Private ruling: Corporate restructure
Published: June 2012
Ruling period: The scheme commences on:

Ruling: Q1: Will Loan carry a right to a variable or fixed return from a company for the purpose of applying paragraph 974-80(1)(a) of the Income Tax Assessment Act1997 (ITAA 1997)? | A1: No. | Q2: If Loan does carry a right to a variable or fixed return from a company, will Loan constitute an equity interest in the company for the purposes of paragraph 974-80(1)(c) of the ITAA 1997? | A2: Not applicable. | Q3: (a) Will Loan be a constituent scheme of a related scheme or schemes for the purposes of subsections 974-15(2) and 974-70(2) of the ITAA 1997? (b) If Loan is a constituent part of a related scheme, will the resulting single notional scheme or schemes be a debt interest for the purpose of applying paragraph 974-80(1)(c) of the ITAA 1997? | A3: (a) No. (b) Not applicable. | Q4: If Loan carries a right to a variable or fixed return from a company and no interest is payable by the issuer in any year of income, is there a scheme, or a series of schemes, designed to operate to fund a return to an ultimate recipient for the purposes of paragraph 974-80(1)(d) of the ITAA 1997? | A4: Not applicable. | Q5: If Loan is a debt interest for income tax purposes, will the repayment of principal made in respect of Loan, where it reduces the amount of the loan owing by an amount equal to the amount repaid, be assessable income of G Trust under section 6-5 or section 6-10 of the ITAA 1997 (and correspondingly not deductible to K Co under section 8-1 and section 8-5 of the ITAA 1997)? | A5: No. The Commissioner agrees that the repayment of principal amount of Loan will not constitute assessable income of G Trust under section 6-5 or section 6-10 of the ITAA 1997 (nor an allowable deduction for K Co under section 8-1 or section 8-5 of the ITAA 1997). | Q6: If the CGT cost base of a unitholder's units in G Trust is equal to the amount subscribed on those units, will a return of the subscribed capital on those units (without a redemption of those units) where the return: a) does not exceed the subscribed amount, has no income tax consequences other than to reduce the CGT cost base of those units pursuant to section 104-70 (CGT event E4)? b) exceeds the subscribed amount, is prima facie a capital gain to the unitholder pursuant to section 104-70 (CGT event E4) to the extent of the excess? | A6: Yes, the Commissioner agrees that a return of subscribed capital on the units without a corresponding redemption of those units will have no income tax consequences for J Co (which holds the units on capital account), other than to reduce the cost base or reduced cost base of the units. The Commissioner also agrees that where the return of subscribed capital on the units exceeds the cost base of the units, J Co will prima facie make a capital gain to the extent of the excess (subject to any rules that allow some or all of the gain to be discounted and/or disregarded). | Q7: If the CGT cost base of a unitholder's units in G Trust is equal to the amount subscribed on those units, will a redemption of the units for an amount equal to the amount originally subscribed give rise to a capital gain or a capital loss to the unitholder under section 104-25 of the ITAA 1997 (CGT event C2)? | A7: Subject to any costs that, if present, form part of the cost base or reduced cost base of the units redeemed (for example, brokerage fees), J Co will not make a capital gain nor a capital loss upon redemption of the units for an amount that equals the amount originally subscribed on the units (the second amount being the cost base or reduced cost base of the units). | Q8: If Loan constitutes a non-share equity interest in accordance with section 974-80 of the ITAA 1997, will the Commissioner make a determination pursuant to subsection 45B(3) of the Income Tax Assessment Act 1936 ( ITAA 1936) that section 45C of the ITAA 1936 applies to some or all of the non-share capital return (capital benefit) being the repayment of principal on Loan to effect the proposed redemption of units in the trust. | A8: Not applicable as the Commissioner does not consider Loan to constitute a non-share equity interest.

Relevant facts and circumstances: K Co is a resident company which is the head company of the K Co income tax consolidated group which contains a number of subsidiary members. All of the shares in K Co are held by a non-resident company, J Co. G Trust is a resident unit trust. All of the units in G Trust are held on capital account by J Co. The Trust is therefore not a Public Unit Trust, a Corporate Unit Trust nor a Public Trading Trust for Australian income tax purposes. The G Trust is not a member of the K Co consolidated group The units in G Trust and the shares in K Co are not stapled. The only assets of G Trust are the Loan and another loan made to K Co. G Trust obtained the funds to make the Loan and the other loan from subscription moneys paid for the units. K Co used the funds from the Loan and the other loan to refinance existing debt and to acquire certain assets. The Taxation of Financial Arrangement (ToFA) rules in Division 230 of the ITAA 1997 apply to both K Co and G Trust for any financial arrangements that the company and the trust starts to hold on or after the ToFA rules commenced. The default tax timing methods apply to any financial arrangements that commenced on or after the ToFA rules commenced. The ToFA rules do not apply to either K Co or G Trust for the Loan. The Loan has a Maturity Date which is 10 years from the date the Loan was issued or another date agreed by the Trustee of G Trust and K Co. K Co must repay any outstanding principal on the Maturity Date. The terms of the Loan do not include interest, other charges or fees. K Co or any member of its consolidated group is not required to pay any fees or charges in connection with the Loan, nor are there any relevant collateral agreements. The Loan is subordinated to senior debt. A repayment of principal on the Loan may be made in certain specified circumstances such as when K Co is not in default on the senior debt. No repayments of principal on Loan to date have contravened the specified circumstances. G Trust will redeem a number of units at the face value of the units. The funds for the redemption will be sourced from a repayment of principal of the Loan. J Co and its shareholders will use the funds for other investment opportunities. The repayment of principal of the Loan is subject to the specified circumstances of the Loan's subordination to senior debt. The other loan is relevant only insofar as it relates to Question 3. Relevantly, the other loan is also between G Trust as lender and K Co as borrower. The terms of the other loan are similar to that of the Loan except the other loan includes terms which allow interest to be levied.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 8-5 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 104-70 | Income Tax Assessment Act 1997 Subsection 974-15(2) | Income Tax Assessment Act 1997 Subsection 974-35(1) | Income Tax Assessment Act 1997 Subsection 974-70(2) | Income Tax Assessment Act 1997 Paragraph 974-80(1)(a) | Income Tax Assessment Act 1997 Paragraph 974-80(1)(c) | Income Tax Assessment Act 1997 Paragraph 974-80(1)(d) | Income Tax Assessment Act 1997 Subsection 974-80(2) | Income Tax Assessment Act 1997 Section 974-135 | Income Tax Assessment Act 1997 Section 974-155 | Income Tax Assessment Act 1936 Section 45B | Income Tax Assessment Act 1936 Subsection 45B(2) | Income Tax Assessment Act 1936 Subsection 45B(3) | Income Tax Assessment Act 1936 Subsection 45B(4) | Income Tax Assessment Act 1936 Subsection 45B(5) | Income Tax Assessment Act 1936 Subsection 45B(7) | Income Tax Assessment Act 1936 Section 45C

Reasons for decision: Detailed Reasoning - Paragraph 974-80(1)(a): Paragraph 974-80(1)(a) requires that: '… an interest carries a right to a variable or fixed return from a company;' | Detailed Reasoning - Loan: The G Trust issued the Loan to K Co. The parties have originally agreed that no return on the investment (that is, 'interest') should apply in respect of the loan facility. Accordingly, there is no clause in the loan agreement which allows for an interest calculation or amount to apply or for interest to be levied or agreed upon. K Co has made no principal repayments on Loan at any time since inception. Similarly, no fees or other payments have been paid by K Co to the G Trust with respect to Loan. The ATO continues to apply section 974-80 in accordance with the principles set out in the withdrawn 2007 Discussion paper on Section 974-80 . The Discussion paper states at paragraphs 38 and 39 that for the purposes of subsection 974-80(1), the term 'return' has the meaning set out in section 995-1 of the ITAA 1997. The relevant meaning for the purposes of subsection 974-80(1) 'does not include a return of an amount invested in the interest.' The terms of the loan agreement do not allow for a return on' Loan. Therefore, Loan does not carry a right to a variable or fixed return from K Co (a company). | Detailed Reasoning - Conclusion for Loan: As there is no right to a variable or fixed return on Loan, paragraph 974-80(1)(a) of the ITAA 1997 does not apply to this loan. As paragraph 974-80(1)(a) is one of the five, conjunctive requirements which must each be satisfied in order for subsection 974-80(1) and in turn section 974-80 to apply (if one of the elements of subsection 974-80(2) is also satisfied), it therefore follows that section 974-80 does not apply to Loan. | Detailed Reasoning - Question 2: If Loan does carry a right to a variable or fixed return from a company, will Loan constitute an equity interest in the company for the purposes of paragraph 974-80(1)(c) of the ITAA 1997? | Detailed Reasoning - Detailed reasoning: Paragraph 974-80(1)(c) states that: 'apart from this section, the interest would not be an *equity interest in the company;'. Loan does not satisfy any of the items 1-4 of the table in subsection 974-75(1) and therefore will not constitute an equity interest. As stated above, Loan does not possess a 'right to a variable or fixed return' for the purposes of paragraph 974-80(1)(a) and therefore all of the five conjunctive requirements which must each be satisfied in order for subsection 974-80(1) and in turn section 974-80 to apply are not satisfied (if one of the elements of subsection 974-80(2) is also satisfied). Therefore section 974-80 does not apply to Loan. Nevertheless, the paragraph 974-80(1)(c) requirement that Loan does not constitute an equity interest, would in the absence of the operation of section 974-80, be satisfied. | Detailed Reasoning - Question 3: (a) Will Loan be a constituent scheme of a related scheme or schemes for the purposes of subsections 974-15(2) and 974-70(2) of the ITAA 1997? (b) If Loan is a constituent part of a related scheme, will the resulting single notional scheme or schemes be a debt interest for the purpose of applying paragraph 974-80(1)(c) of the ITAA 1997? | Detailed Reasoning - Detailed reasoning: Subsections 974-15(2) and 974-70(2) of the ITAA 1997 respectively require consideration of whether two or more schemes which are related in any way (described as the constituent schemes), may give rise to a debt or equity interest where the economic effect of the combined schemes is equivalent to either a debt interest or an equity interest. As Loan will satisfy the definition of a scheme in section 995-1 of the ITAA 1997, it is therefore necessary to determine whether Loan is related to the other loan or the units in G Trust in accordance with the requirements outlined below in section 974-155 of the ITAA 1997: (1) Subject to subsection (3), 2 *schemes are related to one another if they are related to one another in any way. (2) Without limiting subsection (1), 2 *schemes are related to each other if: (a) the schemes are based on stapled instruments; or (b) one of the schemes would, from a commercial point of view, be unlikely to be entered into unless the other scheme was entered into; or (c) one of the schemes depends for its effect on the operation of the other scheme; or (d) one scheme complements or supplements the other; or (e) there is another scheme to which both the schemes are related because of a previous application or applications of this subsection. (3) Two *schemes are not related to one another merely because: (a) one refers to the other; or (b) they have a common party. | Detailed Reasoning - Whether Loan is related to the other loan in any way: Loan was initially obtained by K Co to meet its particular funding requirements. Each of Loan and the other loan was sourced from G Trust which is a related entity within the K Co. Group. Notwithstanding each of Loan and other loan is between the same parties, the Commissioner cannot objectively conclude from the overall facts that Loan is related to the other loan in line with the 'definition' of the term 'related schemes' in section 974-155 of the ITAA 1997. Loan was made to K Co for a specific funding purpose which is not related to the other loan in any way as Loan and the other loan: · Are not based on stapled instruments; · Commercially would have still been made even if the other loan was not made, · Was not dependant or reliant upon the other loan being entered into, · Does not complement or supplement any of the other loan; · Is not related to a third 'scheme' which is also related to the other loan because of one or more applications of subsection 974-155(2). The Commissioner considers that in the circumstances of the arrangement set out above in the Relevant facts and circumstances , Loan and the other loan are not merely related because G Trust and K Co are each a common party to each of Loan and the other loan. Loan does not refer to the other loan and similarly the other loan does not refer to Loan. As Loan is not related to the other loan in any way for the purposes of section 974-155,,it is not necessary to consider the application of subsection 974-15(2) of the ITAA 1997. | Detailed Reasoning - Whether Loan is related to some or all of the units in G Trust: For the same reasons as set out for Loan and the other loan, the Commissioner does not consider that the separate schemes of (each relevant) issue of units in G Trust and Loan constitutes part of a larger interest of which Loan is a constituent interest (together with the relevant units) which is something other than a debt interest. | Detailed Reasoning - Question 4: If Loan carries a right to a variable or fixed return from a company and no interest is payable by the issuer in any year of income, is there a scheme, or a series of schemes, designed to operate to fund a return to an ultimate recipient for the purposes of paragraph 974-80(1)(d) of the ITAA 1997? | Detailed Reasoning - Detailed reasoning: As Loan does not carry a right to a variable or fixed return from K Co, it cannot be said that there is a scheme or a series of schemes that are designed to operate to provide a return to G Trust (arising from the right) that is to be used by the Trust to fund a return to one or more ultimate beneficiaries for the purposes of paragraph 974-80(1)(d). | Detailed Reasoning - Question 5: If Loan is a debt interest for income tax purposes, will the repayment of principal made in respect of Loan, where it reduces the amount of the loan owing by an amount equal to the amount repaid, be assessable income of G Trust under section 6-5 or section 6-10 of the ITAA 1997 (and correspondingly not deductible to K Co under section 8-1 and section 8-5 of the ITAA 1997)? | Detailed Reasoning - Detailed reasoning: The ToFA rules do not apply to G Trust (nor to K Co) for Loan as the loan was made before the ToFA rules commenced and no relevant election has been made. As set out in the Explanation above for Question 2 , Loan does not constitute an equity interest. Further, as set out in the Explanation above for Question 1 and the responses in respect of the various aspects of section 974-80 above, Loan is not taken to be an equity interest by operation of section 974-80. Therefore, Loan 1 cannot constitute a non-share equity interest. A repayment of principal on Loan will not constitute assessable income of G Trust for the purposes of section 6-5 or section 6-10 irrespective of whether Loan is a debt interest or neither a debt nor equity interest. In either case in the circumstances of G Trust, the receipt of repayment of principal is not income according to ordinary concepts ('ordinary income') or otherwise taken to be assessable income by operation of another provision of Australian income tax legislation ('statutory income'). Similarly, in either case in the circumstances of K Co, the repayment of principal will not constitute an allowable deduction for an expense incurred in gaining or producing K Co.'s assessable income as the repayment is capital or capital in nature pursuant to section 8-1 ('general deduction') and is otherwise not subject to another provision of Australian income tax legislation which would allow the deduction ('specific deduction'). Where not characterised as a debt interest pursuant to Division 974, one might nevertheless consider Loan as 'debt' according to ordinary principles in that it is required to be repaid in full. The repayment of the 'debt' will not constitute assessable income when received by G Trust nor an allowable deduction when made by K Co. | Detailed Reasoning - Question 6: If the CGT cost base of a unitholder's units in G Trust is equal to the amount subscribed on those units, will a return of the subscribed capital on those units (without a redemption of those units) where the return: a) does not exceed the subscribed amount, has no income tax consequences other than to reduce the CGT cost base of those units pursuant to section 104-70 (CGT event E4)? b) exceeds the subscribed amount, is prima facie a capital gain to the unitholder pursuant to section 104-70 (CGT event E4) to the extent of the excess? | Detailed Reasoning - Detailed reasoning: In accordance with subsection 104-70(1) of the ITAA 1997, CGT event E4 happens for a unit holder when the trustee makes a payment in respect of the unit and some or all of the payment (the non-assessable part) is not included in the unitholder's assessable income. Subsection 104-70(1) provides that CGT event E4 happens if: (a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the Trust (except for *CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and (b) some or all of the payment (the non-assessable part ) is not included in your assessable income. G Trust is an Australian unit trust of which all the units are wholly owned by J Co. | Detailed Reasoning - (a) Where a return of subscribed capital on the units does not exceed the subscribed amount: A return of subscribed capital on units held in G Trust by J Co (without a corresponding redemption of the units) will have no income tax consequences for J Co other than to reduce the cost base or reduced cost base of the units pursuant to CGT event E4. This is based on: · J Co holding the units on capital account; · The cost base of the units being equal to the amount subscribed for the units; · The amount returned not exceeding the subscribed amount.; and · The source of funds for the payment will be the repayment of the principal of Loan. | Detailed Reasoning - (b) Where a return of subscribed capital on the units exceeds the subscribed amount: A capital gain will arise pursuant to CGT event E4 where the amount of subscribed capital returned on the units held by J Co is greater than the cost base of the units. The amount of the capital gain is usually the excess but may be reduced by certain undeducted costs such as brokerage fees. This is based on: · J Co holding the units on capital account; · The cost base of the units being equal to the amount subscribed for the units; · The amount returned exceeding the subscribed amount; and · The source of funds for the payment will be the repayment of the principal of Loan. Any gain may be reduced by available capital losses and/or the CGT discount if J Co meets certain criteria. Further, J Co may be entitled to disregard any capital gains or capital losses if J Co meets certain criteria. | Detailed Reasoning - Question 7: If the CGT cost base of a unitholder's units in G Trust is equal to the amount subscribed on those units, will a redemption of the units for an amount equal to the amount originally subscribed give rise to a capital gain or a capital loss to the unitholder under section 104-25 of the ITAA 1997 (CGT event C2)? | Detailed Reasoning - Detailed reasoning: A redemption of units held by J Co in G Trust will give rise to a CGT event C2 set out in section 104-25 of the ITAA 1997. Subsection 104-25(1) states that CGT event C2 happens if: … your ownership of an intangible *CGT asset ends by the asset: (a) being redeemed or cancelled; or … Pursuant to subsection 104-25(1) of the ITAA 1997, if G Trust redeems units held by J Co for an amount equal to the cost base of the units, J Co will not make a capital gain and will not make a capital loss. This is based on: · J Co holding the units on capital account; · The cost base of the units being equal to the amount subscribed for the units; · The redemption price of the units equals the amount subscribed for the units; and · The source of funds for the redemption price will be the repayment of the principal of the Loan. | Detailed Reasoning - Question 8: If Loan constitutes a non-share equity interest in accordance with section 974-80 of the ITAA 1997, will the Commissioner make a determination pursuant to subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to some or all of the non-share capital return (capital benefit) being the repayment of principal on Loan to effect the proposed redemption of units in G Trust. | Detailed Reasoning - Detailed reasoning: Loan is not a share and G Trust is not a member of K Co. In addition, as set out in the Explanation for Questions 1 and 2 above , Loan does not constitute an equity interest nor is Loan taken to be an equity interest by operation of section 974-80. Therefore, Loan does not constitute a non-share equity interest as the term is defined in section 995-1 (which in turn refers to the definition of an 'equity interest' in a company). The purpose of section 45B, contained in Subdivision D of Division 2 of Part III of the ITAA 1936 is to ensure that relevant amounts distributed to shareholders of a company are treated as dividends for tax purposes if certain payments, allocations and distributions are made in substitution for dividends. Section 45B applies if each of the following, conjunctive conditions set out in subsection 45B(2) are met: (a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and (b) under the scheme, a taxpayer (the relevant taxpayer ), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and (c) 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 a taxpayer (the relevant taxpayer ) to obtain a tax benefit. The first requirement set out in paragraph 45B(2)(a) is that there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company. The repayment of principal on Loan will not constitute the provision of a demerger benefit as defined in subsection 45B(4). The repayment of principal on Loan will not constitute the provision of a capital benefit as it is not the distribution of share capital to a person nor is it a non-share capital return that is taken to be the distribution of share capital to a person pursuant to subsections 45B(5) and 45B(7). As there is no provision of a capital benefit to a person for the purposes of subsection 45B(2), section 45B will have no application in respect of the repayment.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.