Private ruling: Part IVA Dividend Stripping
Date of advice: 23 September 2015
Published: September 2015
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 20XX

Ruling: Q1: Do sections 177E and 177F of the Income Tax Assessment Act 1936 (ITAA 1936) apply in relation to the proposal to interpose a new company between current shareholders of XYZ Company Pty Limited and to isolate accumulated wealth that has accrued during the ownership period of the current shareholders in the new company? | A1: No | Q2: Does any provision within Part IVA of the ITAA 1936 apply to the proposed arrangement? | A2: No | Q3: Will the arrangement be considered part of a dividend stripping operation for the purposes of section 207-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: No

Relevant facts and circumstances: XYZ Company Pty Ltd (XYZ) is a Registered Training Organisation (RTO). A RTO is an organisation providing Vocational Education and Training (VET) to students, resulting in qualifications or statements of attainment that are recognised and accepted by industry and other educational institutions throughout Australia. To become registered as a RTO, an organisation must apply to the regulatory body under whose jurisdiction it falls. XYZ falls under the jurisdiction of the Australian Skills Quality Authority (ASQA). The regulatory and accreditation requirements of RTOs under ASQA are complex. A RTOs registration is not transferable. If a RTO sells or otherwise transfers its business to another person or corporation, its registration cannot be transferred to that person or corporation. There are two shares in XYZ, both beneficially owned by Shareholder 1. Shareholder 1 has received an annual dividend from XYZ. The business is for sale and interested buyers have been found. Shareholder 1 has agreed to provide finance to those wishing to purchase the business. XYZ has accumulated profits. Due to the regulatory requirements of RTOs, the sale can only proceed by way of a sale of the company that already holds the RTO accreditation. It is planned to interpose a new company, using Division 615 ITAA 1997 to provide rollover relief, into which the majority of accumulated profits will be transferred prior to the sale. The new company will provide the vendor finance and dispose of its newly acquired shares in XYZ. The vendor finance will be provided on commercial terms. It is planned to pay dividends out of the new company to Shareholder 1 over time.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 177E | Income Tax Assessment Act 1936 Section 177F | Income Tax Assessment Act 1997 Section 207-155

Reasons for decision: Summary: The restructure of the business is due to the restrictions placed on RTOs and the inability to transfer a RTOs registration to another person or corporation. The restructure will involve moving the retained profits of XYZ to another company that will be owned by the same shareholders. XYZ has a history of paying out fully franked dividends over a number of years and the new company intends to pay dividends over time. There is not a scheme to which section 177E and therefore section 177F of the ITAA 1936 applies. | Detailed Reasoning - Does any provision within Part IVA of the ITAA 1936 apply to the proposed arrangement?: Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a tax benefit, or part of 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. In broad terms, Part IVA will apply where the following requirements are satisfied: • there is a scheme (see section 177A); • a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme (see section 177C); and • the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b)). | Summary: The dominant purpose in the proposed restructure of the business is to overcome the commercial limitations placed on RTOs and retain the RTO licensing arrangement with the company. It is determined that Part IVA would not apply to the proposed restructure. | Detailed Reasoning - Question 3: Will the arrangement be considered part of a dividend stripping operation for the purposes of section 207-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? Section 207-155 defines when a distribution is made as part of a dividend stripping operation. A distribution made to a corporate tax entity is taken to be part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, a scheme that: • was by way of, or in the nature of, dividend stripping; or • had substantially the effect of a scheme by way of, or in the nature of, dividend stripping. Dividend stripping is not defined, although the broad definition provided in section 207-155 parallels that contained in section 177E (1). Having regard to the overall scope and purpose of the section, an important element to be looked at will be any release of profits of a company to its shareholders in a non-taxable form, regardless of the different methods that might be used to achieve this result. Sections 207-145 and 207-150 provide that if a distribution is made as a part of a dividend stripping operation, no gross-up amount will be included in assessable income and there will be no entitlement to a tax offset. | Summary: The restructure of the business is due to the restrictions placed on RTOs and the inability to transfer a RTOs registration to another person or corporation. The restructure will involve moving the retained profits of XY to another company that will be owned by the same shareholders. XYZ has a history of paying out fully franked dividends over a number of years and the new company intends to pay dividends over time. The arrangement will not be considered part of a dividend stripping operation for the purposes of section 207-155 ITAA 1997.

Section 177E ITAA 1936 is a specific anti-avoidance provision within Part IVA designed to prevent dividend stripping schemes. The provision applies where: | • as a result of a dividend stripping scheme, any property of the company is disposed of | • the Commissioner is of the opinion that the disposal of the property represents, wholly or in part, a distribution of profits (whether of the current, a past or a future accounting period) of the company, and | • if the profits represented by the disposal of the property had been paid as a dividend immediately before the scheme was entered into, it would be reasonable to expect that this would result in an amount being included in a taxpayer's assessable income. | Where these conditions are satisfied, the scheme is taken to be a scheme to which Part IVA applies. Section 177E applies only to schemes that have the dominant purpose of tax avoidance. Ordinarily, this purpose is to allow the shareholder to receive profits of the company in a substantially, if not entirely, tax-free form. This avoids tax that could be payable if the company's profits were paid as dividends to shareholders. | Subsection 177F(1) gives the Commissioner a discretion to make a determination cancelling a tax benefit that has been obtained, or would but for section 177F be obtained, in connection with a scheme to which Part IVA applies. The discretion can only be exercised where a tax benefit has been obtained by a taxpayer in connection with a scheme to which Part IVA applies. | The essential function of section 177F is to enable the Commissioner to determine precisely what tax adjustments should be made in the assessments of the taxpayers affected by the scheme. | Section 177E will not apply where a company has merely engaged in a corporate reorganisation rather than a scheme with the sole or dominant purpose of avoiding taxation upon any anticipated profit distribution.( Consolidated Press Holdings 2001 ATC 4343).