Private ruling: Family trust
Date of advice: 23 May 2023
Published: 10 July 2023
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: XX XX XX

Ruling: Q1: Will section 109XA of the Income Tax Assessment Act 1936 [1] apply to the Wife if under the Family Court Orders: • a proportion of the units in Unit Trust A held by the A Family Trust were transferred to the Wife in her individual capacity; and/or • a proportion of the units in Unit Trust B held by the B Family Trust were transferred to the Wife in her individual capacity. | A1: No. | Q2: If section 109XA does not have application to the proposed transfer of the Units mentioned in Question 1, does section 109T apply to treat the transfer of the units under the Family Court Orders from existing holders to the Wife as a payment? | A2: No

Relevant facts and circumstances: 1. The marriage of Person A (the Husband) and Person B (the Wife) has broken down and the parties have separated. 2. It is proposed a proportion of the following marital assets be transferred to the Wife under a family court order (Family Court Order): • units in Unit Trust A owned by the A Family Trust • units in Unit Trust B owned by the B Family Trust • ordinary shares in Company A. 3. The units proposed to be transferred under the Family Court Order are collectively referred to as the Units and the shares proposed to be transferred under the family court order are referred to as the Shares. Group Structure 4. Unit Trust A : • The trustee of the Unit Trust A is Company B. • X units were issued on establishment of the trust at an issue price of $X per unit. • Company C as trustee for the A Family Trust holds X units in Unit Trust A. • There have been no changes to the original unit holdings. 5. Unit Trust B: • The trustee of Unit Trust B is Company D. • X units were issued on establishment of the trust at an issue price of $X per unit. • Company C as trustee for the B Family Trust holds X units in Unit Trust C. • There have been no changes to the original unit holdings. 6. A Family Trust: • The trustee of the A Family Trust is Company E. • The Husband and Wife are joint appointors of the A Family Trust. • The Wife is a beneficiary of the A Family Trust. • The A Family Trust owns X units in Unit Trust A. • The A Family Trust has pre-July 2009 unpaid present entitlements (UPE) owing to Company F. 7. C Family Trust: • The trustee of the B Family Trust is Company E. • The joint appointors of the B Family Trust are the Husband and Wife. • The Wife is a beneficiary. • The B Family Trust owns X units in Unit Trust C. • The B Family Trust has pre-July 2009 UPE's owing to Company F. 8. Company F: • Company F was incorporated on XX XX XX. • The original ordinary shareholders were: ­ the Husband - X W Class Shares ­ Person C - X Y Class Shares; and ­ Person D - X Z Class Shares. • The shares originally owned by Person C were passed to Person E on the death of Person C. • The current shareholders of Company F are: Table 1: Current shareholders of Company F Share Class Number Shareholder T Class Ordinary X The Husband V Class Ordinary X Person C W Class Ordinary X Person E X Class Ordinary X Company A Y Class Ordinary X Company G Z Class Ordinary X Company H 9. In the XX financial year, a corporate restructure was undertaken as part of a family succession plan and X, Y and Z Class Ordinary shares were issued to the following entities (the New Companies): • Company A • Company G; and • Company H 10. In the XX year the entire retained profits of Company F were distributed in equal proportions to the holders of the X, Y and Z Class Ordinary shares. 11. The Husband is one of the original shareholders in Company F. 12. The Husband and the Wife have the same, or a very similar, tax profile. The Husband is a resident individual taxpayer and taxed at marginal tax rates. The Wife is also a resident individual taxpayer who is taxed at marginal tax rates. • Company A was incorporated on XX XX XX. • The shareholders of Company A are as follows: Table 2: Shareholders of Company A Share Class Number Shareholder X - Ordinary X The Husband X2 - Dividend (V) X Person G X3 - Dividend (V) X Person H T Class Shares X The Wife S Class Shares X Person I ORD - Ordinary Shares X The Husband 14. Future dividends may be declared and paid on the Shares.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 109C | Income Tax Assessment Act 1936 Subsection 109C(3) | Income Tax Assessment Act 1936 Section 109T | Income Tax Assessment Act 1936 Subsection 109T(1) | Income Tax Assessment Act 1936 Subsection 109T(2) | Income Tax Assessment Act 1936 Subsection 109T(3) | Income Tax Assessment Act 1936 Subdivision EA | Income Tax Assessment Act 1936 Section 109XA | Income Tax Assessment Act 1936 Subsection 109XA(1) | Income Tax Assessment Act 1936 Subsection 109XA(7) | Income Tax Assessment Act 1936 Section 109XB | Income Tax Assessment Act 1936 Section 177E | Income Tax Assessment Act 1936 Paragraph 177E(1)(a) | Income Tax Assessment Act 1936 Paragraph 177E(1)(b)

Reasons for decision: Summary: No. | Detailed Reasoning - Detailed reasoning: 16. Section 109XA sets out the conditions where certain payments made by trustees, including transfers of property, are treated as deemed dividends in accordance with section 109XB. 17. Subsection 109XA(1) provides section 109XB applies if: • a trustee makes a payment (including a payment through an interposed entity) to a shareholder or an associate of a shareholder of a private company (except a shareholder or associate that is a company), and • the payment is a discharge of or a reduction in a present entitlement or associate that is wholly or partly attributable to an amount that is an unrealised gain, and • either: ­ the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgement and the date of lodgement of the trustees return of income for the trust for the year of income of the trust in which the actual transaction takes place; or ­ the company becomes presently entitled to an amount from the net income of the trust estate after the actual transaction takes place, but before the earlier of the due date for lodgement and the date of lodgement of the trustees return of income for the trust for the year of income of the trust in which the actual transaction takes place, and the whole of the amount has not been paid to the company before the earlier of those dates. 18. Payment is defined in subsection 109C(3) and includes the transfer of property. 19. An unrealised gain in relation to a trust estate is defined under subsection 109XA(7): • Unrealised gain in relation to a trust estate and an actual payment means any unrealised gain, whether of a capital or income nature, but does not include an unrealised gain to the extent that it has been or would be included in the assessable income of the trust, apart from this Division, for: ­ a year of income before the year in which the actual payment was made; or ­ the year of income in which the actual payment was made; or ­ the year of income following the year in which the actual payment was made. 20. The Explanatory Memorandum ("EM") to the Tax Laws Amendment (2004 Measures No. 1) Act 2004 provides at paragraph 8.13: The term 'unrealised gain' is intended to apply very broadly. It is defined to mean any unrealised gain whether of a capital or income nature. For the purposes of these rules, realisation will be taken to have occurred when a gain converts into a recoverable debt. | Detailed Reasoning - Application to the facts: 21. For subsection 109XA(1) to operate, all elements under the subsection must be satisfied. • A payment is made by the trustee to the shareholder or associate of a shareholder of a private company. • The payment is a discharge of or a reduction in a present entitlement of the shareholder or associate that is wholly or partly attributable to an amount that is an unrealised gain. 22. The transfer of the Units to the Wife would constitute a payment as defined in subsection 109C(3). 23. The transfer of the Units does not occur to discharge a present entitlement to an unrealised gain of the trust. The Units will be transferred to discharge the obligation set out in the court orders issued by the Family Court. 24. Therefore, since the payment will not be a discharge of a reduction in a present entitlement of the shareholder that is wholly or partly attributable to an amount that is an unrealised gain, all of the conditions in the section will not be satisfied. 25. Accordingly, subsection 109XA(1) will not apply to the transfer of the Units under a family court order to the Wife. | Detailed Reasoning - Question 2: If section 109XA does not have application to the proposed transfer of the Units mentioned in Question 1, does section 109T apply to treat the transfer of the Units from existing holders to Angelina Correia as a payment? | Summary: No. | Detailed Reasoning - Detailed reasoning: 26. Subsection 109T(1) provides that a private company will be taken to make a payment or loan to the target entity where a reasonable person would conclude (having regard to all the circumstances) that the private company made the payment or loan to the first interposed entity, solely or mainly, as part of an arrangement involving a payment or loan through one or more interposed entities to the target entity. 27. For the purposes of section 109T, it does not matter (subsection 109T(2)): • whether the interposed entity made the payment or loan to the target entity before, after or at the same time as the first interposed entity received the payment or loan from the private company; or • whether or not the interposed entity paid or lent the target entity the same amount as the private company paid or lent the first interposed entity. 28. Subsection 109T(1) will not operate to treat the target entity as having received a payment or loan from a private company if the private company is taken (under Subdivision B) to pay a dividend as a result of the actual payment or loan to the first interposed entity (subsection 109T(3)). 29. The transfer of the Units to the Wife is a payment for the purposes of subsection 109C(3). 30. The Units held by the family trusts had been held by each trust since the establishment of each respective trust in XX. 31. The Units will be transferred from the two family trusts to discharge the obligation set out in the Family Court Orders. 32. The payment from the family trusts to the Wife are not sourced directly or indirectly from a payment or loan made by a private company. 33. A reasonable person would conclude that the Units are being transferred to discharge the Family Court Orders. 34. Accordingly, subsection 109T(1) will not apply to the transfer of the Units to the Wife. [1] All legislative references are to the Income Tax Assessment Act 1936 , unless otherwise indicated.

The proposed transaction is not part of a broader scheme or arrangement. | Will section 109XA of the Income Tax Assessment Act 1936 apply to the Wife if under the Family Court Orders: