Private ruling: Interaction between Division 7A and the Consolidations regime
Published: October 2013
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: A1: Yes.

Relevant facts and circumstances: Trust B wholly owns the units in several unit trusts (the subsidiary trusts). Trust B and its subsidiary trusts are undertaking a commercial enterprise. The following group restructure is proposed: (a) Firstly, the unit holders of Trust B exchange all their units in Trust B for shares in Co C, which results in Trust B being wholly owned by Co C, and (b) Co C forms a consolidated group with Co C as the head company. Trust B and the subsidiary trusts will be members of that consolidated group. The proposed group restructure is intended to facilitate the ability for the group to accumulate future profits in a commercially efficient manner within a corporate structure for reinvestment and expansion of the commercial enterprise. The tax consolidation of the group will also create additional efficiencies from a tax compliance and internal transactions perspective. After the group restructure, it is proposed that Co A will make payments or loans to the trustee of Trust B or the trustees of the subsidiary trusts. The loans or payments will not be on-paid or on-lent to an entity outside the consolidated group. The trustee of Trust B, the trustees of the subsidiary trusts and Co C are associates of the shareholder of Co A.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 109K. | Income Tax Assessment Act 1936 Section 318. | Income Tax Assessment Act 1997 Subsection 701-1(1). | Income Tax Assessment Act 1997 Subsection 701-1(2). | Income Tax Assessment Act 1997 Subsection 701-1(3).

Reasons for decision: Summary: After the proposed group restructure, the SER will apply and the payments or loans from Co A to the trustee of Trust B or trustees of subsidiary unit trusts of Trust B will not be taken as dividends because: (a) Under the SER, the trustee of Trust B or trustees of subsidiary unit trusts of Trust B will be treated as part of Co C, the head company of the consolidated group, (b) Co C is a company, and (c) Section 109K in Subdivision D of Division 7A of the ITAA 1936 excludes payments and loans to a company from being taken as a dividend. | Detailed Reasoning - Detailed reasoning: The intended operation of the SER is to apply the income tax laws to a consolidated group as if it were a single entity being the head company. As ruled by the Commissioner in paragraph 4 of TR 2004/11, the SER will only apply for the purposes of working out the amount of income tax liability of the head company and the subsidiary members as well as all matters relevant and incidental to those calculations: 4. The SER operates for the purposes set out in subsections 701-1(2) and (3) of the ITAA 1997 (the core purposes). These purposes are to work out the amount of the head company and subsidiary member's liability for income tax and the amount of a loss for a relevant period. They include all matters relevant and incidental to those calculations. The intended operation of the SER is to apply the income tax laws to a consolidated group as if it were a single entity. As Division 7A of the ITAA 1936 may deem a payment or loan received from a private company as a dividend, it is a matter relevant to the calculation of the income tax liability of the recipient. Consequently, the SER will apply to the recipient. This means, after the group restructure, Co C will be treated as the recipient of any payment or loan from Co A to Trust B or the subsidiary trusts pursuant to the SER. When Co A, a private company, makes a payment or loan to Co C, an associate of a shareholder of Co A, Division 7A of the ITAA 1936 will apply, subject to the application of Subdivision D of Division 7A of the ITAA 1936. Section 109K in Subdivision D of the ITAA 1936 provides that a payment or loan made by a private company to another company is not taken to be a dividend, unless the payment or loan is made to a company in its capacity as a trustee. As Co C is a company and the payment or loan will not be made to it in its capacity as trustee, section 109K of the ITAA 1936 will apply. As a result, Co A will not be taken to pay a dividend under Division 7A of the ITAA 1936. It should be noted that if the money that was paid or loaned ended up being paid or loaned to an entity outside the consolidated group, the SER will not apply. This is because the SER only applies for the core purposes. Whether or not Division 7A of the ITAA 1936 applies to treat an entity outside of the consolidated group as receiving an assessable dividend is irrelevant for the core purposes, namely, working out the head company's liability for income tax and the subsidiary unit trusts' net income.

Does the single entity rule (SER) in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) apply such that any deemed dividends that may arise under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) with respect to loans and/or payments from Co A to the trustee of Trust B or the trustees of subsidiary unit trusts of Trust B are disregarded under section 109K of the ITAA 1936?