Private ruling: Application of Part IVA of the Income Tax Assessment Act 1936
Date of advice: 25 June 2015
Published: June 2015
Ruling period: December of Year 1 to 30 June of Year 3
Date scheme commenced: December of Year 1

Ruling: Q1: Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the Top Hat scheme? | A1: No. | Q2: If the answer to Question 1 is 'no', is there a narrower scheme incorporating some elements of the Top Hat Scheme which is a sub-scheme to which Part IVA of ITAA 1936 applies? | A2: No. | Q3: If the answer to Question 2 is 'no', is there a wider scheme that involves additional steps to those comprising the Top Hat Scheme to which Part IVA of ITAA 1936 applies? | A3: No.

Relevant facts and circumstances: Partnership A operated its professional services business through a partnership. Company A Ltd was then incorporated and registered with the industry regulator. Company A Ltd acquired the goodwill in the partnership from Partnership A. The partners received shares in Company A Ltd in exchange for their interests in the partnership. Work-in-progress and unbilled disbursements continued to be held by the partnership. At a later time, Company A Ltd acquired the remaining work-in-progress and unbilled disbursements from the partnership. In July of Year 1, Company A Ltd considered expanding its business to overseas jurisdictions and intended to list on the Australian stock exchange in a later year. Also around this time, Company A was seriously considering the acquisition of a business in Country X. A discussion paper was circulated to the Board of Company A Ltd about potential corporate structures to enable the expansion and listing. The paper included proposal for a top hat structure. This top hat structure involved interposing a new company as the holding company for Company A Ltd and any overseas subsidiaries with the intention of floating the holding company on Australian stock exchange. The top hat structure was favoured by members of the board for expansion into Country X's market by acquisition as it would be simple from a compliance perspective as well as operational and financial management with one management board and set of shareholders. In November of Year 1, Company A Ltd received advice from Law Firm Y about the benefits of the top hat structure. It provided that the structure would help prevent potential breaches of professional regulations as well as other non-tax benefits for Company A Ltd: It will be beneficial for Company A Ltd to pursue the proposed top hat structure for the following reasons: i. The segregation of assets into logical subsidiaries such that professional services business does nothing more than engage in services. This could limit the risk of any future changes in regulation; ii. The top hat company would give flexibility to the directors to sell the professional services business or the shares in other subsidiaries; iii. There would be no risk of inadvertently breaching professional regulations; and iv. The constitution of the top-hat company would not need to include specific provisions required to be included by professional regulations, which may be helpful in marketing shares to investors. In December of Year 1, 2 other Australian companies were incorporated with Company A Ltd being the sole shareholder of both companies. In the due diligence committee meeting, the committee chairman advised that the top hat structure is 'nice to have' rather than a 'must have'. In February of Year 2, Company A Ltd received advice from Accounting Firm Z recommending that the company should elect to form a tax consolidated group from the incorporation of the 2 Australian subsidiaries. In March of Year 2, the board of Company A Ltd recommended to its shareholders to proceed with the top hat structure. Company B Ltd was incorporated. A share exchange agreement was executed by the shareholders of Company A Ltd to exchange their shares in Company A Ltd for shares in Company B Ltd. Company B Ltd became the sole shareholder of Company A Ltd. On the same day, Company A Ltd transferred its shares in its Australian subsidiaries to Company B Ltd. In March of Year 2, Accounting Firm W advised Company B Ltd that "some of our preliminary calculations suggest that it may be better to decide to tax consolidate immediately after the top hat has occurred rather than before". At a due diligence committee meeting in March of Year 2, the chief financial officer of Company B Ltd said that a paper on tax consolidation of the group suggested that, depending on the timing of the tax consolidation, there may be significant tax deductible available to the group. Company B Ltd made the election to form a tax consolidated group with effect from 1 July of Year 2.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 177A, | Income Tax Assessment Act 1936 Section 177C, | Income Tax Assessment Act 1936 Section 177CB, | Income Tax Assessment Act 1936 Section 177D, | Income Tax Assessment Act 1936 Section 177F, | Income Tax Assessment Act 1997 Section 25-95, | Income Tax Assessment Act 1997 Section 124-380 (former), | Income Tax Assessment Act 1997 Division 701, | Income Tax Assessment Act 1997 Division 705,

Reasons for decision: Summary: The Commissioner will not apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to the scheme identified, as the Commissioner does not consider that Company A Ltd and Company B Ltd entered into the scheme for the sole or dominant purpose of obtaining a tax benefit. | Detailed Reasoning - Detailed Reasoning: Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. In broad terms, Part IVA will apply where the following requirements are satisfied: • there is a scheme (see section 177A) • a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme (see section 177C) • the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b)). The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. In your case, there are multiple 'schemes' within the arrangement capable of attracting the operation of Part IVA. The Commissioner considered the top hat structure to be a rational commercial structure for the expansionary plan of the group. When considered in conjunction with the remaining factors in paragraph 177D(b) of the ITAA 1936, the Commissioner has made a finely balanced decision that Company A Ltd and Company B Ltd did not enter into, or carry out the schemes for the dominant purpose of enabling Company B Ltd to obtain a tax benefit. As such, the Commissioner will not apply Part IVA to the arrangement. Having regard to the ruling request and the information provided, the Commissioner has not identified any wider scheme, which involves additional steps to those comprising the top hat scheme, to which Part IVA applies.