: Family Trust Specified individual Commencement date Person A Family Trust Person A XX XXX XXXX Person B Family Trust Person B XX XXX XXXX Person C Family Trust Person C XX XXX XXXX Person D Family Trust Person D XX XXX XXXX 23. No IEE has been made by any of the Sons' Family Trusts. 24. Each of the Sons has established a company with the shareholders being the respective son and his spouse. The respective son and the spouse each hold a 50% interest in the shares of the respective company. The companies (the Sons' Companies) are: • Person A Pty Ltd - with Person A and his spouse as equal shareholders • Person B Pty Ltd - with Person B and his spouse as equal shareholders • Person C Pty Ltd - with Person C and his spouse as equal shareholders • Person D Pty Ltd - with Person D and his spouse as equal shareholders. 25. The Sons' Companies were established with individuals as shareholders to ensure any dividends received from the Family Trust are made to entities within Family Group. Company B 26. Company B was incorporated on XX XXX XXXX. 27. Company B currently has a total of X ordinary shares on issue: • The Family Trust holds X ordinary shares • Company E holds X ordinary shares. 28. Company B conducts investment activities including investing in the Company's shares. Company E 29. Company E was incorporated on XX XXX XXXX. 30. Company E currently has four ordinary shares on issue, with the following shareholders each hold X ordinary shares: • Person A Family Trust • Person B Family Trust • Person C Family Trust, and • Person D Family Trust Land Sale by the Company 31. The Company sold a parcel of land on XX XXX XXXX (the Sale) for $X, which has resulted in an estimated capital gain of $X in the income year ended 30 June 20XX. Potential Family Trust Distribution Tax (FTDT) exposure 32. Effective from 1 July 20XX, the Company made an IEE in respect of the Family Trust. The IEE enabled the Family Trust to make distributions to the Company without triggering FTDT. However, as a result of the IEE, the Company is restricted to making distributions to members of Specified Individual's family group (the Family Group) if it is not to be liable to pay FTDT. 33. The Family Trust has fixed interests in X% of the income and capital of Company B. However, the remaining X% interest is held by Company E, which is owned by the Sons' Family Trusts, which trusts are not members of the Family Group because they each have made an FTE with other specified individuals. 34. Consequently, Company B is not a member of the Family Group. 35. Any future distributions by the Company to Company B would be a distribution to a member outside the Family Group, and therefore the distribution would be subject to FTDT at a rate of 47%. The Proposed Transaction 36. To avoid triggering FTDT, the Company proposes to restructure its share capital as detailed below. 37. Step 1: Create two new classes of shares, A and B class (shares in which classes are hereafter referred to as the A Class Shares and the B Class Shares, respectively). The rights attaching to the A Class Shares and the B Class Shares will be identical, as follows: • voting rights, and the rights to be paid a dividend to the exclusion of other classes of shares subject to the discretion of the directors • no rights to capital on winding-up • the rights to be paid dividends will be extinguished by the effluxion of 47 months for the date of the share issue. 38. Step 2: The Company will issue one A Class Share to the Unit Trust and one B Class Share to Company B for consideration of $X per share. 39. Step 3: Once Steps 1 and 2 have been completed, the Company will pay fully franked dividends out of profits to the Unit Trust on the A Class Share. The Unit Trust will distribute the fully franked dividend to the Family Trust, which will distribute the fully franked dividend to the Sons' Companies in equal proportions. 40. Step 4: The right to receive a dividend on the A Class Share and the B Class Share will be extinguished after 47 months from the date of the share issue. 41. The Company expects to pay several fully franked dividends to its A Class shareholder prior to the cancellation of the A Class Share's dividend rights. It is estimated that the initial fully franked dividend will be approximately $X, paid out of the profits on the Sale. 42. Immediately after the payment of the anticipated dividend, the Company expects to have remaining assets of approximately $X. In the years following the initial distribution and prior to the cancellation of the A Class Share and the B Class Share dividend rights under the Proposed Transaction, the Company expects to liquidate its assets and be wound up. 43. The purpose of issuing the B Class Share to Company B is to maintain the same ownership share rights for both shareholders, in proportion to the existing ordinary shares. 44. The Company does not intend to declare or pay any dividends on the B Class Share, because any distributions by the Company to Company B would trigger FTDT. 45. The Unit Trust and Company B will be a qualified person in respect of the distributions made by the Company under the Proposed Transaction for the purposes of Division 1A of former Part IIIAA of the ITAA 1936, on the basis that they both have held the relevant shares in the Company for a continuous period of at least 45 days (for shares which are not preference shares) pursuant to former section 160APHO(2) of the ITAA 1936. Assumptions 46. Throughout the ruling period, no powers have been or will be exercised to defeat the interest of any unit holder, with respect to their units in the Unit Trust, including: • there will only be one class of units, no units of different classes will be issued • no units will be reclassified • the rights attached to units will not be modified • units will only be issued or redeemed on a basis that satisfies the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 • the Trustee will ensure that units will only be transferred or transmitted for market value • all Unit Holders will be entitled to the income and capital of the trust in proportion to their unitholding - if requested by a unitholder, the Trustee will transfer assets rather than pay cash in satisfaction of amounts owing, including as part of winding up the trust, to that particular unitholder. The Trustee will only transfer to that particular unitholder assets of the Trust to the extent that the market value of the assets equivalent to their proportion of unitholding • the Trustee will ensure any assets of the trust fund that are transferred to an associate will be transferred at market value • the trustee will not seek to amend or vary the Trust Deed to defeat the interest, or change the entitlements, of unitholders to the income and capital of the trust. 47. Throughout the Ruling Period, no arrangement has been or will be entered into which would result in section 272-35 in Schedule 2F of the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 1A of former Part IIIAA | Income Tax Assessment Act 1936 Part IVA of the ITAA 1936 | 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 Paragraph 177D(b) | Income Tax Assessment Act 1936 Section 177E | Income Tax Assessment Act 1936 Paragraph 177E(1)(a) | Income Tax Assessment Act 1936 Subparagraph 177E(1)(a)(i) | Income Tax Assessment Act 1936 Paragraph 177E(1)(b) | Income Tax Assessment Act 1936 Paragraph 177E(1)(c) | Income Tax Assessment Act 1936 paragraph 177E(1)(e) | Income Tax Assessment Act 1936 Section 177EA | Income Tax Assessment Act 1936 Subsection 177EA(3) | Income Tax Assessment Act 1936 Section 177F | Income Tax Assessment Act 1936 Division 271 of Schedule 2F | Income Tax Assessment Act 1936 Section 271-15 of Schedule 2F | Income Tax Assessment Act 1936 Section 271-20 of Schedule 2F | Income Tax Assessment Act 1936 Section 271-30 of Schedule 2F | Income Tax Assessment Act 1936 Division 272 in Schedule 2F | Income Tax Assessment Act 1936 Section 272-5 of Schedule 2F | Income Tax Assessment Act 1936 Subsection 272-5(1) of Schedule 2F | Income Tax Assessment Act 1936 Subsection 272-5(2) of Schedule 2F | Income Tax Assessment Act 1936 Subsection 272-5(3) of Schedule 2F | Income Tax Assessment Act 1936 Paragraph 272-5(3)(b) of Schedule 2F | Income Tax Assessment Act 1936 Subparagraph 272-5(3)(i) of Schedule 2F | Income Tax Assessment Act 1936 Subparagraph 272-5(3)(ii) of Schedule 2F | Income Tax Assessment Act 1936 Subparagraph 272-5(3)(iii) of Schedule 2F | Income Tax Assessment Act 1936 Section 272-65 of Schedule 2F | Income Tax Assessment Act 1936 Section 272-90 of Schedule 2F | Income Tax Assessment Act 1936 Subsection 272-90(5) of Schedule 2F | Income Tax Assessment Act 1936 Section 271-105 of Schedule 2F | Income Tax Assessment Act 1997 Section 204-30 | Income Tax Assessment Act 1997 Paragraph 204-30(1)(a) | Income Tax Assessment Act 1997 Paragraph 204-30(1)(b) | Income Tax Assessment Act 1997 Paragraph 204-30(1)(c) | Income Tax Assessment Act 1997 Subsection 204-30(6) | Income Tax Assessment Act 1997 Subsection 204-30(8) | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 Subdivision 207-B | Income Tax Assessment Act 1997 Section 207-35 | Income Tax Assessment Act 1997 Section 207-55 | Income Tax Assessment Act 1997 Section 207-57 | Income Tax Assessment Act 1997 Section 207-145 | Income Tax Assessment Act 1997 Subsection 207-145(1) | Income Tax Assessment Act 1997 Paragraph 207-145(1)(c) | Income Tax Assessment Act 1997 Paragraph 207-145(1)(f) | Income Tax Assessment Act 1997 Division 725 | Income Tax Assessment Act 1997 Section 725-90 | Income Tax Assessment Act 1997 Section 725-145 | Income Tax Assessment Act 1997 Paragraph 725-145(1)(b) | Income Tax Assessment Act 1997 Subsections 725-145(2) | Income Tax Assessment Act 1997 Subsection 725-145(3) | Income Tax Assessment Act 1997 Subdivision 974-B | Income Tax Assessment Act 1997 Paragraph 974-20(1)(c) | Income Tax Assessment Act 1997 Subsection 974-70(1) | Income Tax Assessment Act 1997 Section 974-75 | Income Tax Assessment Act 1997 Section 974-75(1) | Income Tax Assessment Act 1997 Subdivision 974-C | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: No. | Detailed Reasoning - Detailed reasoning: 48. Section 272-65 of Schedule 2F to the ITAA 1936 provides: A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust. 49. The definition of the term 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides that 'an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936.' 50. Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a 'fixed entitlement' in a trust: If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital. 51. The term 'vested and indefeasible' is not defined in the taxation legislation. The Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 explains its ordinary meaning at some length, at paragraphs 13.4 to 13.9. 52. Practical Compliance Guidelines PCG 2016/16: Fixed entitlements and fixed trusts (PCG 2016/16), explains the meaning of the terms 'vested' and 'indefeasible' in the context of section 272-5 of Schedule 2F to the ITAA 1936: 15. An interest is defeasible if it can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events. An interest of a default beneficiary in the income or capital of the trust is an example of a defeasible interest. 53. In Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16 Stone J stated at [97] that in the absence of a definition, and subject to qualification in subsection 272-5(2) of Schedule 2F, the term 'indefeasible' bears its ordinary meaning when applied to an interest, that is that 'the interest cannot be terminated, invalidated or annulled'. 54. In a case where a beneficiary has a vested interest which may be 'terminated, invalidated or cancelled' the beneficiary will have a defeasible interest. For example, where that interest is brought to an end by the exercise of a power of appointment in favour of someone else - see Dwight v Commissioner of Taxation [1992] FCA 178. 55. It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest 'under a trust instrument'. 56. Determining whether a beneficiary has a 'vested and indefeasible' interest in a trust requires an examination of the terms of the trust upon which the relevant trust property is held, including individual clauses, and whether a beneficiary's interest in a share of the income or capital is defeasible by virtue of any of the powers contained in the trust instrument (see CPT Custodian Pty Ltd v Commissioner of State Revenue; Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd [2005] HCA 53). 57. Paragraph 16 of PCG 2016/16 provides examples of powers in modern trust instruments which cause a beneficiary's interests to be defeasible which include: • Broad powers to amend the trust instrument • Powers to issue new units after the trust is settled, or to redeem existing units • A power to reclassify existing units so that they do not all have equal rights to receive the income and capital of the trust • A power to classify receipts as being on income or capital account where the units that have been issued do not all have the same rights to receive the income and capital of the trust • A power to appoint a beneficiary's interest in the income or capital of the trust to another beneficiary • A power to settle or appoint any part of the corpus of the trust to a new trust with different beneficiaries • A power to enforce the forfeiture or cancellation of partly paid units due to the non-payment of a call except where such partly paid units would be void ab initio. 58. However, the saving rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936 provides that the interest of a unit holder in a unit trust will not be taken to be defeasible only because the units can be issued or redeemed. This is provided the units are redeemable or further units are able to be issued only for market value or for a price that represents the net asset value of the trust. Subsection 272-5(2) states: If: (a) a person holds units in a unit trust; and (b) the units are redeemable or further units are able to be issued; and (c) if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and (d) if the units are not listed as mentioned in paragraph (c) - the units held by the person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue; then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person's interest, as a Unitholder, in the income or capital of the unit trust is defeasible. Application to your circumstances 59. For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument of the Unit Trust consists of the Trust Deed and the Deeds of Variation. 60. Clauses X of the Trust Deed provides that Unit Holders have a beneficial interest in the Trust Fund in proportion to the units they hold. 61. Clause X provides that after the Vesting Day, the Unit Holders are entitled to the Trust Fund in proportion to their unit holding. 62. Clause X provides the Unit Holders until Vesting Day will be entitled to the net income of the Trust Fund in proportion to the number of units they hold. 63. Clause X provides the trustee the power (with the consent of the Unit Holders) to pay amounts out of capital to the Unit Holders in proportion to their Units before the Vesting Day. 64. Accordingly, it is accepted that the Trust Deed provides the Unit Holders with a vested interest in the income and capital of the Trust. 65. However, there are various clauses in the Trust Deed relating to the Trustee's powers that may cause a beneficiary's interests to be defeasible, including: • Clause X - the Trustee (with the consent of the Unit Holders) may issue new units on such terms and to such persons as it thinks fit and to classify or to reclassify units which are already issued in such a manner as the Trustee thinks fit. • Clause X - the trustee with the consent of all Unit Holders may redeem the whole or any part of the units held by any Unit Holder at fair value of the units and on such terms and conditions as the trustee may in its absolute discretion determine. Fair value is ascertained by the trustee valuing the investments and other assets of the trust Fund and deducting all outstanding liabilities and dividing the result by the number of units on issue. However, any Unit Holder can serve written notice requiring the trustee to instruct the Auditors to certify the sum which in their opinion is the fair value and that value will be deemed the fair value. • Clauses X and X and X - the power to classify receipts and outgoings as capital and income. • Clause X - the power to transfer the assets of the trust a Trustee of another Trust: To transfer any of the investments and property constituting the Trust Fund or any part thereof to the trustee of any other trust (whether or not the trustee hereof is in any way associated with such other Trust) on receiving such cash as in the absolute discretion of the trustee is fixed or determined as the equivalent to the fair and reasonable value of such investment or property at the date of transfer. • Clause X - the power to vary the Trust Deed, provided that any law against perpetuities is not infringed and the interests of the Unit Holders are not prejudiced and that such a variation alteration or addition is not in favour of or will not result in any benefit to the Settlor or the Trustee or any person who has been a Trustee or any of them. Savings rule 66. The savings rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936 is not satisfied as the trustee can create and issue additional units on such terms and to such persons as it thinks fit and classify or re classify units which are already issued in such a manner as the Trustee thinks fit. Conclusion 67. The Unit Holder does not have a fixed entitlement to a share of the income and capital of the Unit Trust for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936. 68. Therefore, the Unit Trust is not a fixed trust for the purposes of section 272-65 of Schedule 2F to the ITAA 1936. | Detailed Reasoning - Question 2: If the Unit Trust is not a fixed trust for the purposes of section 272-65 of Schedule 2F to the ITAA 1936, will the Commissioner exercise the discretion under in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the Unit Holders of the Unit Trust as having fixed entitlements to all of the income and capital of the Unit Trust for purposes of the Proposed Transaction? | Summary: Yes. | Detailed Reasoning - Detailed reasoning: 69. Subsection 272-5(3) of Schedule 2F to the ITAA 1936 contains a discretion, whereby in cases where beneficiaries do not have a fixed entitlement, the Commissioner may, for the purposes of the Act, treat such beneficiaries as having a fixed entitlement where it is reasonable to do so based upon the factors prescribed in paragraph 272-5(3)(b) if: (a) a beneficiary with an interest in a share of income that the trust derives from time to time, or of the capital of a trust, does not have a fixed entitlement to the share; and (b) the Commissioner considers that the beneficiary should be treated as having the fixed entitlement, having regard to: (i) the circumstances in which the entitlement is capable of not vesting or the defeasance can happen; and (ii) the likelihood of the entitlement not vesting or the defeasance happening; and (iii) the nature of the trust; the beneficiary has a fixed entitlement. Subparagraph 272-5(3)(i) - the circumstances in which the entitlement is capable of not vesting or the defeasance can happen 70. In relation to the circumstances in which the entitlement is capable of not vesting or the defeasance can happen, the following factors are relevant: • Issue, redemption, and reclassification of units: ­ The trustee of the Unit Trust has never exercised its powers to issue additional units, reclassify units or redeem any units since the establishment of the Unit Trust. • The deed has been amended on two occasions: ­ DD MMM YYYY to additional powers to the trustee including the power to provide indemnity and the power to enter into foreign exchange transactions and agreements ­ DD MMM YYYY to give additional powers to the trustee to appoint an attorney and the power to enter into derivatives, interest rate and foreign currency contracts ­ The additional powers given to the Trustee per the variations of the Trust Deed did not defeat the interests of any unitholders. Subparagraph 272-5(3)(ii) - the likelihood of the entitlement not vesting or the defeasance happening 71. The circumstances in which the interests in the Trust can be defeased will not occur during the Ruling Period, in accordance with the Facts and Assumptions forming part of this Ruling. Subparagraph 272-5(3)(iii) the nature of the trust 72. The Unit Trust has the following attributes: • it has a trust instrument • the Unit Trust is a unitised trust however it is not subject to any specific industry regulation, licensing or registration requirements which is legally enforceable • all of the beneficial interests in the income and capital of the trust are vested • there is only one type of unit currently on issue and therefore all beneficial interests have the same rights to receive the income and capital of the Trust • all the beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capital of the trust • the trust does not have a default clause for either income or capital and currently the trust has no discretionary powers to appoint income or capital of the Trust. Other matters 73. In accordance with the Assumptions forming part of the ruling, throughout the Ruling Period, no arrangement has been or will be entered into which would result in section 272-35 in Schedule 2F of the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction. Conclusion 74. Having regard to all the relevant circumstances and the factors set out in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, the Commissioner will exercise the discretion pursuant to subsection 272-5(3) to deem the Unit Holders as having fixed entitlement to the income and capital of the Unit Trust. | Detailed Reasoning - Question 3: Will Family Trust Distributions Tax (FTDT), pursuant to Division 271 of Schedule 2F to the ITAA 1936, apply to a dividend declared by the Company under Step 3 of the Proposed Transaction? | Summary: No. | Detailed Reasoning - Detailed reasoning: 75. Broadly, FTDT is imposed if an entity that has made a FTE or has an IEE in force, confers a present entitlement on, or distributes income or capital to, an entity that is not a member of the family group of the individual specified in the FTE (Sections 271-15 (family trust), 271-20 (interposed trust) and 271-30 (interposed company) of Schedule 2F to the ITAA 1936) 76. The family group for these purposes is defined in section 272-90 of Schedule 2F to the ITAA 1936 and includes entities from the following categories: • family members of the individual specified in the FTE • the family trusts in respect of which the FTE has been made with the same specified individual • interposed entities that have made an IEE to be included in the family group • certain other 100% family-owned entities • estates of specified individual or family members if all are dead; and • certain charities, other institutions covered by the gift deduction provision or tax-exempt bodies to which distributions are allowed. 77. Subsection 272-90(5) of Schedule 2F to the ITAA 1936 states: A company, partnership or trust is a member of the primary individual ' s family group in relation to the conferral or distribution if, when the conferral takes place or the distribution is made: (a) the primary individual; or (b) one or more members of the primary individual ' s family; or (c) the trustees of one or more family trusts, provided the primary individual is specified in the family trust election of each of those family trusts; or any combination of the above, have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust. Application to your circumstances 78. Under step 3 of the Proposed Transaction a fully franked dividend will be paid by the Company out of profits to the Unit Trust on the A Class Share. 79. The Company made an IEE in respect of the Family Trust, naming the Specified Individual and with effect from 1 July 2017. 80. The Unit Trust has not made an IEE. 81. However, as per the answer to the previous question, the Commissioner has exercised the discretion pursuant to subsection 272-5(3) of Schedule 2F to deem the Unit Holders of the Unit Trust as having fixed entitlement to the income and capital of the Unit Trust. 82. The sole Unit Holder of The Unit Trust is the Family Trust. 83. Accordingly, the Unit Trust will be a member of the Family Group pursuant to subsection 272-90(5) of Schedule 2F to ITAA 1936. 84. As a result, there will not be a liability to pay FTDT when the Company pays a dividend to the Unit Trust under the Proposed Transaction. | Detailed Reasoning - Question 4: Will the A Class Share and the B Class Share issued by the Company under the Proposed Transaction to the Unit Trust and Company B, respectively, be equity interests in a company under subsection 974-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | Summary: Yes. | Detailed Reasoning - Detailed reasoning: 85. Subsection 974-70(1) of the ITAA 1997 states: A scheme gives rise to an equity interest in a company if, when the scheme comes into existence: (a) the scheme satisfies the equity test in subsection 974-75(1) in relation to the company because of the existence of an interest; and (b) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a debt interest in the company, or a connected entity of the company, under Subdivision 974-B. 86. A scheme is defined broadly under section 995-1 of the ITAA 1997 to mean any arrangement, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. As such, the Proposed Transaction would be a scheme for the purpose of Subdivision 974-C of the ITAA 1997. 87. Pursuant to section 974-75 of the ITAA 1997, a scheme satisfies the equity test if it is an interest listed in the table under section 974-75(1), which includes: (i) An interest in the company as a member or stockholder of the company. (ii) An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is in substance or effect contingent on aspects of the economic performance (whether past, current or future) of the company... (iii) An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is at the discretion of the company... 88. Both the A and B Class Shares would fall within item 1 of section 974-75(1) of the ITAA 1997 (being an interest in the company as a member or stockholder of the company). As such, these shares would satisfy the equity test. 89. Paragraph 974-70(1)(b) of the ITAA 1997 requires that the interest is not characterised as, and does not form part of a larger interest that is characterised as a debt interest in the company, or a connected entity under Subdivision 974-B. 90. The A and B Class Shares would fail the debt interest test in Subdivision 974-B of the ITAA 1997, as there is no effectively non-contingent obligation as required by paragraph 974-20(1)(c), because the shareholder entitlement to dividends under both the A and B Class Shares is contingent on the company having the ability to pay dividend and the discretion of the directors to declare a dividend on the shares. 91. Accordingly, the A and B Class Shares that the Company would issue if the Proposed Arrangement was to proceed would be equity interests under Subdivision 974-C of the ITAA 1997. | Detailed Reasoning - Question 5: Will subsection 725-90(1) of the ITAA 1997 apply to Step 2 of the Proposed Transaction such that the value shifting consequences (if any) will be disregarded under Division 725? | Summary: Yes. | Detailed Reasoning - Detailed reasoning: 92. Division 725 of the ITAA 1997 deals with shifting of value between equity interests in the same company and adjusts the value of the interests to take into account material changes in the market value of those interests for taxation purposes and treats the value shift as a partial realisation to the extent that value is shifted between interest held by different owners. 93. Section 725-145 of the ITAA 1997 provides that there is a direct value shift (DVS) under the scheme involving equity interests in a company if: (a) There is a decrease in the market value of one or more equity interests in the company, and (b) The decrease is reasonably attributable to one or more things done under the scheme and occurs at a time or after when that thing or the first of those things is done. (c) Either or both of subsections 725-145(2) or (3) of the ITAA 1997 are satisfied. 94. However, section 725-50 of the ITAA 1997 relevantly provides that a DVS will only have consequences under Division 725 if section 725-90 does not apply. 95. Section 725-90 of the ITAA 1997 applies if: 96. When considering the DVS rules in connection with the Proposed Transaction, it is not necessary to determine if there is a DVS pursuant to section 725-145 of the ITAA 1997, where section 725-90 of the ITAA 1997 will apply such that any DVS will not have any consequences under Division 725. 97. The 'one or more things' referred to in section 725-145(1)(b) of the ITAA 1997 that have brought about a state of affairs is the issue of the A and B Class Shares. 98. The relevant 'state of affairs' is that the proposed A and B Class Shares have specific characteristics in the form of discretionary dividend rights. 99. The rights to dividends will come to an end 47 months from when the A and B Class Shares are issued as part of the scheme. 100. Accordingly, as the state of affairs that brings about any potential value shift will be reversed within four years, there will be no consequences under Division 725 of the ITAA 1997 in relation to any potential value shift | Detailed Reasoning - Question 6: Will the Proposed Transaction be considered a scheme for the stripping of company profits within the meaning of subsection 177E(1) of the ITAA 1936, either: • by way of or in the nature of dividend stripping within the meaning of subparagraph 177E(1)(a)(i) (the first limb); or • having substantially the effect of a scheme by way of or in the nature of a dividend stripping (the second limb)? | Summary: No. | Detailed Reasoning - Detailed reasoning: 101. Section 177E of the ITAA 1936 applies where: • property of a company is disposed of as a result of • paragraph (177E(1)(a)): ­ a scheme by way of or in the nature of dividend stripping; or ­ a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping; and • in the Commissioner's opinion, the disposal of property represents, in whole or in part, a distribution of profits of the company (paragraph 177E(1)(b)); and • if, immediately before the scheme was entered into, the company had paid a dividend equal to the amount of the disposal of property, an amount (referred to as the notional amount) would have been included in the assessable income of a taxpayer of a year of income (paragraph 177E(1)(c)); and • the scheme is entered into after 27 May 1981 (paragraph 177E(1)(e)). 102. Where all of the above conditions (set out in paragraphs 177E(1)(a)-(d)) of the ITAA 1936 are met, the effect of paragraphs 177E(1)(e)-(g) is that the scheme is taken to be a scheme to which Part IVA of the ITAA 1936 applies, and the taxpayer is taken to have obtained a tax benefit in connection with the scheme equal to the notional amount. 103. Scheme is defined broadly in subsection 177A(1) of the ITAA 1936. In this case, the relevant scheme comprises of the steps of the Proposed Transaction. 104. For section 177E of the ITAA 1936 to apply, paragraph 177E(1)(c) must be satisfied. That is if, immediately before the scheme was entered into, the company had paid a dividend equal to the amount of the disposal of property, an amount (referred to as the notional amount) would have been included in the assessable income of a taxpayer of a year of income. 105. The Company would be liable to pay FTDT on any dividend paid to Company B under section 271-30 of Schedule 2F to the ITAA 1936) as it is not a member of the Family Group. 106. Consequently, pursuant to section 271-105 of Schedule 2F to ITAA 1936, the dividend would be non-assessable non-exempt income in the hands of Company B. 107. Thus, there is no notional amount identified under paragraph 177E(1)(c) of the ITAA 1936 in connection with the scheme. 108. Accordingly, section 177E of the ITAA 1936 will not apply. | Detailed Reasoning - Question 7: Will the Commissioner make a determination to deny the Unit Trust a tax offset in relation to a franked distribution paid to the A Class shareholder in Step 3 of the Proposed Transaction pursuant to subsection 204-30(3) of the ITAA 1997? | Summary: Yes. | Detailed Reasoning - Detailed reasoning: 109. Section 204-30 of the ITAA 1997 is one of the integrity rules for the imputation system which allows the Commissioner to cancel franking credits or create franking debits where an entity streams distributions to entities that would benefit more from imputation benefits. 110. The Explanatory Memorandum to New Business Tax System (Imputation) Bill 2002 provides the background of the policy intent of these rules : 3.8 Where members hold interests in the profits of a corporate tax entity, the policy is that credits for tax paid on behalf of all members should flow to all members and not to only some of them. The franking rules do not, in general, attempt either to track the source of distributed profits or the particular members who hold an interest in a corporate tax entity at any given time. However, the policy of the tax law assumes that the benefit of imputation will, over time, be spread more or less evenly across members in proportion to their holdings in a corporate tax entity, having regard to any particular rights that attach to those holdings. 3.9 A consequence of generally spreading imputation benefits evenly across members is that members who cannot use, or cannot fully use, imputation benefits will nevertheless receive franked distributions. This results in the wastage of those benefits, which is a design feature of the imputation system. Wastage of imputation benefits also includes the failure to use franking credits attributable to profits that are never distributed. 3.10 The benchmark rule and the anti-streaming rules ensure that the intended wastage of imputation benefits is not undermined. 111. Section 204-30 of the ITAA 1997 gives the Commissioner the power to make determinations where the entity streams distributions in such as 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)); and • the member would derive a greater benefit from franking credits than another member of the entity (paragraph 204-30(1)(b)); and • 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)). 112. The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member. 113. Imputation benefits are defined in subsection 204-30(6) and includes: • a member who is entitled to a tax offset under Division 207 as a result of the distribution • an amount would be included in the member 's assessable income as a result of the distribution because of the operation of section 207-35. 114. Subdivision 207-B provides for franked distributions to flow through a trust (or trusts) to the beneficiaries. Section 207-35 of the ITAA 1997 operates such that if a franked distribution is made to a trust and the trust is not a corporate tax entity at the time of the distribution is made, nor a complying superannuation fund, then the assessable income of the trust for that income year includes an amount of the franking credit on the distribution. (Sections 207-55, 207-57 and 207-58 of the ITAA 1997 set out the flow through of the franking credits attaching to the distribution flowing through a trust for the beneficiaries.) 115. Additionally, for the amount to be included in the member 's assessable income as a result of the distribution, none of the circumstances listed in subsection 207-145(1) of the ITAA 1997 may apply. One of these circumstances is that 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. 116. The Unit Trust and Company B will be a qualified person in respect of the distributions made by the Company under the Proposed Transaction for the purposes of Division 1A of former Part IIIAA of the ITAA 1936. 117. Apart from the operation of section 204-30, none of the other circumstances listed in subsection 207-145(1) if the ITAA 1997 apply. 118. Thus, the amount of the distribution would be included in the Unit Trust's assessable income as a result of section 207-35 of the ITAA 1997, and accordingly the Unit Trust would obtain an imputation benefit. 119. Subsection 204-30(8) of the ITAA 1997 sets out certain circumstances when a member derives a greater benefit from franking credits than another member, including, per paragraph 204-30(8)(b), when the other member would not be entitled to any tax offset under Division 207 because of the distribution. 120. As mentioned previously, if the Company paid a dividend to Company B, the Company would be liable to pay FTDT and consequently, pursuant to section 271-105 of Schedule 2F to ITAA 1936, the dividend would be non-assessable non-exempt (NANE) income in the hands of Company B. 121. An entity is not entitled to a tax offset under Division 207 of the ITAA 1997 if it is NANE in the hands of the entity under subsection 207-90(1). 122. Accordingly, Company B would not be entitled to a tax offset on a distribution paid by the Company and would be the disadvantaged member. 123. The Explanatory Memorandum to New Business Tax System (Imputation) Bill 2002 provides further explanation as to what is streaming: 3.28 Streaming is selectively directing the flow of franked distributions to those members who can most benefit from imputation credits. 3.29 The law uses an essentially objective test for streaming, although purpose may be relevant where future conduct is a relevant consideration. It will normally be apparent on the face of an arrangement that a strategy for streaming is being implemented. The distinguishing of members on the basis of their ability to use franking benefits is a key element of streaming. 3.30 Thus, streaming is unlikely to occur when a corporate tax entity, in making franked distributions, distinguishes between 2 classes of members, both of which comprise members who can and who cannot benefit from imputation credits. However, where one class is predominantly able to use imputation credits, and the other is predominantly not, it may be apparent that an arrangement is streaming, notwithstanding the presence in each class of a small minority of the other type of member. 3.31 Broadly speaking, any strategy directed to defeating the policy of the law by avoiding wastage of imputation benefits through directing the flow of franked distributions to members who can most benefit from them to the exclusion of other members, may amount to streaming. 124. Section 204-30 is an objective test as to whether the Company has streamed the franked distribution to a member who can most benefit, to the exclusion of the member who would benefit less. 125. The Explanatory Memorandum to New Business Tax System (Imputation) Bill 2002 further explains that it is necessary to distinguish cases where individual members have no effective interest in the profits of a corporate tax entity. For example, where the rights of the members holding interests in the company are effectively discretionary, where the entity can make distributions to some members to the exclusion of other members at its discretion: 3.36....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. 3.37 In these cases, the receipt of a franked distribution by one class of members does not imply that the other classes of members who have not received a franked distribution have 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. 3.38 In general, therefore, the distribution of franked and unfranked distributions by a closely-held family company or trust among family members is unlikely to be streaming. 126. Before the Proposed Transaction there was only one class of shareholders. Any payment of franked distributions would have had to been paid to both ordinary class shareholders, who would have shared equally in the profits in proportion to their shareholdings. 127. That is, before the Proposed Transaction the members did not have a discretionary interest in the profits of the Company. 128. The Company proposes to restructure its share capital under the Proposed Transaction. As part of this restructure A and B class shares are being issued, to the existing two ordinary shareholders. 129. The Company expects to pay several fully franked dividends to the A Class shareholder prior to the cancellation of the dividend rights. 130. The stated purpose of issuing the B Class Share to Company B is to maintain the same ownership share rights for both shareholders, in proportion to the existing ordinary shares. 131. The issue of the shares under the Proposed Transactions changes the entitlement to share in the profits from an equal share to discretionary interest. 132. However, the Company does not intend to declare or pay any dividends on the B Class Shares, because any distributions would trigger FTDT, and intends to wind up the Company before the dividend rights expire. 133. This situation can be distinguished from a true discretionary interest in the profits already in existence, as outlined in the EM. 134. The change to a discretionary interest in the profits is part of an arrangement to stream the distributions to one shareholder. 135. It also does not reflect the intention of the Company. The B Class shareholder (the disadvantaged member) is not intended to share in the profits from the Company. 136. The Explanatory Memorandum to New Business Tax System (Imputation) Bill 2002 notes at paragraph 3.33 that it is not necessary for there to be two distributions by the corporate tax entity for streaming to occur. Benefits may also be directed to associates of members and, in some cases where the disadvantaged member is a corporate tax entity or trust, streaming may involve by-passing the member in favour of its ultimate owners. 137. The A Class shareholder is the favoured member and is able to benefit from the imputation credits, whereas the B class shareholder cannot, and the streaming of the distribution under the Proposed Transaction would operate to by-pass the disadvantaged member in favour of the ultimate owners. 138. While the predominant purpose of the Proposed Transaction may be to avoid the application of FTDT on the distributions if paid to Company B, section 204-30 does not have a purpose test. 139. In essence, streaming for the purposes of section 204-30 of the ITAA 1997 is selectively directing the flow of franked distributions to those members who can most benefit from imputation credits. 140. The Proposed Transaction selectively streams the franked distributions to the A Class shareholder, which shareholder (apart from section 204-30) can benefit most from the imputation credits. The B Class shareholder, who cannot benefit from the distribution, receives no distribution or imputation benefits. 141. The policy intent of the anti-streaming rules is that imputation credits of a corporate tax entity should flow to all members and not to only some of them and that some wastage of imputation credits is intended. 142. When the Proposed Transaction is viewed objectively against this policy intent, it is clear that it results in a scenario that the anti-streaming rules in section 204-30 of the ITAA 1997 were implemented to target in ensuring the imputation system was not undermined. 143. Accordingly, the Commissioner is empowered to make a determination pursuant to subsection 204-30(1). The nature of the determination under subsection 204-30(3) would be that no imputation benefit is to arise in respect of a distribution that is made to a favoured member, i.e. the Unit Trust. | Detailed Reasoning - Question 8: Will paragraph 207-145(1)(f) of the ITAA 1997 operate to deny a tax offset in relation to a franked distribution paid to the A Class shareholder in Step 3 of the Proposed Transaction? | Summary: It is unnecessary to consider paragraph 207-145(1)(f) of the ITAA 1997 as section 204-30 of the ITAA 1997 operates to deny the tax offset. | Detailed Reasoning - Detailed reasoning: 144. An entity is not entitled to a franking tax offset under Division 207 of the ITAA 1997 if the distribution is made in one of the circumstances listed in subsection 207-145(1) of the ITAA 1997, including: • paragraph 207-145(1)(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 • paragraph 207-145(1)(f), where the entity is not entitled to a tax offset under Division 207 because of the distribution. 145. As set out in the previous question, section 204-30 applies and the Commissioner will make a determination under subsection 204-30(3) that no imputation benefit is to arise in respect of a distribution that is made to the A class shareholder. 146. Accordingly, paragraph 207-145(1)(c) applies. 147. While this also results in the A Class shareholder having no entitlement to an imputation benefit under Division 207, as paragraph 207-145(1)(c) applies and this is the more specific provision, it is unnecessary to consider whether paragraph 207-145(1)(f) of the ITAA 1997 applies. | Detailed Reasoning - Question 9: Will the Commissioner make a determination that a franking debit arises or that no imputation benefit arises on a franked distribution paid to the A Class shareholder in Step 3 of the Proposed Transaction pursuant to section 177EA of the ITAA 1936? | Summary: As per the answer to question 7, section 204-30 of the ITAA 1997 applies. As the specific anti-streaming rule applies, it is not necessary to consider section 177EA of the ITAA 1936. | Detailed Reasoning - Detailed Reasoning: 148. Section 177EA is a general anti-avoidance rule that is intended 'to prevent abuse of the imputation system through schemes which circumvent the basic rules for the franking of dividends. 149. Section 177EA can only apply if, but for its application, a relevant taxpayer would receive or could reasonably be expected to receive an imputation benefit, and other conditions specified in subsection 177EA(3) are satisfied. 150. Where these conditions are satisfied, the Commissioner has a discretion to either cancel the imputation benefits that would otherwise arise for the relevant taxpayer that receives a franked distribution, or (in certain circumstances) to make a franking debit determination for a corporate tax entity that makes a franked distribution. 151. Section 177EA was 'intended to be a 'catch-all' provision to deal with schemes not otherwise prevented' by the more specific rules. It was introduced in recognition the specific provisions might be unable to deal with certain arrangements that undermine the principles of the imputation system (paragraphs 8.126 and 8.136 of the Explanatory Memorandum to New Business Tax System (Imputation) Bill 2002 ). 152. Section 204-30 of the ITAA 1997 is the specific anti-streaming rule that applies where a corporate tax entity streams distributions in such a way as to give imputation benefits to those members who benefit most from imputation credits. 153. As per the answer to question 7, section 204-30 of the ITAA 1997 applies. As the specific anti-streaming rule applies, it is not necessary to consider section 177EA of the ITAA 1936. | Detailed Reasoning - Question 10: Will the Proposed Transaction result in 'the obtaining by a taxpayer of a tax benefit in connection with a scheme' for the purposes of subsection 177C(1) or 177C(2) of the ITAA 1936 with respect to the avoidance or non-incidence of FTDT, as provided for in Division 271 of Schedule 2F to the ITAA 1936? Summary No. Detailed reasoning See reasoning for Question 11. | Detailed Reasoning - Question 11: Will Part IVA apply to the Proposed Transaction in relation to a taxpayer obtaining a tax benefit in connection with a scheme in respect of: • the non-inclusion of an amount in assessable income by way of non-inclusion of a dividend by Company B (Scheme One); or • avoiding the consequences of a value shift resulting in non-inclusion of an amount, such as a net capital gain in the assessable income of a taxpayer (Scheme Two)? Summary No. Detailed Reasoning 154. Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. 155. Part IVA of the ITAA 1936 applies to an arrangement where the following elements exist: • there is a scheme as defined in subsection 177A(1) of the ITAA 1936; • there is a tax benefit as defined in subsection 177C(1) of the ITAA 1936 obtained by a taxpayer in connection with a scheme; • it would be concluded having regard to the eight matters listed in paragraph 177D(b) of the ITAA 1936 that a person who entered into or carried out the scheme did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme; and • the Commissioner makes a determination under section 177F of the ITAA 1936 to cancel the relevant tax benefit. 156. The identified scheme must be a 'scheme' as defined in subsection 177A(1) of the ITAA 1936 to mean: a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and b) any scheme, plan, proposal, course of action or course of conduct.' 157. Part IVA of the ITAA 1936 cannot apply unless the taxpayer has obtained, or would, but for the operation of section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. 158. Subsection 177C(1) defines the term tax benefit to include benefits relating broadly to: • an amount not being included in the assessable income of the taxpayer of a year of income • a deduction being allowable to the taxpayer in relation to a year of income • a capital loss being incurred by the taxpayer during a year of income • a foreign income tax offset being allowable to the taxpayer • an innovation tax offset being allowable to a taxpayer • an exploration credit being issued to a taxpayer • an amount of withholding tax not being incurred by the taxpayer in a year of income. 159. Subsection 177C(2) defines certain things that are not tax benefits. 160. The conclusion as to dominant purpose must be made by reference to the particular scheme and the tax benefit that relates to that scheme. 161. Paragraph 177D(b) of the ITAA 1936 lists eight criteria by which the 'purpose' of a transaction can be determined. Part IVA of the ITAA 1936 applies to a scheme where, having regard to the eight factors, it would be concluded that the taxpayer entered into or carried out the scheme for the purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. 162. Ultimately, what needs to be considered is whether, having regard to the eight factors in paragraph 177D(b) of the ITAA 1936, it would be concluded that the dominant purpose of some person who entered into or carried out the scheme with its particular features was the obtaining of a tax benefit. Application of the law 163. The Proposed Transaction is a scheme as identified in section 177A of the ITAA 1936. 164. The taxpayer's stated purpose in undertaking the Proposed Transaction to restructure the Company share capital is to avoid triggering FTDT when a dividend is paid by the Company. 165. The non-inclusion of an amount in the assessable income of Company B by way of the non-inclusion of a dividend is part of the arrangement to avoid FTDT, as any dividend paid to Company B would render the Company liable to FTDT, as mentioned above. 166. As part of the Proposed Transaction, the right to receive a dividend attached to the DAS will be extinguished 47 months from the date of the share issue. 167. CGT event K8 happens if there is a 'taxing event generating a gain' for a down interest under section 725-245 of the ITAA 1997 (subsection 104-250(1) of the ITAA 1997). 168. The extinguishment of the dividend rights to the A and B Class shares after 47 months provides that, if there was a potential value shift under Division 725 of the ITAA 1997 as a result of the issue of the shares, section 725-90 will apply such that any DVS will not have any consequences under Division 725. 169. As there is no DVS that has consequences under Division 725, CGT event K8 will not happen as a result of the Proposed Transaction. 170. The rights attached to the A and B Class shares are part of the Proposed Transaction to avoid FTDT. 171. Having regard to the relevant circumstances set out in subsection 177D(2) and the stated purposes of the taxpayer, the Commissioner considers that one of the objective purpose sought to be achieved by the Proposed Transaction is the non-application of FTDT, by structuring to allow the streaming of dividends to be paid solely to shareholders that are members of the Family Group. 172. The dominant purpose of the scheme is the non-application of FTDT in relation to any distributions made by the Company. 173. Part IVA cannot apply unless a taxpayer has obtained, or would, but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. 174. The non-application of FTDT is not a tax benefit as defined by subsections 177C(1) and (2). 175. Accordingly, as the non-application of FTDT is not a tax benefit as defined in section 177C, the necessary elements are not present for Part IVA of the ITAA 1936. 176. On this basis, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to cancel any tax benefits obtained as part of the Proposed Transaction.

the one or more things referred to in paragraph 725-145(1)(b) of the ITAA 1997 brought about a state of affairs, but for which the direct value shift would not have happened; and | as at the time referred to in that paragraph, it is more likely than not that, because of the scheme, that state of affairs will cease to exist within 4 years after that time.