Private ruling: Business restructure
Date of advice: 12 June 2023
Published: 7 August 2023
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: XX XX XX

Ruling: Q1: If a proportion of the ordinary shares held by the Husband in Company A were required to be transferred to the Wife under a Family Court order, would the Commissioner seek to apply section 177E of the ITAA 1936, including on future distributions on the shares transferred under the Court Order? | A1: 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: 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 and does not have any carried forward income losses. 13. Company A • Company A was incorporated on XX XX XX. • The shareholders of Company A are as follows: 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. 15. The proposed transaction is not part of a broader scheme or arrangement.

Relevant legislative provisions: 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 177E applies where: • property of a company is disposed of as a result of: - a scheme by way of or in the nature of dividend stripping; or - a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping; and • in the Commissioner's opinion, the disposal of property represents, in whole or in part, a distribution of profits of the company; and • if, immediately before the scheme was entered into, the company had paid a dividend equal to the amount of the disposal of property, an amount (referred to as the notional amount) would have been included in the assessable income of a taxpayer of a year of income; and • the scheme is entered into after 27 May 1981. 17. Where all of the above conditions (set out in paragraphs 177E(1)(a)-(d)) are met, the effect of paragraphs 177E(1)(e)-(g) is that the scheme is taken to be a scheme to which Part IVA applies, and the taxpayer is taken to have obtained a tax benefit in connection with the scheme equal to the notional amount. | Detailed Reasoning - Is the scheme by way of or in the nature of dividend stripping?: 18. The term 'dividend stripping' is not defined in the ITAA 1936. 19. As set out in TD 2014/1 [1] , dividend stripping has been recognised by the courts as involving the following six common characteristics: i. a target company which has substantial undistributed profits, creating a potential tax liability either for the company or its shareholders; ii. the sale or allotment of shares in the target company to another party; iii. the payment of a dividend to the purchaser or allottee of the shares out of the target company's profits; iv. the purchaser escaping Australian income tax on the dividend so declared; v. the vendor shareholders receiving a capital sum for their shares in an amount the same as or very close to the dividends paid to the purchasers (there being no capital gains tax liability at the relevant time); and vi. the scheme being carefully planned, with all the parties acting in concert, for the predominant if not sole purpose of the vendor shareholders avoiding tax on a distribution of dividends by the target company. 20. The Full Federal Court in Consolidated Press [2] observed that the use of the words 'by way of or in the nature of' in paragraph 177E(1)(a) suggests that variations from these six characteristics will not necessarily result in the scheme being excluded, provided it retains the central characteristics of a dividend stripping scheme. | Detailed Reasoning - A scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping: 21. In determining whether the second limb of paragraph 177E(1)(b) has application, consideration must be given to whether the transaction was entered into with a dominant purpose of avoiding tax on a distribution. The Courts have consistently held, that despite section 177E operating independently to the general anti-avoidance provisions of Part IVA, one of the core elements in the nature of a dividend stripping scheme would be the identification of a tax avoidance purpose [3] . | Detailed Reasoning - Application of the law: 22. On the facts provided, a number of the elements of a dividend stripping arrangement are not evident. 23. Dividends may be declared and paid on the Shares in the future. 24. Criterion iv is not satisfied: The Wife has the same tax profile as the Husband, accordingly the Wife does not have a preferred tax profile in comparison to the original shareholder (the Husband). The Wife (as transferee) will pay tax at the marginal rate for resident individuals, if a dividend is declared and paid on the Shares, which would be the same for the Husband if the transfer did not happen. 25. The transfer of Shares is due to the breakdown of the marriage, and the Shares will be transferred to discharge the obligation set out in the Family Court Orders. As mentioned above, as both the Husband and Wife have a similar tax profile the transfer of the Shares is not entered into with a dominant purpose of avoiding tax on a distribution. 26. Accordingly, criterion vi and the second limb of paragraph 177E(1)(b) are not satisfied. 27. The necessary elements of a dividend stripping arrangement are not present and accordingly section 177E will not apply to the transfer of the Shares to the Wife. [1] [1] Tax Determination TD 2014/1 Income tax: is the 'dividend access share' arrangement of the type described in this Taxation Determination a scheme 'by way of or in the nature of dividend stripping' within the meaning of section 177E of Part IVA of the Income Tax Assessment Act 1936? [2] Commissioner of Taxation v. Consolidated Press Holdings Ltd (No 1) (1999) 91 FCR 524; [1999] FCA 1199 at 156 [3] Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235; Lawrence v Federal Commissioner of Taxation (2009) 175 FCR 277.