Private ruling: Income tax - payments between entities and assessable income
Date of advice: 2 July 2020
Published: August 2020
Ruling period: Income year ended 30 June 2020 | Income year ended 30 June 2021 | Income year ended 30 June 2022 | Income year ended 30 June 2023 | Income year ended 30 June 2024 | Income year ended 30 June 2025
Date scheme commenced: During the income year ended 30 June 2020

Ruling: Q1: Will the payment or payments made by the Company to the Fund under the scheme be ordinary income to be included in the assessable income of the Applicant under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the payment or payments made by the Company to the Fund under the scheme be deemed to be statutory income to be included in the assessable income of the Applicant under subsection 6-10(4) of the ITAA 1997? | A2: Not applicable due to the answer to Question 1. | Q3: Will the payment or payments made by the Company to the Fund under the scheme give rise to a dividend to be included in the assessable income of the Applicant under section 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: Not applicable due to the answer to Question 1. | Q4: Will the payment or payments made by the Company to the Fund under the scheme be treated as a dividend to be included in the assessable income of the Applicant under section 109C of the ITAA 1936? | A4: Not applicable due to the answer to Question 1. | Q5: Will the payment or payments made by the Company to the Fund under the scheme cause any of the CGT events described in Division 104 of the ITAA 1997 to happen in relation to shares held by the Applicant in the Company? | A5: Not applicable due to the answer to Question 1. | Q6: Will the payment or payments made by the Company to the Fund under the scheme cause a direct value shift or shifts for the purposes of Division 725 of the ITAA 1997 which gives rise to a taxing event as described in section 725-245 in respect of the Applicant's shares in the Company? | A6: No | Q7: Will the payment or payments made by the Company to the Fund under the scheme be a direct value shift or shifts for the purposes of Division 725 of the ITAA 1997 which gives rise to a decrease in the adjustable value of the Applicant's shares in the Company as described in section 725-250? | A7: No | Q8: Will the payment or payments made by the Company to the Fund under the scheme be an indirect value shift or shifts for the purposes of Division 727 of the ITAA 1997 which gives rise to an adjustment of the CGT cost base described in section 725-245 in respect of the Applicant's shares in the Company? | A8: No. Due to the answer to Question 1, Division 727 of the ITAA will have no application. | Q9: Will the payment or payments made by the Company to the Fund under the scheme be determined to be a scheme by way of or in the nature of dividend stripping or a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping to which section 177E of the ITAA 1936 applies and gives rise to a notional amount as described in paragraph 177E(1)(c) to be included in the Applicant's assessable income in any income year? | A9: The Commissioner will decline to rule on this question. | Q10: Will the payment or payments made by the Company to the Fund be determined as a scheme giving rise to a tax benefit to the Applicant to which the Commissioner will apply the general anti-avoidance provision contained in Part IVA of the ITAA 1936? | A10: The Commissioner will decline to rule on this question.

Relevant facts and circumstances: The Applicant is the sole shareholder in the Company which is a private investment company. The Company's directors are the Applicant, and persons associated to the Applicant. The Applicant has advised that there is no present intention for the Company to pay dividends to the Applicant. During the 2019 financial year, the Applicant established the Fund as an unlisted public company limited by guarantee. The Fund's Members and Directors are the Applicant (as the controlling individual), and persons associated with the Applicant, and all those persons are directors of the Company. The Fund was registered as a charity by the Australian Charities and Not-for-profits Commission and was endorsed for charity tax concessions. The Fund is not a deducible gift recipient. The Applicant intends to give all or part of the funds held as retained earnings by the Company to the Fund, which is a newly established private company and a charitable fund. The Fund then proposes to provide gifts and grants to charitable organisations who may or may not be deductible gift recipients, and to make investments in accordance with the Fund's charter. The Company has retained earnings which have been largely derived from dividends paid by an overseas company. These dividends were non-assessable non-exempt (NANE) income pursuant to section 768-10 of the ITAA 1997. It is intended that the Company will gift all or part of the retained earnings of the Company to the Fund. The amounts that are to be paid to the Fund in any one income year will depend on the activities that have been identified for the Fund and there is no specific timeframe for the completion of the scheme. The payments to the Fund will be made from the retained earnings of the Company and not from the capital of the Company. No tax deduction will be sought by the Company for the payments. The Applicant has advised that the Fund will not make investments directly or indirectly in associates of the Applicant, or in entities which are controlled by the Applicant. The Applicant has advised that there is no present intention to wind up the Company. The Company will continue to invest funds which it has not gifted to the Fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 subsection 6-5(4) | Income Tax Assessment Act 1997 Division 725 | Income Tax Assessment Act 1997 section 725-145 | Income Tax Assessment Act 1997 subsection 725-145(1) | Income Tax Assessment Act 1997 Division 727 | Income Tax Assessment Act 1997 section 727-100 | Income Tax Assessment Act 1997 paragraph 727-100(a) | Income Tax Assessment Act 1997 paragraph 727-100(b) | Income Tax Assessment Act 1997 paragraph 727-100(c) | Income Tax Assessment Act 1997 paragraph 727-100(d) | Income Tax Assessment Act 1997 section 727-105 | Income Tax Assessment Act 1997 section 727-250 | Income Tax Assessment Act 1997 subsection 727-250(1) | Income Tax Assessment Act 1997 subsection 727-250(2) | Income Tax Assessment Act 1997 Subdivision 727-C | Income Tax Assessment Act 1997 section 727-350 | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177E | Income Tax Assessment Act 1936 section 318

Reasons for decision: Summary: The payments made by the Company to the Fund under the scheme will be assessable income to the Applicant in accordance with subsection 6-5(1) and (4) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the ITAA 1997 provides that if you are an Australian resident, your assessable income includes the ordinary income you derive directly or indirectly from all sources, whether in or out of Australia during an income year. Ordinary income is defined by subsection 6-5(1) of the ITAA 1997 as income according to ordinary concepts. Whether an amount is income under ordinary concepts depends on the ordinary concepts and usages of mankind. As a general proposition, a gain derived from property has the character of income, including a gain to an owner who has waited passively for that return. The question then becomes whether, the gain in question has been severed from and is a product of, the property in question. In determining whether a payment has the character of income, it must be characterised in the hands of the recipient. Payments made by the Company under the scheme will not be made to the Applicant. However, subsection 6-5(4) of the ITAA 1997 provides that, in working out whether the Applicant has derived an amount of ordinary income, the Applicant is taken to have received an amount which is applied or dealt with in any way on the Applicant's behalf or as the Applicant directs. In the present case, it is considered that amounts paid by the Company will be dealt with on the Applicant's behalf or as the Applicant directs. In this regard: · The various rights constituted by the Applicant's shares include a claim over the net assets of the Company, including an undivided share of profits · These profits will be divided or allocated when payments are made by the Company · These payments represent an effectuation of the Applicant's private purposes, as opposed to the exercise of any function of the Company recognised under company law · In particular, the payments: o are not authorised by the Company's constitution o cannot reasonably be regarded as being in the Company's best interests, and o can only be made because there is no-one else entitled to complain, once the Applicant's consent or acquiescence has been obtained · The Applicant's rights to the profits of the Company represented by the payments are therefore exercised, rather than violated, each time a payment is made. Since the payments are made on the Applicant's behalf or as the Applicant directs, subsection 6-5(4) deems the Applicant to have received them. On this assumption, the amounts would constitute ordinary income of the Applicant, comprising gains derived and severed from the Applicant's shares, which remain intact. It does not matter that the Applicant does not in fact receive these amounts because subsection 6-5(4) is premised on a taxpayer having income which they do not receive. | Detailed Reasoning - Question 2: As detailed in Question 1, the payments made by the Company to the Fund under the scheme will be assessable income according to ordinary concepts to the Applicant pursuant to subsection 6-5(4) of the ITAA 1997. Therefore, a response to this Question is not required. | Detailed Reasoning - Question 3: As detailed in Question 1, the payments made by the Company to the Fund under the scheme will be assessable income according to ordinary concepts to the Applicant pursuant to subsection 6-5(4) of the ITAA 1997. Therefore, a response to this Question is not required. | Detailed Reasoning - Question 4: As detailed in Question 1, the payments made by the Company to the Fund under the scheme will be assessable income according to ordinary concepts to the Applicant pursuant to subsection 6-5(4) of the ITAA 1997. Therefore, a response to this Question is not required. | Detailed Reasoning - Question 5: As detailed in Question 1, the payments made by the Company to the Fund under the scheme will be assessable income according to ordinary concepts to the Applicant pursuant to subsection 6-5(4) of the ITAA 1997. Therefore, a response to this Question is not required. | Summary: The payments made by the Company to the Fund under the scheme will not cause a direct value shift in respect of the Applicant's shares in the Company for the purposes of Division 725 of the ITAA 1997. Accordingly, there will not be any down interest or up interest consequences for the Applicant's shares in the Company pursuant to Subdivision 725-D of the ITAA 1997 by virtue of the direct value shifting provisions contained in Division 725. | Detailed Reasoning - Detailed reasoning: Division 725 of the ITAA 1997 may apply where there is a direct value shift under a scheme involving equity interests in an entity. Under section 725-145 there is a direct value shift where, under a scheme there is an increase in the value of the equity or loan interests - or the interests are issued at a discount - and a decrease in the value of other interests in the target entity. Subsection 725-145(1) states that direct value shift under a scheme involving equity or loan interests in an entity (the target entity) if: (a) there is a decrease in the market value of one or more equity or loan interests in the target entity; and (b) the decrease is reasonably attributable to one or more things done under the scheme, and occurs at or after the time when that thing, or the first of those things, is done; and (c) either or both of subsections (2) and (3) are satisfied. Examples of something done under a scheme are issuing new shares at a discount, buying back shares or changing the voting rights attached to shares. In the circumstances of this case, the interests in the Company (i.e. the shares) are held solely by the Applicant. The Company has only one shareholder and these shares are all of the same class. There will be no change of voting rights and the scheme does not involve the issue of any new shares. As such, there can be no decrease in the market value of certain shares and increase in the market value of other shares. All of the Company's shares held by the Applicant are equally affected. Accordingly, the direct value shifting provisions contained in Division 725 of the ITAA 1997 have no application in respect of the payments made under the scheme. | Summary: The indirect value shifting provisions under Division 727 of the ITAA 1997 will have no application in this case as an exclusion applies pursuant to subsection 727-250(2). | Detailed Reasoning - Detailed reasoning: Generally, a value shift occurs in situations where, in doing something, the value of one thing increases and the value of another thing decreases. The general value shifting regime mainly affects interests in companies and trusts that meet control or common ownership tests. Entities dealing at arm's length or on market value terms are not subject to the value shifting rules. The indirect value shifting rules in Division 727 of the ITAA 1997 do not apply unless the entities between which the value is shifted (the losing entity and the gaining entity) satisfy an ultimate controller test (section 727-105) and/or a common ownership nexus test (section 727-110). The indirect value shifting provisions under Division 727 of the ITAA 1997 operate to prevent an inappropriate loss or gain from arising on realisation of an interest. The Division may result in the reduction of realised losses or gains, or adjustment to the interest's value for income tax purposes taking into account the indirect value shift. An indirect value shift will have consequences under section 727-100 of the ITAA 1997 when: (a) the losing entity is at the time of the indirect value shift a company or trust (except one listed in section 727-125 (about superannuation entities)); and (b) in relation to either or both of the following: (i) the losing entity providing one or more economic benefits to the gaining entity in connection with the scheme from which the indirect value shift results; (ii) the gaining entity providing one or more economic benefits to the losing entity in connection with the scheme; the 2 entities are not dealing with each other at arm ' s length; and (c) either or both of sections 727-105 and 727-110 are satisfied; and (d) no exclusion in Subdivision 727-C applies. Application to your circumstances Each of the requirements in section 727-100 of the ITAA 1997 must be satisfied if there are to be consequences for an indirect value shift under Division 727. Relevantly, in this case: (a) the requirement that the entity be a company is satisfied; (b) the losing entity is the Company and the gaining entity the Applicant - but the dealing must not be at arm's length (this requirement will be satisfied); (c) there must be the same 'ultimate controller' of both entities at some time during the IVS period (as set out in section 727-150) or the two entities must have a 'common-ownership nexus'; and (d) if there is a relevant exclusion in Subdivision 727-C. Arm's length dealing In this case, the Company and the Applicant are not dealing at arm's length as the Applicant is the guiding mind of the Company. Therefore, the payments from the Company to the Fund under the terms of the scheme will not be at arm's length. Accordingly, paragraph 727-100(b) of the ITAA 1997 will be satisfied. Ultimate controller test Section 727-105 of the ITAA 1997 requires that the Company and the Applicant must at some time in the IVS period have the same ultimate controller. Section 727-350 of the ITAA 1997 defines an ultimate controller as: An entity is an ultimate controller of another entity if, and only if: (a) the first entity controls (for value shifting purposes) the other entity; and (b) there is no entity that controls (for value shifting purposes) both the first entity and the other entity. In this case, the Applicant is the sole shareholder and is therefore the ultimate controller of the Company and paragraph 727-100(c) of the ITAA 1997 will be satisfied. Exclusions Section 727-250 of the ITAA 1997 contains anti-overlap provisions for a distribution by an entity to a member or beneficiary. Subsection 727-250(1) states that: an indirect value shift does not have consequences under this Division if: (a) the greater benefits consist entirely of: (i) a distribution of income or capital that the * losing entity makes to the * gaining entity; or (ii) a right to a distribution of income or capital that the losing entity is to make to the gaining entity; because the gaining entity holds * primary equity interests in the losing entity; and (b) either: (i) an amount covered by one or more of subsections (2), (3) and (4); or (ii) the total of 2 or more such amounts; equals or exceeds the amount of the distribution. Subsection 727-250(2) of the ITAA 1997 further explains that: this subsection covers an amount that the assessable income or exempt income of the gaining entity for any income year includes because of the distribution or right. Conclusion As the payments made by the Company to the Fund under the scheme will be assessable income according to ordinary concepts to the Applicant pursuant to subsection 6-5(4) of the ITAA 1997 (as detailed in Question 1), the Applicant will be the gaining entity by means of a distribution. Subsection 727-250(2) of the ITAA 1997 excludes an amount that the assessable income or exempt income of the gaining entity for any income year includes because of the distribution or right. Therefore, paragraph 727-100(d) of the ITAA 1997 will not be satisfied because of the exclusion in Subdivision 727-C of the ITAA 1997; see subsection 727-250(2) of the ITAA 1997. Accordingly, the indirect value shifting provisions in Division 727 will not apply to the scheme. | Summary: The Commissioner considers that the correctness of your ruling in relation to section 177E of the ITAA 1936 would depend on making assumptions about future events in circumstances where such assumptions would be speculative and unreliable. Therefore, the Commissioner is not prepared to make a ruling in relation to section 177E of the ITAA 1936 for this case on the basis of future assumptions. | Summary: The Commissioner considers that the correctness of your ruling in relation to Part IVA of the ITAA 1936 would depend on making assumptions about future events in circumstances where such assumptions would be speculative and unreliable. Therefore, the Commissioner is not prepared to make a ruling in relation to Part IVA of the ITAA 1936 for this case on the basis of future assumptions.