Private ruling: Division 7A and Part IVA
Published: April 2013
Ruling period: 1 July 2011 to 30 June 2012

Ruling: Questions and answers | 1. Is the taxpayer taken to have received a deemed dividend pursuant to section 109C of the Income Taxation Assessment Act 1936 ? | Yes. | 2. Does section 109J of the Income Taxation Assessment Act 1936 , in relation to the payment made by the company to the taxpayer? | Yes. | 3. Is the payment to the taxpayer an excessive payment under section 109 of the Income Taxation Assessment Act 1936 ? | No. | 4. Is the payment to the taxpayer a dividend as defined in section 6(1) of the Income Taxation Assessment Act 1936 ? | No. | 5. Is the payment to the taxpayer statutory income under section 44(1) of the Income Taxation Assessment Act 1936 ? | No. | 6. Will provision Part IVA of the Income Taxation Assessment Act 1936 be applied to the payment? | No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Individual 1, Individual 2 and the Company are all residents of Australia for taxation purposes. Individual 1 and Individual 2 are married, but separated. Individual 2 is the current sole director and shareholder of the Company. Individual 1 is not a shareholder of the Company. Individual 1 is an associate of the Company because of Individual 2 who is the director and shareholder of the Company. No services have been rendered by Individual 1 to the Company. There has been no office or employment held by Individual 1 in the Company. The Orders are proposed as part of the property settlement between Individual 1 and Individual 2 arising out of their separation. The Orders are, in essence, settled between the parties pending the outcome of this ruling request. The Orders will be binding on all parties. Pursuant to paragraph 21 of the Orders, the Company will pay to Individual 1 the payment. This will occur within a period of the publication of the Orders. Cash payment to the spouse 21. Upon compliance with the previous orders and within 120 days of the publication of these orders, ("the settlement date") the company do pay to the spouse the sum ("the cash payment") calculated in the manner shown in schedule C to these orders. The purpose of the Payment is to ensure that Individual 1 and Individual 2 each receive a part of the total available assets. Individual 1 and Individual 2 have at all times dealt with each other at arm's length in relation to the property settlement. Individual 1 and Individual 2 have always been represented by a separate set of lawyers and advisers. Part IVA In considering the 8 points of Part IVA your representative advised the following; First Point: The manner in which the scheme will be entered into or carried out In this context, "manner" includes a consideration of the way in which and the method or procedure by which the particular scheme was established ( FCT v Spotless Ltd & Anor 96 ATC 5201). The Payment is required to be made by the Company pursuant to the Orders. The need for the Orders in the first place arises from the separation of Individual 1 and Individual 2, and the need to divide the property of their relationship between them (including property accumulated during their relationship, but owned by companies and trusts which one or both of them control). Individual 1 and Individual 2 have at all times dealt with each other at arm's length in relation to the property settlement, which arm's length dealing is evidenced by the fact that each of them is, and always has been, represented by a separate set of lawyers and advisers. Further, the amount of the proposed payments to be made to each of them pursuant to the Orders, represent arm's length amounts presumably considered consistent with their entitlements to share in the division of the property of their relationship. The Orders are consistent with normal commercial or family dealings in the context of a property settlement following the breakdown of a marriage or relationship. The Orders do not contemplate section 109J applying. Section 109J happens to be a provision which applies to the circumstances which have arisen as a result of the financial settlement between Individual 1 and Individual 2 which is expressed in the Orders. This, points to the conclusion that the requisite purpose in section 177D of the ITAA 1936 does not exist. Second Point: The form and substance of the scheme The second point to be considered under section 177D(b) of the ITAA 1936 is the form and substance of the scheme. The Rulees will be ordered by the Family Court under the Faintly Law Act 1975 (Cth) to make the payments in the manner contemplated by the Orders. There is no artificial or contrived actions in the proposed transactions the subject of the Orders for which the only explanation is the pursuit of the relevant tax benefits. Relevantly, the Orders, as a matter of substance, have the effect of imposing legally binding obligations on the parties to the Orders. The Orders are intended to be final orders in the proceedings to end the financial relationship between Individual 1 and Individual 2. The ruling, prevailing or most influential purpose of taxpayers in complying with Family Court orders is typically, as is the ease here, to permanently sever the financial connections or relationship between the individuals. The form and substance of such transactions in these circumstances will typically, as is the ease here, reflect that prevailing purpose. This, points to the conclusion that the requisite purpose in section 177D of the ITAA 1936 does not exist. Third Point: The time at which the scheme will be entered into and the period of time during which the scheme will be carried out The third point to be considered under section 177D(b) of the ITAA 1936 is the time at which the scheme was entered into and the length of the period during which the scheme was carried out. In Hart & Anor 2002 ATC 4608, Hill J said that an example of a case where timing would be most relevant to Part IVA of the ITAA 1936 would be a scheme involving a flurry of activity around the end of the tax year directed at obtaining a deduction in that year. In the present case, the timing of the entering into the Orders and the carrying out of the proposed transactions the subject of the Orders is not in any way tax driven so as to enable any or all of the Rulees or any other taxpayer to obtain a tax benefit. Rather, the proceedings, and the proposed Orders, are intended to finalise the property settlement between them as soon as possible and in the most commercially satisfactory way, by avoiding the need for lengthy and protracted litigation. This, points to the conclusion that the requisite purpose in section 177D of the ITAA 1936 does not exist. Fourth Point: The result in relation to the operation of the ITAA36 and the ITAA97 that, but for Part IVA, would be achieved by the scheme The fourth point to be considered for the purposes of section 177D(b) of the ITAA 1936 is the result in relation to the operation of the ITAA 1936 and the ITAA 1997 that, but for Part IVA of the ITAA 1936, would be achieved by the scheme. In the present ease, the results in relation to the operation of the ITAA 1936 and the ITAA 1997 that, but for Part IVA of the ITAA 1936, would be achieved by the scheme are set out in the annexure attached to the ruling request. Whilst the transactions the subject of the Orders do result in one of the Rulee taxpayers obtaining, aside from the application of Part IVA, a tax free amount, these results must be weighed against other aspects of the arrangement in order to determine the dominant purpose of the relevant Rulee. In FCT v Mochkin 2003 ATC 4272 at 4289 the Full Federal Court stated: "91. The result in relation to the operation of the ITAA that, apart from Part IVA, would be achieved by the scheme, included the distribution of income generated by Daccar and Ledger to the beneficiaries of the No 1 and No 2 Trusts. As I have already noted, it is difficult to see how the result of the scheme, in the sense in which that term was used in s 177D(b)(iv), could be said to be tax neutral Viewed objectively, the result sought by the scheme, so far as the ITAA was concerned, was the opportunity to distribute net commission income derived by Daccar and Ledger in a tax effective manner. This result nonetheless must be weighed against other aspects of the scheme in order to determine the Taxpayer 's dominant purpose." In the present case, when the relevant tax benefits are considered in conjunction with the first and second point, this fourth point is essentially neutral. Fifth, Sixth and Seventh Points - the effect of the scheme The fifth, sixth and seventh points focus on the non-tax effects of the scheme, not only for the relevant taxpayer, but also for all connected parties. These points look to the practical financial, legal, economic and any other outcomes achieved by the scheme for the taxpayer and connected patties. In summary, the Payment the subject of the Orders to which the ruling request is concerned, essentially results in a transfer of money from the Company to Individual 1, resulting in an increase in money and property held by Individual 1 and a decrease in money and/or property held by the Company. However, these consequences are commercial in character when considered in context, relevantly being that they reflect the Orders to be made by the Family Court in order to permanently sever the financial relationship between Individual 1 and Individual 2. It is generally accepted by the ATO that the fifth, sixth and seventh points of subsection 177D(b) will often require consideration in conjunction with the second point (paragraph 106 of PS LA 2005/24), i.e. the form and substance of the scheme. In the present case, when the relevant tax benefits are considered in conjunction with the second point, the fifth, sixth and seventh points are essentially neutral. Eighth point - the nature and connection between the relevant taxpayer and any person connected with the taxpayer Paragraph 110 of PS LA 2005/24 provides that: "The existence of any connection between the taxpayer and those other persons is relevant to the identification of the other factors, such as the manner of the scheme, the form and substance of the scheme, and the tax, financial and other consequences of the scheme ". In the present case Individual 1 and Individual 2 were in a relationship for many years and that relationship has ceased. Individual 2 as the sole director and shareholder of the Company was and is, the controller of the Company. However, the connection between the parties in the present case is essentially neutral as regards determining the requisite purpose in section 177D(b) of the ITAA 1936 when considered in conjunction with the first three matters. Conclusion Whilst the tax consequences set out in the annexure to the ruling request will follow from the transactions the subject of the Orders, this should come as no surprise "having regard to the reality that the tax laws affect the shape of nearly every transaction." ( FCT v Mochkin 2003 ATC 4272 at 4282). In the present case, it is entirely appropriate in reaching a view as to the requisite purpose in section 177D of the ITAA 1997, to weigh up the commercial and practical side of the arrangements against any perceived tax benefits ( FCT v Mochkin 2003 ATC 4272 at 4288), and to form a "global assessment of purpose ( FCT v Consolidated Press Holdings Ltd & Anor 2001 ATC 4343 at 4360). It is submitted that an objective assessment of all of the facts leads to the conclusion that the transactions the subject of the Orders are not intended to be undertaken for the sole or dominant purpose of obtaining a tax benefit (section 177D of the ITAA 1997). Relevantly, in the present case the "ruling, prevailing or most influential purpose" ( FCT v Spotless Services Ltd & Anor 96 ATC 5201 at 5206) of the Rulees in complying with the Orders is to comply with legally binding obligations so as to permanently sever the financial connections or relationship between Individual 1 and Individual 2 to allow them to get on with their lives. The Orders of the Family Court are consistent with normal commercial or family dealings in the context of a property settlement following the breakdown of a marriage or relationship. The Orders do not contemplate section 109J applying. Section 109J happens to be a provision which applies to the circumstances which have arisen as a result of the financial settlement between Individual 1 and Individual 2 which is expressed in the Orders.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1936 Section 109C | Income Tax Assessment Act 1936 subsection 109C(1) | Income Tax Assessment Act 1936 Section 109J | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 subsection 177A(3) | Income Tax Assessment Act 1936 subsection 177A(5) | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 subsection 177C(1) | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Section 177F

Reasons for decision: Detailed Reasoning - Subsection 109C(1) and 109J of the Income Tax Assessment Act 1936: Subdivision B of Part III of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) deals with the circumstances under which certain private company payments will be treated as dividends. A Family Court order directing the company to pay cash to the Rulee is a payment for the purposes of section 109C of the ITAA 1936 and would meet the requirements to be treated as a dividend for the purposes of subsection 109C(1) of the ITAA 1936. However Subdivision D of Division 7A of Part III of the ITAA 1936 sets out rules about some payments which are not treated as dividends under subsection 109C(1) of the ITAA 1936. Section 109J of the ITAA 1936 in Subdivision D is specifically relevant to the circumstances here. Section 109J of the ITAA 1936 provides that: A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment: a. discharges an obligation of the private company to pay money to the entity; and b. is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length. | Detailed Reasoning - Subsection 109(1) of the Income Tax Assessment 1936: Subsection 109(1) of the Income Tax Assessment 1936 provides: If a private company pays or credits to an associated person an amount (in this subsection called the excessive amount ) that is, or purports to be: (a) a remuneration for services rendered by the associated person: or (b) an allowance, gratuity or compensation in consequence of the retirement of the associated person in the company, or upon the termination of any such office or employment; so much (if any) of the excessive amount as exceeds an amount that, in the opinion of the Commissioner, is reasonable: (c) (c) is not an allowable deduction; and (d) (d) shall, for the purposes of this Act other than Division 11A of Part III, be deemed to be a dividend paid by the company: (i) to the associated person as a shareholder in the company; (ii) out of profits derived by the company; and (iii) on the last day of the year of income of the company in which the excessive payment or credit is made. | Detailed Reasoning - Application to your circumstances: Effectively, section 109J of the ITAA 1936 provides that such a payment is not taken to be the payment of a dividend for the purposes of section 109C of the ITAA 1936 to the extent that it discharges an obligation of the private company to pay money to a shareholder or an associate of the shareholder, and does not exceed the arm's length amount required to discharge that obligation. Consequently, provided the Family Court order binding the Company, as a party to the proceedings, is an explicit order binding the company to specifically pay cash to you, and not some other alternative obligation, the payment would not be considered a dividend by virtue of section 109J of the ITAA 1936. In relation to excessive payment; if the Commissioner believes that the payment - or part thereof - exceeds an amount that is considered reasonable, then that payment - or part thereof - will be deemed a dividend by Section 109 of the ITAA 1936. Individual 1 has not provided services to the Company. There has been no office or employment held by Individual 1 in the Company. Therefore, the payment Individual 1 will receive from the Company under the court order is not considered a dividend under section 109 of the ITAA 1936. | Detailed Reasoning - Subsection 6(1) of the Income Tax Assessment Act 1936: Subsection 6(1) of the ITAA 1936 defines 'dividend' to include: (a) any distribution made by a company to any of its shareholders, whether in money or other property; and (b) any amount credited by a company to any of its shareholders as shareholders; (c) (Repealed by No 63 of 1998) but does not include: (d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or (e) moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if: (i) the company gives the holder of the share a notice when it redeems or cancels the share; and (ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and (iii) the amount is debited to the company's share capital account; except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or (f) a reversionary bonus on a life assurance policy. | Detailed Reasoning - Subsection 44(1) of the Income Tax Assessment Act 1936: Subsection 44(1) of the ITAA 1936 states that the assessable income of a resident shareholder includes dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source and all non-share dividends paid to the shareholder by the company. | Detailed Reasoning - Application to your circumstances: The payment would not come within the definition of the word 'dividend' in subsection 6(1) of the ITAA 1936. The payment to the shareholder is a payment made pursuant to court proceedings and is not in the nature of being a distribution as required in the definition. As the payment is not a dividend section 44(1) has no application. | Detailed Reasoning - Application of Part IVA: 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. | Detailed Reasoning - Application to your circumstances: What you are proposing is a 'scheme' capable of attracting the operation of Part IVA. However, when considered in conjunction with the factors in paragraph 177D(b) of the ITAA 1936, all these factors either point against the application of Part IVA or are neutral. Therefore, Part IVA will not apply to this arrangement.