Private ruling: Part IVA
Published: April 2012
Ruling period: Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to any residual taxable income retained in the company and taxed at company tax rates? | A1: No

Relevant facts and circumstances: The company was established several years ago, with a sole director. The company has self assessed as a Personal Services Business (PSB) as it meets the requirements of section 87-20 of the Income Tax Assessment Act 1997 (ITAA 1997) (the unrelated clients test). All shares in the company are owned by the director and his wife as trustees of the their Family Trust The company was established for the following reasons: · The director was eager to pursue commercial gains · Allow enhanced asset protection, including the ownership of shares via a discretionary trust · Minimise on-costs to clients, including workers compensation, payroll tax and superannuation · To be able to work with a variety of clients on a variety of projects · To have flexible working arrangements and an improved quality of life · To allow the option of employing staff at a later date to enhance the services that could be offered by the company. · The director is paid a commercial remuneration regarding his work for the company, subject to the amount of consultancy income earned. The director's wife is employed by the company to assist with administrative duties. In any year, if the company earns consultancy income in excess of the commercial wages paid to the director and his wife and other operating costs, dividends may be distributed to the shareholders.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA.

Reasons for decision: Summary: Part IVA will not apply to any residual taxable income retained in the company and taxed at company tax rates. | Detailed Reasoning - The general anti-avoidance provisions: Part IVA applies to a scheme in connection with which a taxpayer has obtained a tax benefit if, having regard to the eight factors specified in section 177D, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the dominant purpose of enabling the taxpayer to obtain the tax benefit. Generally, the tax benefit obtained by the taxpayer will be that an amount is not included in the assessable income of the taxpayer in 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 absent the scheme. Is there a scheme? For Part IVA to apply there must be a scheme within the meaning of section 177A, by which a taxpayer obtains a tax benefit. Under section 177A, a scheme is defined to include any agreement, understanding, promise or undertaking and whether or not enforceable and any scheme, plan, proposal, action, course of action or course of conduct. In the current case, there is a scheme, as described in the 'relevant facts' outlined above, being the establishment of the company to provide a consultancy service. Is there a tax benefit The anti-avoidance provisions only apply where there is a tax benefit from the scheme. Under section 177C of the ITAA 1936 a tax benefit received in relation to a scheme is any of the following four amounts: · An amount that was not included in the assessable income of the taxpayer, where that amount would have been included, or might reasonably be expected to be included, in the assessable income of the taxpayer if the scheme had not been entered into. · An amount for a deduction being allowable to the taxpayer, where that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into. · An amount of a capital loss being incurred by the taxpayer, where that amount would not have been, or might reasonably be expected not to have been, incurred by the taxpayer if the scheme had not been entered into. · An amount of a foreign tax credit being allowable to the taxpayer, where that foreign tax credit would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into. In the current case a tax benefit may arise where the net taxable income of the company exceeds the commercial salary paid to the director. The tax benefit will be the difference between the company tax rate and the marginal tax rate of the director. Part IVA factors Under subsection 177D(b) the Commissioner must have regard to: i) the manner in which the scheme was entered into or carried out; ii) the form and substance of the scheme; iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; vii) any other consequences for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi) in concluding that the person who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers). Applying these factors to your circumstances: · There were clearly identifiable commercial reasons for the establishment of the company - to enhance asset protection, reduce on-costs, and allow for the tendering for contracts; · the company is paying a commercial salary to its director in relation to the work he performs for the company; · the company will derive a taxable income in those years where the total income received is in excess of the commercial remuneration paid to the director and his wife and other operating costs. The company will be taxable on this excess and it will either be retained by the company to fund working and capital requirements or returned the company's shareholders as dividends. | Detailed Reasoning - Conclusion: After considering all the relevant facts and evidence the Commissioner is of the opinion that the scheme has not been entered into or carried out for the dominant purpose of enabling the relevant person to obtain a tax benefit. Accordingly, Part IVA will not apply to any residual income that is retained in the company and on which the company is taxed at the company tax rate.

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