Private ruling: Income tax: Proposed payment of special dividends
Published: July 2014
Ruling period: Income year ending 30 June 2015
Date scheme commenced: The scheme has yet to commence

Ruling: Q1: Will the payment of the fully-franked share dividends from the Company, flowing through the Family Trust and ultimately out to the relevant beneficiaries, carry and retain the relevant franking credits under Subdivision 207-B of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the relevant beneficiaries be entitled to a tax offset pursuant to section 207-45 of the ITAA 1997? | A2: Yes | Q3: Is the proposed scheme a scheme to which paragraphs 207-145(1)(a) and/or 207-150(1)(a) of the ITAA 1997 would apply? | A3: No | Q4: Is the proposed scheme a scheme to which section 177E of the Income Tax Assessment Act 1936 (ITAA 1936) would apply? | A4: No | Q5: Is the proposed scheme a scheme to which section 204-30 of the ITAA 1997 would apply? | A5: No | Q6: Is the proposed scheme a scheme to which section 177EA of the ITAA 1936 would apply? | A6: No | Q7: Is the proposed scheme a scheme to which Part IVA of the ITAA 1936 would apply? | A7: No

Relevant facts and circumstances: A proposed transaction has been put forward to meet the aim of recognising the current interests and future responsibilities of the family members. The steps in the proposed transaction are: • the payment of an initial fully franked special dividend by the Family Company to the Family Trust; • the trustees for the Family Trust resolving to distribute the fully franked special dividend equally among each of the relevant beneficiaries; • each relevant beneficiary having the option to subscribe for shares in the Company or keep the money; • the payment of a second fully franked special dividend of an undetermined amount by the Company to the Family Trust; and • the trustees for the Family Trust resolving to distribute amounts to each of the relevant beneficiaries.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 177A(1) | Income Tax Assessment Act 1936 section 177C(1) | Income Tax Assessment Act 1936 subsection 177CB(2) | Income Tax Assessment Act 1936 subsection 177CB(3) | Income Tax Assessment Act 1936 subsection 177CB(4) | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 subsection 177E(1) | Income Tax Assessment Act 1936 paragraph 177E(2)(a) | Income Tax Assessment Act 1936 section 177EA | Income Tax Assessment Act 1936 subsection 177EA(3) | Income Tax Assessment Act 1936 paragraph 177EA(3)(b) | Income Tax Assessment Act 1936 paragraph 177EA(14)(a) | Income Tax Assessment Act 1997 Subdivision 204-D | Income Tax Assessment Act 1997 subsection 204-30(1) | Income Tax Assessment Act 1997 subsection 204-30(3) | 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 subsection 207-20(1) | Income Tax Assessment Act 1997 subsection 207-20(2) | Income Tax Assessment Act 1997 section 207-45 | Income Tax Assessment Act 1997 paragraph 207-50(1)(a) | Income Tax Assessment Act 1997 paragraph 207-50(1)(b) | Income Tax Assessment Act 1997 subsection 207-50(3) | Income Tax Assessment Act 1997 subsection 207-50(5) | Income Tax Assessment Act 1997 subsection 207-55(3) | Income Tax Assessment Act 1997 subsection 207-58(1) | Income Tax Assessment Act 1997 subsection 207-58(2) | Income Tax Assessment Act 1997 Subdivision 207-F | Income Tax Assessment Act 1997 paragraph 207-145(1)(a) | Income Tax Assessment Act 1997 paragraph 207-145(1)(f) | Income Tax Assessment Act 1997 paragraph 207-145(1)(g) | Income Tax Assessment Act 1997 paragraph 207-145(1)(h) | Income Tax Assessment Act 1997 paragraph 207-150(1)(a) | Income Tax Assessment Act 1997 paragraph 207-150(1)(g) | Income Tax Assessment Act 1997 paragraph 207-150(1)(h) | Income Tax Assessment Act 1997 subsection 207-150(3)

Reasons for decision: Detailed Reasoning - Detailed reasoning: Subdivision 207-B of the ITAA 1997 sets out the effect of an entity receiving a franked distribution through one or more interposed partnerships or trusts. In certain circumstances, a franked distribution to a trust is treated as flowing indirectly to a beneficiary of the trust (or through the trust as an interposed entity). Flows indirectly to the beneficiaries Paragraph 207-50(1)(a) of the ITAA 1997 directs attention to (relevantly) subsection 207-50(3) of the ITAA 1997 to determine when a franked distribution flows indirectly to beneficiaries. Subsection 207-50(3) of the ITAA 1997 provides: A *franked distribution flows indirectly to a beneficiary of a trust in an income year if, and only if: (a) during that income year, the distribution is made to the trustee of the trust…; and (b) the beneficiary has this amount for that income year (the share amount ): (i) a share of the trust's *net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936 ; or (ii) an individual interest in the trust's net income for that income year that is covered by section 98A or 100 of that Act; (whether or not the share amount becomes assessable income in the hands of the beneficiary); and (c) the beneficiary's *share of the distribution under section 207-55 is a positive amount (whether or not the beneficiary actually receives any of that share). Distribution made to trustee of trust Under the proposed scheme, paragraph 207-50(3)(a) of the ITAA 1997 is satisfied. Beneficiary has a share amount Under the proposed scheme, paragraph 207-50(3)(b) of the ITAA 1997 is satisfied. The beneficiaries' share of the distribution is a positive amount The trustees of the Family Trust will exercise their discretion to distribute the income of the trust to the relevant beneficiaries. The relevant beneficiaries will have a share of the net financial benefit and therefore have a positive amount to which they are specifically entitled. Paragraph 207-50(3)(c) of the ITAA 1997 is satisfied. As a result of all the conditions in subsection 207-50(3) of the ITAA 1997 being satisfied, we conclude that the franked distributions under the proposed scheme flow indirectly to the relevant beneficiaries. The relevant beneficiaries' share of the franking credits on the franked distribution is an amount notionally allocated to each beneficiary under subsection 207-57(1) of the ITAA 1997 and calculated in accordance with 207-57(2) of the ITAA 1997. Flows indirectly through the Family Trust Paragraph 207-50(1)(b) of the ITAA 1997 directs attention to subsection 207-50(5) of the ITAA 1997 to determine when a franked distribution flows indirectly through an entity. Subsection 207-50(5) of the ITAA 1997 provides: A *franked distribution flows indirectly through an entity (the first entity ) to another entity if, and only if: (a) the other entity is the focal entity in an item of the table in section 207-55 in relation to the distribution; and (b) that focal entity's *share of the distribution is based on the first entity's share of the distribution as an intermediary entity in that or another item of the table. The trustees for the Family Trust is the intermediary entity and the relevant beneficiaries the focal entity under item 3 of subsection 207-55(3) of the ITAA 1997. Under the proposed scheme, the beneficiaries' share of the distribution is based on the Family Trust's share. As the conditions in subsection 207-50(5) of the ITAA 1997 are satisfied, we conclude the distribution flows indirectly through the Family Trust to the relevant beneficiaries. The relevant beneficiaries' share of the franking credits on the franked distribution is an amount notionally allocated to each beneficiary under subsection 207-57(1) of the ITAA 1997 and calculated in accordance with 207-57(2) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 207-45 of the ITAA 1997 provides (relevantly): An entity to whom a *franked distribution *flows indirectly in an income year is entitled to a *tax offset for that income year that is equal to its *share of the *franking credit on the distribution, if it is: (a) an individual; or (b) …. Each of the relevant beneficiaries are individuals to whom a franked distribution flows indirectly and are therefore entitled to a tax offset that is equal to their respective share of the franking credit on the distribution. However, in accordance with section 207-70 of the ITAA 1997, any non-resident beneficiaries will not gross up their assessable income or be entitled to a tax offset under subsections 207-20(1) and 207-20(2) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subdivision 207-F of the ITAA 1997 provides tax consequences where the imputation system has been manipulated in a manner not permitted under the income tax law. Relevantly, where a franked distribution is made to an entity and that entity is not a qualified person (for the purposes of Division 1A of former Part IIIA of the ITAA 1936) in relation to the distribution as stated at paragraph 207-145(1)(a) of the ITAA 1997, the following consequences arise: • the franking credit is not included in the entity's assessable income (paragraph 207-145(1)(f) of the ITAA 1997); • the entity is not entitled to a tax offset (paragraph 207-145(1)(g) of the ITAA 1997); and • where the distribution flows indirectly through the entity to another entity, that entity also will not include the franking credits in assessable income or be entitled to the tax offset (paragraph 207-145(1)(h) of the ITAA 1997). Paragraph 207-150 of the ITAA 1997 is couched in similar terms and applies to a distribution that flows indirectly to an entity. Relevantly, where a franked distribution flows indirectly to an entity that is not a qualified person (for the purposes of Division 1A of former Part IIIA of the ITAA 1936) as stated at paragraph 207-150(a) of the ITAA 1997, the following consequences arise: • in the case of a beneficiary of a trust, an amount equal to the lesser of the share of the distribution or the share of the franking credits on the distribution will be deducted (subsection 107-150(3) of the ITAA 1997); • the entity is not entitled to a tax offset (paragraph 207-150(1)(g) of the ITAA 1997); and • where the distribution flows indirectly through the entity to another entity, that entity will also not include the franking credits in assessable income or be entitled to a tax offset (paragraph 207-150(1)(h) of the ITAA 1997. Taxation Determination TD 2007/11 Income tax: imputation: franked distributions: qualified persons: does an entity have to be a qualified person within the meaning of Division 1A of former Part IIIA of the Income Tax Assessment Act 1936 to avoid the application of paragraphs 207-145(1)(a) and 207-150(1)(a) of the Income Tax Assessment Act 1997 in respect of a franked distribution made directly or indirectly to the entity on or after 1 July 2002 (TD 2007/11) confirms that the qualified person rule continues to operate in respect of franked distributions made after 1 July 2002 for the purposes of sections 207-145 and 207-150 of the ITAA 1997. In terms of the proposed scheme, the Family Trust needs to be a qualified person for the purposes of paragraph 207-145(1)(a) of the ITAA 1997 and the relevant beneficiaries need to be qualified persons for the purposes of paragraph 207-150(1)(a) of the ITAA 1997. The qualified person provisions of Division 1A of former Part IIIA of the ITAA 1936 applied to shares that were: • if held directly - acquired on or after 1 July 1997; or • if held indirectly through a trust - acquired after 3pm on 31 December 1997. The relevant share was acquired by the trustees of the Family Trust prior to 1 July 1997. As the share was not acquired after 1 July 1997 (for the Family Trust) or the interest in the share after 3pm on 31 December 1997 (for the relevant beneficiaries), the qualified person provisions have no application. As the qualified person provisions have no application, it is unnecessary to satisfy paragraphs 207-145(1)(a) and 207-150(1)(a) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 177E(1) of the ITAA 1936 states: Where: (a) as a result of a scheme that is, in relation to a company: (i) a scheme by way of or in the nature of dividend stripping; or (ii) a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping; any property of the company is disposed of; (b) in the opinion of the Commissioner, the disposal of that property represents, in whole or in part, a distribution (whether to a shareholder of another person) of profits of the company (whether of the accounting period in which the disposal occurred or of any earlier or later accounting period); (c) if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits the distribution of which is, in his or her opinion, represented by the disposal of the property referred to in paragraph (a), an amount (in this subsection referred to as the notional amount ) would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer of a year of income; and (d) the scheme has been or is entered into after 27 May 1981, whether in Australia or outside Australia; the following provisions have effect: (e) the scheme shall be taken to be a scheme to which this Part applies; (f) for the purposes of section 177F, the taxpayer shall be taken to have obtained a tax benefit in connection with the scheme that is referable to the notional amount not being included in the assessable income of the taxpayer of the year of income; and (g) the amount of that tax benefit shall be taken to be the notional amount. Relevantly, the payment of a dividend constitutes a disposal of property as provided in paragraph 177E(2)(a) of the ITAA 1936. Scheme A scheme is defined in subsection 177A(1) of the ITAA 1936 as: (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, action, course of action or course of conduct. There is a scheme for the purposes of subsection 177A(1) of the ITAA 1936. By way of or in the nature of dividend stripping (subparagraph 177E(1)(a)(i) of the ITAA 1936 The first limb requires that there be a scheme by way of or in the nature of dividend under which property of the company is disposed of. The two franked distributions proposed to be made by the Company would constitute a disposal of property for the purposes of section 177E of the ITAA 1936. The term 'dividend stripping' is not defined in the legislation. The Courts have identified a number of common characteristics that equate to a traditional dividend strip. These common characteristics were surmised in the Full Federal Court in FC of T v Consolidated Press Holdings Limited (No 1) [1999] FCA 1199 (CPH Case) and reinforced in Lawrence v FC of T [2009] FCAFC 29 (Lawrence Case) to include: • a target company, which had substantial undistributed profits creating a potential tax liability either for the company or its shareholders; • the sale or allotment of shares in the target company to another party; • the payment of a dividend to the purchaser or allottee of the shares out of the target company's profits; • the purchaser escaping Australian income tax on the dividend; and • the vendor shareholders receiving a capital sum for their share in an amount the same as or very close to the dividends paid to the purchasers. A further common characteristic identified by the Courts was that the scheme was carefully planned with all parties acting in concert for the predominant or sole purpose of the vendor shareholders avoiding tax on a distribution of dividends. This predominant or sole purpose is consistent with the dividend stripping provisions being contained within Part IVA. In Taxation Ruling IT 2627 Income Tax: Application of Part IVA to dividend stripping arrangements (IT 2627), the Commissioner's view on what constitutes dividend stripping is provided. The Commissioner details the typical elements of a traditional dividend strip at paragraph 9 of IT 2627 which is reflective of those identified by the Courts and provided above. However, the Commissioner states at paragraph 10 of IT 2627 that no exhaustive list can be given of what constitutes a dividend strip for the purposes of section 177E of the ITAA 1936 but that a key element is the release of profits of a company to shareholders in a non-taxable form. The proposed scheme is not a scheme by way of or in the nature of dividend stripping. Scheme having substantially the effect of a scheme by way of or in the nature of a dividend strip The second limb requires property of the company to be disposed of under a scheme having substantially the effect of a scheme by way of or in the nature of a dividend strip. The sole or dominant purpose of tax avoidance on the distributions is required under the scheme. As previously stated, the special franked distributions would constitute a disposal of property for the purposes of section 177E of the ITAA 1936. IT 2627 provides at paragraph 13 that for a scheme to fall within the second limb, it requires at a minimum company profits to be effectively distributed to shareholders. The proposed scheme is not a scheme having substantially the effect of a scheme by way of or in the nature of a dividend strip. Conclusion Neither the first or second limb of paragraph 177E(1)(a) of the ITAA 1936 is satisfied. As such, the proposed scheme is not considered to constitute a dividend strip or have the effect of a dividend strip. | Detailed Reasoning - Detailed Reasoning: Subdivision 204-D of the ITAA 1997 aims to prevent the streaming of imputation benefits to one member of a corporate tax entity in preference to another. Subsection 204-30(1) of the ITAA 1997 states: This section empowers the Commissioner to make determinations if an entity streams one or more *distributions (or one or more distributions and the giving of other benefits), whether in a single *franking period or in a number of franking periods, in such a way that: (a) an imputation benefit is, or apart from this section would be, received by a *member of the entity as a result of the distribution or distributions; and (b) the member would *derive a *greater benefit from franking credits than another member of the entity; and (c) 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. 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 . A distribution is defined in subsection 960-120 of the ITAA 1997 as a dividend or something taken to be a dividend under the Act. Where the above is present, the Commissioner can make a determination to either debit the franking account of the entity or that no imputation benefit is to arise in relation to the distribution made to the favoured member under subsection 204-30(3) of the ITAA 1997. An imputation benefit is (relevantly) received as a result of a distribution where a member: • is entitled to a tax offset under Division 207 of the ITAA 1997 (paragraph 204-30(6)(a) of the ITAA 1997); or • includes an amount in assessable income as a result of the distribution by virtue of section 207-35 of the ITAA 1936 (paragraph 204-30(6)(b) of the ITAA 1997); • or the member is not liable to pay withholding tax on the distribution because of paragraph 128B(3ga) of the ITAA 1936 (paragraph 204-30(6)(e) of the ITAA 1997). A favoured member receives a greater benefit from franking credits than another member pursuant to subsection 204-30(8) of the ITAA 1997 where: • the other member is a foreign resident (paragraph 204-30(8)(a) of the ITAA 1997); • the other member is not entitled to a tax offset under Division 207 because of the distribution (paragraph 204-30(8)(b) of the ITAA 1997); • the amount of income tax that, apart from this Division, would be payable by the other member because of the distribution is less than the tax offset to which the other member would be entitled (paragraph 204-30(8)(c) of the ITAA 1997); • is a corporate tax entity but no franking credit arises as a result of the distribution (paragraph 204-30(8)(d) of the ITAA 1997); • is a corporate tax entity that cannot utilise franking credits because it is not a franking entity or is unable to make frankable distributions (paragraph 204-30(8)(e) of the ITAA 1997); or • is an exempting entity (paragraph 204-30(8)(f) of the ITAA 1997). However, subsection 204-30(7) of the ITAA 1997 states the above list should not be considered as exhaustive. The term "streaming" is not defined in the Act. Streaming of distributions is roundly thought of as selectively directing the flow of franked distributions to those members who can most benefit from imputation benefits and is described as such in paragraph [3.28] of Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002. The proposed scheme will see two special fully franked but separate dividends paid The trustees will distribute each of the fully franked dividends to the relevant beneficiaries by exercising their discretion in favour of those beneficiaries only. After receipt of the first trust distribution, the relevant beneficiaries will subscribe for and be issued with (if they so choose) shares in the Company. After the share issue, the second franked dividend will be paid to the Family Trust and the trustees resolving to distribute the amount to the relevant beneficiaries. First special fully franked dividend The payment of the first special fully franked dividend is a distribution for the purposes of the Act. The Family Trust would receive an imputation benefit under paragraph 204-30(6)(b) of the ITAA 1997. The first condition in subsection 204-30(1) of the ITAA 1997 is therefore satisfied. The other shareholders hold either (or a mix of) ordinary, or other classes of shares. As all other shareholders in the Company at the time of the first distribution would be residents for tax purposes, the Family Trust could not be said to have derived a greater benefit from franking credits than the other shareholders of the Company. The second condition in subsection 204-30(1) of the ITAA 1997 is therefore not satisfied. It follows that the first distribution has not been streamed in the requisite manner necessary to warrant application of section 204-30 of the ITAA 1997. Second special fully franked dividend The payment of the second special fully franked dividend is a distribution for the purposes of the Act. The Family Trust would receive an imputation benefit under paragraph 204-30(6)(b) of the ITAA 1997. The first condition in subsection 204-30(1) of the ITAA 1997 is therefore satisfied. It is anticipated that all relevant beneficiaries of the Family Trust will subscribe for shares. The Family Trust could be said to have derived a greater benefit from franking credits when compared to the shareholders of the class of shares to be issued under the proposed scheme on the basis that five (5) of those shareholders are non-residents and unable to utilise franking credits. The second condition in subsection 204-30(1) of the ITAA 1997 is therefore arguably satisfied. It then falls to consider whether those shareholders would receive lesser or no imputation benefits. Ultimately, those shareholders would receive (albeit indirectly) the franked distributions through the Family Trust. The resident shareholders would be entitled to a tax offset while the non-resident shareholders would not be liable to withholding tax on the distribution. As such, paragraph 204-30(1)(c) of the ITAA 1997 is not satisfied. Summary As the requisite conditions have not been satisfied in respect of the first or second special fully franked dividends to be made under the proposed scheme, section 204-30 of the ITAA 1997 does not apply. | Detailed Reasoning - Detailed Reasoning: Section 177EA of the ITAA 1936 is directed at schemes involving franking credit and dividend streaming. Subsection 177EA(3) of the ITAA 1936 states: This section applies if: (a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and (b) either: (i) a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or (ii) a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and (c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and (d) except for this section, the person (the relevant taxpayer ) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and (e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit. A scheme is defined in subsection 177A(1) of the ITAA 1936 as: (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, action, course of action or course of conduct. A scheme for a disposition of membership interests includes a scheme under which membership interests are issued as per paragraph 177EA(14)(a) of the ITAA 1936. There is a disposition of membership interests under the proposed scheme. Under the proposed scheme, there will be dividends which are capable of being franked and will be franked. The Family Trust will then distribute the franked distributions to the relevant beneficiaries. Paragraph 177EA(3)(b) of the ITAA 1936 requires a frankable distribution be paid or is expected to be payable in respect of the membership interests. Under the proposed scheme, there is the expectation frankable distributions will be paid. However, the distributions are to be paid on the share held by the Family Trust and not on the shares the relevant beneficiaries are expected to subscribe to. The dividends are also to be paid to assist the relevant beneficiaries to subscribe for shares if, in their absolute discretion, they so choose. The two special franked dividends are not in respect of those shares. Paragraph 177EA(3)(b) of the ITAA 1936 is not satisfied. Section 177EA of the ITAA 1936 therefore has no application. | Detailed Reasoning - Detailed reasoning: Section 177D of Part IVA of the ITAA 1936 spells out a core test for distinguishing schemes where the dominant purpose of carrying out the scheme is to obtain a tax benefit from those schemes which are merely tax planning. Section 177D of Part IVA of the ITAA 1936 states: This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where: (a) a taxpayer (in this section referred to as the 'relevant taxpayer' has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having 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 other 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 consequence 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) it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for 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). The eight factors listed in section 177D of the ITAA 1997 give an indication as to whether the dominant purpose of the scheme was to enable a tax benefit to be obtained. The application of the eight factors is therefore dependent upon there being a scheme and a tax benefit obtained in connection with that scheme. Scheme A scheme is defined in subsection 177A(1) of the ITAA 1936 as: (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, action, course of action or course of conduct. The proposed transaction constitutes a scheme for the purposes of subsection 177A(1) of the ITAA 1936. Tax benefit Subsection 177C(1) of the ITAA 1936 (relevantly) states: Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (a) an amount not being included in assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or (b) … Determining whether a tax benefit exists is a two-step enquiry. Firstly, a taxpayer must have received a beneficial tax outcome under the scheme. In this case, the most relevant beneficial tax outcome is an amount that would not be included in the assessable income of the relevant shareholders of the Company or the relevant beneficiaries of the Family Trust because of the scheme. Secondly, it must be established that that outcome would not have happened, or it is reasonable to expect that it would not have happened, had the scheme not been entered into or carried out. Is there a beneficial tax outcome under the proposed scheme? The relevant shareholders would not receive a beneficial tax outcome under the proposed scheme. The resident relevant beneficiaries would not receive a beneficial tax outcome under the proposed scheme. The non-resident relevant beneficiaries would receive a beneficial tax outcome under the proposed scheme. Would the beneficial tax outcome have not occurred or reasonably be expected not to have occurred but for the scheme? Section 177CB of the ITAA 1936 provides rules to assist in determining when a tax benefit arises in connection with a scheme. Establishing whether a tax benefit arises under the proposed scheme requires the formulation of an alternative postulate or alternative postulates. The bases of the alternative postulate(s) are: • what would have occurred if the scheme had not been entered into or carried out (referred to as the "annihilation approach" and found in subsection 177CB(2) of the ITAA 1936; and • what might reasonably have been expected to have occurred if the scheme had not been carried out (referred to as the "reconstruction approach" and found in subsection 177CB(3) of the ITAA 1936. Annihilation approach Under the annihilation approach, the scheme is assumed to not have happened and the alternative postulate must comprise only the events or circumstances that actually happened or existed. If the scheme is assumed not to have happened, there would be no transaction that could give rise to the existence of a tax benefit. Reconstruction approach Under the reconstruction approach, the alternative postulate must be a reasonable alternative to the scheme. Subsection 177CB(4) of the ITAA 1935 requires the formulation of a reasonable alternative must have regard to the substance (that is, the commercial and economic substance) of the scheme and its results and consequences for the taxpayers, but disregards potential tax results and consequences. The proposed scheme is an equitable succession plan under which all relevant beneficiaries are provided with the opportunity to subscribe for shares in the Company and the discretion to so choose to subscribe. There is no reasonable alternative that would replicate the outcomes of the proposed transaction. Conclusion No tax benefit can be identified under the proposed scheme and therefore Part IVA has no application.