Private ruling: application of Part IVA to a trust distribution
Published: May 2015
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20YY
Date scheme commenced: 1 July 20ZZ

Ruling: Q1: Will the provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the proposed arrangement? | A1: No.

Relevant facts and circumstances: 1. You are the beneficiaries of a trust. 2. The trust was established by your remote relative. 3. Your parent was entitled to the net income of the trust during their life. 4. Your parent passed away, you then became entitled to a portion of the capital and income of the trust. 5. The capital of the Trust is Y shares in the Company. 6. The only income of the trust is and has been dividends from the shareholding in the Company. 7. The Company holds as assets an investment portfolio of listed shares. 8. You do not want to keep your interest in the Trust. You want to be paid the value of the capital and trust income in cash. The trust 9. Your interest in the trust arose upon you reaching a specified age. 10. Your interests were subject to the interest of your parent until their death. 11. The trustee proposes to wind up of the Trust. The Company 12. The shares in the Company are pre-CGT and the cost base of each of the shares owned by the Trust are $X. 13. The Company has sold one third of its investment portfolio. 14. The Company will pay CGT on the sale of 1/3 investment portfolio from funds in escrow. 15. In the 20XX income years the company will pay to the trust: (a) a fully franked divided of approximately $X; (b) an unfranked dividend of approximately $X; and (c) make a loan of approximately $X to the trust. 16. In the 20XX income year the trust will make the following taxable distributions in total to you both: (a) a fully franked divided of approximately $X, and (b) an unfranked dividend of approximately $X. 17. In the 20YY income year the company will pay the trust a further: (a) a fully franked divided of approximately $X; and (b) an unfranked dividend of approximately $X. 18. The trust will repay the loan to the company from the proceeds of the dividends paid in the 20YY income year before the company lodges its 20YY income tax return. 19. In the 20XX income year the trust will make the following taxable distributions in total to you both: (c) a fully franked divided of approximately $X, and (d) an unfranked dividend of approximately $X. 20. On or after 1 July 20XX, the Company will cancel the shares that the Trust holds. 21. As the shares will have no value other than their subscription price at this time, the capital proceeds received by the Trust will be $X, and this amount will be distributed to you as a capital sum. 22. Immediately after this time, the Trustee will wind up the Trust.

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

Reasons for decision: Summary: The provisions of Part IVA of the ITAA 1936 will not apply to the proposed arrangement. | Detailed Reasoning - Detailed reasoning: 1. You do not have an absolute entitlement to the trust property 2. You will not make a capital gain upon CGT event C2 happening to your interest in the Trust at the time it is wound up. 3. 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. 4. 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 will constitute a 'scheme'. 5. Under section 177C of the ITAA 1936 a tax benefit received in relation to a scheme will include an amount not being included in assessable income where that amount would have been included, or might reasonably be expected to have been included if the scheme had not been entered into. 6. Having regard to all the circumstances around the proposed arrangement, it is considered that the dominant purpose of the arrangement was for the taxpayers to receive the full value of their entitlement in the investments of the company, in accordance with their remote relative's wishes. It is not considered that any of the scheme participants have entered into, or carried out the scheme for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. 7. Accordingly, Part IVA of the ITAA 1936 will not apply.