Private ruling: Part IVA
Published: April 2015
Ruling period: Year of income ended 30 June 2015 | Year of income ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Is there a scheme to which Part IVA, and therefore section 177F, of the Income Tax Assessment Act 1936 (ITAA 1936) applies? | A1: No

Relevant facts and circumstances: Background The Trust currently owns a rural property, which it has owned for over 20 years. The Land was originally acquired as a Crown Lease and was converted to freehold. The Land has a CGT cost base of $X and was recently valued at $X. X family members were carrying on a primary production business in partnership on the land until a couple years ago. The X family members are all aged between 55 and 70 years of age. The X family members are the trustees and members of a self-managed superannuation fund (the Fund). The X family members are nearing retirement, and have significantly reduced work hours in connection with the cessation of the partnership primary production business. The Trust wishes to migrate the Land to the Fund. This will occur subject to a lease of the Land, which has been in place since the primary production business ceased, with an arm's length party. The lease of the Land yields 6% return on the market value of the Land and is therefore considered to be a suitable asset to be acquired by the Fund. In order to implement their desire to transfer the Land to the Fund, the proposal initially proposed by the family members would have resulted in an unanticipated and undesired stamp duty liability. As a result, their lawyers have identified an alternate course of action outlined below under 'Proposed arrangement' that would not attract stamp duty due to the operation of the relevant state stamp duty legislation. Proposed arrangement The Trust will vest the land in the X family members in equal shares as an in-specie distribution of the capital of the Trust. This will result in a capital gain to the Trust. After applying the Division 115 CGT general 50% discount, and the Subdivision 152-D small business retirement exemption to the capital gain, the net capital gain in the Trust will be reduced to $Nil. The X family members will each make an in-specie distribution of their share of the land to the Fund as non-concessional contributions. The X family members will agree to settle a total of $X, in cash, on the Trust. The Trust will use these funds to make payments to the Fund of $X for each family member, in accordance with sections 152-325 and 292-100 of the ITAA 1997. The Trust will then be wound up. CGT Small business relief and other matters The Trust satisfies the basic conditions for relief under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the small business concessions available under Division 152. In accordance with section 115-20 of the ITAA 1997, the cost base of the land will be calculated without reference to indexation. In accordance with section 328-115 of the ITAA 1997, the aggregated turnover is under $2 million. The trustee has advised that, in accordance with section 152-15 of the ITAA 1997, the maximum net asset value of the assets of the Trust, its affiliates and entities connected with it will be less than $6 million immediately before the proposed transaction occurs. The X family members all qualify as Division 152 CGT concession stakeholders for the year ending 30 June 2015.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA. | Income Tax Assessment Act 1997 Subdivision 152-D.

Reasons for decision: Summary: Part IVA, and therefore section 177F, of the ITAA 1936 will not apply to the proposed scheme. | Detailed Reasoning - Detailed reasoning: Part IVA may apply to a scheme in circumstances where a person or persons who entered into or carried out the scheme or part of it did so for the purpose of: • enabling a taxpayer to obtain a tax benefit in connection with the scheme; or • enabling the relevant taxpayer and another taxpayer(s) each to obtain a tax benefit in connection with the scheme. In this case, the Trust is seeking to apply the small business retirement exemption in respect of the in specie transfer of land it makes to the Fund. As such, the relevant tax benefit under paragraph 170C(1)(a) of the ITAA 1936 will be the capital gain that would have been included in the assessable income of the Trust if the scheme had not been entered into (provided that the requirements in subdivision 152-D of the ITAA1997 and in particular section 152-325 are satisfied). Before considering the application of Part IVA to the scheme, it is necessary to consider the application of the tax law to the scheme that gives rise to the tax benefit. | Detailed Reasoning - Subdivision 152-D of the ITAA 1997: Subsection 152-305(2) of the ITAA 1997 provides that a Trust can choose to disregard all or part of a capital gain if: • the basic conditions in subdivision 152-A are satisfied; • the entity satisfies the significant individual test; and • the company or trust conditions in section 152-325 are satisfied. You have advised that the basic conditions are satisfied. You have also advised that the X family members will be CGT concession stakeholders of the Trust with a participation percentage of Y% each, and therefore they will all be significant individuals (sections 152-50, 152-55 and 152-60 of the ITAA 1997). Therefore the main issue for consideration is the company and trust requirements. Section 152-325 of the ITAA 1997 - company and trust requirements Subsection 152-325(1) of the ITAA 1997 requires that the Trust must: …make a payment (whether directly or indirectly through one or more interposed entities) to at least one of its *CGT concession stakeholders if… (b) …the trust received an amount of capital proceeds from a CGT event… The CGT event in this instance is the transfer of land from the Trust to the Fund (CGT event A1) for which the Trust capital proceeds received is the market value as determined by the market value substitution rule in section 116-30 of the ITAA 1997. While the capital proceeds received is the deemed market value, the issues to be considered when determining whether there has been a payment for which subsection 152-325(1) of the ITAA 1997 applies are whether: • the deemed market value capital proceeds can be the payment that is required to be made to the CGT concession stakeholders or whether an additional payment is required; and • payment (either additional or from the deemed capital proceeds) can be made directly by the Trust to the Fund, with the Fund being an interposed entity as referred to in subsection 152-325(1). Subsection 152-325(1) of the ITAA 1997 requires that the payment must be made to a CGT concession stakeholder which is defined in section 152-60 to mean: An individual is a CGT concession stakeholder of a company or trust at a time if the individual is: a *significant individual in the company or trust; or … It is accepted that the X individuals will be significant individuals of the Trust and therefore, the relevant CGT concession stakeholders. Subsection 152-325(3) of the ITAA 1997 states: If a payment is made to more than one *CGT concession stakeholder, the amount of each such payment is to be worked out by reference to each individual's percentage (see subsection 152-315(5)) of the relevant *CGT exempt amount. As there are multiple CGT concession stakeholders, subsection 152-315(5) of the ITAA 1997 states that the Trust is to also specify in writing the percentage of each CGT asset's CGT exempt amount that is attributable to each of the CGT concession stakeholders, which in this case has been advised as being Y% each. However, the operation of subdivision 152-D of the ITAA 1997 does not contemplate that the following events can occur simultaneously: • CGT event giving rise to the capital gain; • choice to disregard all or part of the capital under Sub-division 152-D; and • payment/contribution required. As such, the deemed market value capital proceeds arising from the CGT event A1 cannot be the same as the payment that is required to be made by the Trust to the CGT concession stakeholder. Therefore, additional payments are required to be made by the Trust to the CGT concession stakeholders separate from the deemed market value capital proceeds received by the Trust. You have advised that in order to satisfy the requirements of sections 152-325 and 292-100 of the ITAA 1997 payments will be made by the X individuals to the Trust to enable the Trust to make that payment to the Fund. Section 292-100 of the ITAA 1997 applies in the context of excluding from the calculation of the excess non-concessional contributions, contributions relating to some CGT small business concessions. Based on the facts of this case, subsection 292-100(1) is applicable and provides that a contribution is covered under this section if: (a) the contribution is made by you to a complying superannuation plan in respect of you in a financial year; and: (b) the requirement in subsection….(8) is met; and (c) you choose, in accordance with subsection (9), to apply this section… Subsection 292-100(8) of the ITAA 1997 requires that: (a) just before the CGT event, you were a CGT concession stakeholder of an entity that could, under subsection 152-305(2), disregard all or part of a capital gain arising from a CGT event…; and (b) the entity makes a payment to you that satisfies the conditions in section 152-325; and (c) the contribution is equal to all or part of the capital gain… (d) the contribution is made within 30 days after the payment is mentioned in paragraph (b). | Detailed Reasoning - Interaction of sections 152-325 and 292-100: Therefore, the interaction between section 292-100 and subdivision 152-D of the ITAA 1997, requires that in respect of the in specie transfer of land by the Trust: • a payment must be made by the Trust to the X individuals (as the CGT concession stakeholders) directly, that is separate to the deemed market value capital proceeds from the in specie transfer - subsection 152-325(1); • the amount of the payment by the Trust to the X family members (as the CGT concession stakeholders under subsection 152-325(1)) required under subsection 152-325(5) based on the advised facts will be $X, being the lesser of: • capital proceeds received - (market value of the land); and • the relevant CGT exempt amount as determined under section 152-315 which has been advised as $X, being the amount that has been chosen to be disregarded under the small business retirement exemption (noting that the capital gain will first be subject to the CGT discount). • subsection 152-325(4) then provides that the payment by the Trust to the X family members directly (the CGT concession stakeholders all being over the age of 55 years) is then required to be made by the later of: • 7 days after the Trust makes the choice to apply this section; and • 7 days after the trust receives capital proceeds from the A1 CGT event - being the day that the transfer of the land occurred as it is advised that there was no written contract to which transfer of the land applied. • Subsection 292-100(1) requires that: • a contribution must be then made by the X individuals to a complying superannuation fund in respect of the X individuals in their own right • the requirements in subsection 292-100(8) (being the applicable subsection on these facts) are satisfied - in this instance the subsection will only be satisfied provided that a separate payment is made by the Trust to the X family members, as the CGT concession stakeholders, (as discussed above) and the contribution has been made within 30 days of that payment under section 152-325 • it is assumed that a choice has been made under subsection 292-100(9). While the Trust cannot pay the amount to the Fund in its own right, it is noted that if the Trust paid the amount per person (totalling $X) to the Fund on behalf of and as directed by the X individuals and in respect of the X individual's accounts in the Fund - with sufficient documentation/substantiation - then the relevant portions of sections 292-100 and 152-325 discussed above, may be satisfied. Therefore, the application of Part IVA of the ITAA 1936 to the proposed scheme is considered on the understanding that the small business CGT retirement exemption requirements, as discussed above, will be met. | Detailed Reasoning - Part IVA: Part IVA applies to a scheme where, having regard to a number of objective factors or matters, it would be concluded that one of the scheme participants who entered into or carried out the scheme or any part of the scheme did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. A 'scheme' is defined in subsection 177A(1) of the ITAA 1936. That definition is widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan or proposal. The factual arrangement described above (being the proposed transfer of the land to the Fund, the subsequent settling of a sum on the Trust by the X beneficiaries, to enable the Trust to make payments in accordance with subdivision 152-D and section 292-100 of the ITAA 1997) will constitute a 'scheme'. The relevant tax benefit under paragraph 170C(1)(a) of the ITAA 1936 (provided that the requirements in subdivision 152-D of the ITAA 1997 are satisfied) will be the amount of capital gain that would have been included in the assessable income of the Trust if the scheme is not entered into. The Commissioner has considered all the relevant matters in relation to the proposed scheme and will not make a determination under subsection 177F(1) of the ITAA 1936 that Part IVA will apply.