Private ruling: Whether Part IVA of ITAA 1936 would apply to the in specie distribution undertaken for trust rationalisation

Ruling: Q1: Whether Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) would apply to the proposed transfer of units of Y Unit Trust to the unit holders of X Unit Trust, to be undertaken by virtue of an in specie distribution. | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 subsection 177C(1) | Income Tax Assessment Act 1936 subsection 177D(b) | Income Tax Assessment Act 1936 paragraph 177D(b)

Reasons for decision: Summary: Part IVA of the ITAA 1936 will not apply to the in specie distribution to be undertaken for the purpose of trust rationalisation as described in the facts of this case. | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise the discretion under subsection 177F(1) of the ITAA 1936, three requirements must be met. They are: · a scheme within the meaning of section 177A · a tax benefit that was obtained or would be obtained in connection with the scheme but for Part IVA · having regard to the matters in paragraph 177D(b), the scheme is one to which Part IVA applies. The scheme The definition of scheme in subsection 177A(1) of the ITAA 1936 states: (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; It is considered that this definition is sufficiently wide to cover the present arrangement, which consists of the trustee of the Sub Trust transferring units in the Head Trust to the unit holders of the Sub Trust in proportion to the beneficial interest that each Sub Trust unit holders holds in the Head Trust. This will be done by virtue of the trustee of the Sub Trust and those unit holders of the Sub Trust participating in the distribution in specie executing the Vesting Deed and the Deed of Consent. Tax benefit 'Tax benefit' is defined in subsection 177C(1) of which the relevant paragraph is: 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: (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; In order to determine the tax benefit that would be derived by the entities involved in this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the trustee of the Sub Trust might reasonably have been expected to enter into to achieve its aims in relation to the trust rationalisation. The applicant has provided the following possible counterfactual: ….prior to the distribution in specie, Sub-Trust Unit Holders are taxed on the distributions of income they receive by virtue of their holding of Units in the Sub-Trust. Those Units entitles those Sub-Trust Unit Holders to such a proportion of the income of the Head Trust received by the Sub-Trust Trustee as is determined by their proportionate holding of Units in the Sub-Trust. Accordingly, a Sub-Trust Unit Holder who holds 10% of the issued Units in the Sub-Trust would be entitled to receive 10% of the Head Trust income received by the Sub-Trust Trustee. As a Sub-Trust Unit Holder participating in the distribution in specie, the relevant Sub-Trust Unit Holder would, in effect, be converting his Units in the Sub-Trust to an appropriate number of Units in the Head Trust, carrying with it the same entitlement to receive Head Trust income as the Sub-Trust Unit Holder would have received prior to the distribution in specie. As stated in the facts of the case, the beneficiaries of the Sub Trust are all presently entitled to the income of the Sub Trust, are not under any legal disability and are Australian resident for income tax purposes. Since the Sub Trust unit holders would receive the same level of income by way of distribution from the Head Trust as it would have done if it had remained a Sub Trust unit holder, not participating in the distribution in specie. The scheme is not directed to varying the entitlement of Sub Trust beneficiaries to their rights to income from the Sub Trust via the Head Trust. The distribution in specie aims at achieving that each Sub Trust unit holder preserves the same right to receive distribution of income from the Head Trust after the distribution in specie as it would have received prior to the distribution in specie. For that reason, the Sub Trust unit holders are only to receive such numbers of units in the Head Trust as properly reflect their beneficial interest in the Sub Trust, thereby preserving their rights to both capital and income strictly in accordance with that beneficial interest. | Detailed Reasoning - Paragraph 177D(b) of the ITAA 1936: Paragraph 177D(b) of the ITAA 1936 sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit: (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 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); (i) The manner of the scheme In considering whether Part IVA of the ITAA 1936 applies or not, the necessary comparison to be made in relation to the factors listed in paragraph 177D(b) of the ITAA 1936 is between the scheme as proposed and the relevant counterfactual. In the present circumstances, the unit holders of the Sub Trust hold units at different percentages which they have acquired at different times in exchange of consideration calculated in accordance with the balance sheet values of the units and in accordance with the relevant provisions of the Sub Trust Unit Trust Deed. The primary asset of the Sub Trust is a holding of certain number of units in the Head Trust, to which the Sub Trust unit holders possessed beneficial entitlement in proportion to their beneficial interest in the Sub Trust. With a view to rationalising the two trusts, it is proposed that there be a distribution in specie to each of the unit holders in the Sub Trust of those units in the Head Trust, to which each unit holder in the Sub Trust is beneficially entitled. The distribution in specie will be required to comply with the provisions of the Head Trust Unit Trust Deed, as well as the SDA, amended and varied as stated in the fact of the case. Those provisions include the requirement that each new unit holder of the Head Trust execute a Deed of Covenant agreeing to be bound by the terms and conditions of the SDA. It also requires that each existing unit holder in the Head Trust consent to the transfer of units in the Head Trust to the unit holder in the Sub Trust. The Sub Trust unit holders would also be required to execute the Vesting Deed in addition to the Deed of Consent. The Vesting Deed is between trustee of the Sub Trust as holder of the units in the Head Trust of the one part and the participating unit holders of the other part. The Vesting Deed recites the matter contemplated by the parties and particularly the wish of the relevant unit holders to acquire from the Sub Trust trustee, the units held in the Head Trust by the Sub Trust trustee to which the participating unit holders are beneficially entitled. The individual Sub Trust unit holders will receive their distributions in specie at a time to suit each of them. So there will not be one omnibus distribution in specie to all Sub Trust unit holders at the one time. No consideration will pass from the Sub Trust unit holders to the Sub Trust Trustee at the time of distribution in specie. The units in the Head Trust will be received by each Sub Trust unit holder in satisfaction of the beneficial entitlement of each Sub Trust unit holder to those units. (ii) The Form and Substance The distribution in specie would be effected pursuant to the terms of the documents prepared to evidence the arrangements. The documents are: · A Vesting Deed · A Deed of Covenant · A Deed of Consent The Recitals of the Vesting Deed specify the Sub Trust unit holders' beneficial interest in the Sub Trust, that such unit holders would be entitled to distribution of or appointment in their favour of such percentage of the assets of the Sub Trust as is equal to their beneficial interest, that such unit holders would be entitled to Head Trust's units in proportion to their beneficial interest in case of an in specie distribution and that the trustee has, in pursuance of the relevant provision of the Unit Trust Deed, resolved to appropriate in favour of the Sub Trust unit holders certain number of units in the Head Trust to be distributed by way of in specie distribution. The operative provisions of the Vesting Deed spell out the acknowledgement, agreement and declarations between the parties regarding the Sub Trust trustee exercising its power to transfer and appropriate the Head Trust units in favour of and in accordance with the beneficial entitlement of the Sub Trust unit holders in the Sub Trust assets to be carried out by virtue of in specie distribution. In addition to executing the Vesting Deed, the participating unit holders of the Sub Trust would be required to execute the Deed of Covenant by virtue of which the participating unit holder covenants to be bound by the terms of the SDA, as required by the SDA. The Deed of Consent is to be executed by the Trustee of the Head Trust and the unit holders of the Head Trust. Through executing the Deed of Consent, the parties agree to the transfer of the Units in the Head Trust from the Sub Trust trustee to the Sub Trust unit holders participating in the distribution in specie and entitled to the relevant units. The same procedures would be followed for each and every Sub Trust unit holder participating in the distribution in specie to the intent and with the consequence that each such participating Sub Trust unit holder would, by virtue of that participation, be vested with the units in the Head Trust to which such participating unit holder was beneficially entitled. (iii) The timing of the scheme No decision has yet been made as to when the distribution in specie would be effected or the period over which it might last. However, it is submitted by the taxpayer that it is likely that individual Sub Trust unit holders will engage in the distribution in specie at different times to meet their own circumstances and convenience. It is also submitted by the taxpayer that it is not proposed that there be one omnibus distribution in specie to all Sub Trust unit holders at the one time. There is nothing regarding this factor that suggests a dominant purpose of seeking to obtain a tax benefit in relation to the scheme. (iv) The result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme The facts of the case disclose that all the Sub Trust unit holders are presently entitled and are Australian resident for the income tax purposes. Therefore, the sub Trust unit holders are taxed on the distributions of the income they receive by virtue of their holding of units in the Sub Trust. The units entitle the Sub Trust unit holders to such a proportion of the income of the Head Trust received by the Sub Trust trustee as is determined by their proportionate holding of units in the Sub Trust. For example, a Sub Trust unit holder who holds 10% of the issued units in the Sub Trust would be entitled to receive 10% of the Head Trust income received by the Sub Trust trustee. When a Sub Trust unit holder is participating in the distribution in specie, the relevant Sub Trust unit holder would, in effect, be converting his/her units in the Sub Trust to an appropriate number of units in the Head Trust, carrying with it the same entitlement to receive Head Trust income as the Sub Trust unit holder would have received prior to the distribution in specie. Therefore, there would be no income tax consequences as a result of the Sub Trust unit holder participating in the distribution in specie. The relevant taxpayer would in effect be in the same position vis-à-vis the ITAA 1936, both before and after the distribution in specie. The relevant taxpayer would receive the same level of income by way of distribution from the Head Trust as it would have done if it had remained a Sub Trust unit holder, not participating in the distribution in specie. The scheme is not varying the entitlement of the Sub Trust beneficiaries to their rights to income from the Sub Trust via the Head Trust. In fact, it is a critical element of the distribution in specie that each Sub Trust unit holder preserves the same right to receive distributions of income from the Head Trust after the distribution in specie as it would have received prior to the distribution in specie. The Vesting Deed, the Deed of Covenant and the Deed of Consent make it very clear that the Sub Trust unit holder are only to receive such number of units in the Head Trust as properly reflect their beneficial interest in the Sub Trust, thereby preserving their rights to both capital and income strictly in accordance with that beneficial interest. Therefore, the result in relation to the operation of the ITAA 1936 with respect to a participating unit holder of the Sub Trust would not change as a result of the distribution in specie. (v) Any change in the financial position of the relevant taxpayer that results from the scheme As noted above, there would be no change in the financial position of the Sub Trust unit holders resulting from the distribution in specie. A Sub Trust unit holder participating in the distribution in specie would in effect be substituting his/her units in the Sub Trust for an appropriate number of units in the Head Trust, reflective of his/her beneficial interest in the Sub Trust. Those Head Trust units would carry with them the entitlement to receive the same level of income from the Head Trust as the Sub Trust unit holders would have received if he/she remained as Sub Trust unit holder. Most particularly, in relation to each participating Sub Trust unit holder, there would be no alienation or diversion of income or any variation in their rights to receive income from the Head Trust. The distribution in specie is designed to facilitate appropriate controls over the transfer of units in the Head Trust and for no other purpose. There is nothing artificial, contrived or notional about the distribution in specie. (vi) Any change in the financial position of other entities or persons who has any connection with the relevant taxpayer as a result of the scheme If a Sub Trust unit holder participates in the distribution in specie, the rights, obligations and entitlements of all other unit holders of the Sub Trust (in so far as they relate to their financial position), would be unaffected by such participation. The rights, entitlements and obligations of each Sub Trust unit holder are discreet and would be unaffected by other Unit Holders participating in the distribution in specie. For example, if some of the Sub Trust unit holders fail or refuse to participate in the distribution in specie, their rights would be preserved by the maintenance of their rights and entitlements as unit holders in the Sub Trust. Their financial position would be unaffected and undiluted by other Sub Trust unit holders participating on the distribution in specie. Those remaining Sub Trust unit holders would continue to be entitled to the distributions of income through the Sub Trust trustee they previously received. Again, parties other than the Sub Trust unit holders would be unaffected by the Sub Trust unit holder participating in the distribution in specie. This is because the only parties entitled to participate in the distribution in specie and to acquire the Units in the Head Trust as a consequence of the distribution in specie would be those parties holding Units in the Sub Trust. The rights to acquire units in the Head Trust would be confined to the holders of the units in the Sub Trust. Accordingly, there would be no means by which parties other than those entitled to do so, would acquire units in the Head Trust. (vii) Any other consequence The purpose of the distribution in specie is the rationalisation of the affairs of both the Sub Trust and the Head Trust, with a view to facilitating uniform and universal control over the transfer of units in the Head Trust. Prior to the distribution in specie, the Sub Trust unit holders would hold the units in the Head Trust in accordance with their beneficial entitlement in the Had Trust but not bound by the terms and conditions of the Head Trust Unit Trust Deed. Once the distribution in specie would be completed, the Sub Trust unit holders would hold the units in the Head Trust directly and would be bound by the same terms and conditions as are binding on the other unit holders of the Head Trust. Those terms and conditions restrict the transfer of the units in the Head Trust as imposed by the provisions of the Head Trust Unit Trust Deed and the SDA for the mutual benefit of all unit holders of the Head Trust. (viii) The nature of any connection (whether of business, family or other nature) between the relevant taxpayer and person referred to in sub-paragraph (vi) Since there would be no change to the financial position of any person who has any connection with the relevant taxpayer within the meaning of subparagraph 177D(b)(vi) of the ITAA 1936 as a result of the scheme, discussion of this provision is not relevant for the present purpose. | Detailed Reasoning - Conclusion - the purpose of the scheme: A consideration of all the factors referred to in paragraph 177D(b) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide trust rationalisation whereby those Sub Trust unit holders who would participate in the in specie distribution would hold the units in the Head Trust directly, rather than through the trustee of the Sub Trust. There would be no change in the tax consequences for either those Sub Trust unit holders or any other person or entities connected to those unit holders. Each participating sub Trust unit holder would have the same amount of income as they would have if they did not participate in the in specie distribution. Also the tax consequences would be the same before and after the in specie distribution since all the Sub Trust unit holders are presently entitled. The only benefit that would result from the Sub Trust unit holders holding the units in the Head Trust directly would be that all the unit holders of the Head Trust would be equally bound by the terms and conditions of the Head Trust unit Trust Deed and the SDA, particularly with reference to the transfer of units in the Head Trust. Accordingly, the Commissioner will make the determination that entering the scheme would not give rise to any undue tax benefit to the Sub Trust unit holders or any other entities connected with such unit holders and hence Part IVA of the ITAA 1936 does not apply to the scheme.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: 1. X Unit Trust (the Sub Trust) appointed Z Pty Ltd (the trustee) of the Sub Trust in terms of a Unit Trust Deed. | 2. There are a number of unit holders in the Sub Trust holding units at different percentages. | 3. The primary asset of the Sub Trust is a holding of certain number of units in Y Unit Trust (the Head Trust). | 4. W Pty Ltd was appointed as the trustee of the Head Trust. | 5. With a view to rationalising the two trusts, it is proposed that there would be a distribution in specie to each of the unit holders of Sub Trust of those units in the Head Trust, to which each unit holder in the Sub Trust is beneficially entitled. | 6. As stated by the trustee of the Sub Trust, the distribution in specie will be required to comply both with the provisions of the Head Trust Unit Trust Deed, as well as the Security Holders and Director's Agreement (SDA) made by and between certain parties and as amended by two subsequent Deeds of Variations. | 7. Those provisions include the requirement that each new unit holder of the Head Trust execute a Deed of Covenant with the trustee of the Head Trust agreeing to be bound by the terms and conditions of the SDA. It is also required that the existing unit holders in the Head Trust execute a Deed of Consent with the trustee of the Head Trust to consent the transfer of units in the Head Trust to unit holders in the Sub Trust. | 8. Each of the Sub Trust unit holders acquired the units in the Sub Trust for valuable consideration. The dates upon which the Sub Trust unit holders acquired the units varied from time to time. At all times, the consideration paid by the Sub Trust unit holder was calculated in accordance with the balance sheet values of the units in accordance with the relevant provisions of the Sub Trust Unit Trust Deed. | 9. No decision has yet been made as to when the distribution in specie would be effected or the period over which it might last. However, the Sub Trust unit holders will engage in the distribution in specie at different times to meet their own circumstances and convenience. There will not be only one omnibus distribution in specie to all Sub Trust unit holders at one time. | 10. No consideration will pass from the Sub Trust unit holders to Sub Trustee at the time of the distribution in specie. The units in the Head Trust will be received by each Sub Trust unit holders in satisfaction of the beneficial entitlement of each Sub Trust unit holders to those units. | 12. The business operations of the Sub Trust are solely as an investment structure that owns a holding of units in the Head Trust. | 13. The Sub Trustee acquired the units in the Head Trust for investment purposes only and does not buy and sell units in unit trusts regularly for income purposes. | 14. All beneficiaries of the Sub-Trust are presently entitled to income of the Trust, are not under any legal disability and are Australian residents at the end of the income year. | 15. To implement the scheme, the following documents were prepared and provided: | c. Draft Deed of Covenant | d. A copy of the Trust Deed establishing the Head Trust | e. The Deed of variation affecting the Head Trust | f. The SDA and two deeds of variation | g. A copy of the Sub Trust Unit Trust Deed | 16. The Sub Trust Unit Trust Deed provides the trustee with the power to appropriate trust find in specie | 17. The Vesting Deed is to be executed between the trustee of the Sub Trust and each unit holder of the Sub Trust participating in the in specie distribution. The recitals of the Vesting Deed provides, among others, the number of units each Sub Trust unit holder holds, the beneficial interest of the unit holders according to their unit holding, the unit holders entitlement in case of in specie distribution, and the resolution of exercise by the trustee of the Sub Trust of its power to appropriate the trust fund in favour of the Sub Trust unit holders | 18. The Deed of Covenant provides that the new unit holders of the Head Trust would be bound by and observe all the provisions of the SDA and be entitled to all rights, privileges and benefits of a security holder as it is defined in the SDA. | 19. The operative provisions of the Deed of Consent provides that the trustee and the unit holders of the Head Trust jointly and severally agree and affirm that all transfers of units in the Head Trust to the Sub Trust unit holders, in satisfaction of their beneficial interest in the Sub Trust, be deemed to be in accordance with the provisions of the Head Trust Unit Trust Deed and the SDA. On such transfer, the new unit holders of the Head Trust would be required to execute a Deed of Covenant where such unit holders would be bound by the SDA. | 20. The Head Trust Unit Trust Deed, as varied under Deed of Variation, imposes restriction against transfer of securities unless all of the other security holders agree and if allowed, it has to be done in accordance with the terms of the Deed of variation. The Deed of Variation provides detailed provisions as to the procedure to be followed for transfer of securities. | 21. The SDA imposes restriction that unless all securityholders otherwise agree, a securityholder must not transfer securities except in accordance with the SDA. A securityholder may transfer all or part of its securities to a related body (a subsidiary) if the securityholder complies with certain clause of the SDA, which requires, among others, that a Deed of Covenant is to be executed by the entity to whom such securities would be transferred. The securityholder and the subsidiary agree in writing that the securities must be re-transferred to the security holder if the subsidiary ceases to be wholly owned by the securityholder or its ultimate holding company.. A securityholder will remain liable for the performance of the duties, responsibilities and obligations assumed by any subsidiary, except that performance by the subsidiary will, to the extent so performed, discharge the securityholder from the performance of those duties, responsibilities and obligations.