Private ruling: Part IVA of the Income Tax Assessment Act 1936
Published: December 2012
Ruling period: 2011 income year to 2015 income year.
Date scheme commenced: 2010 income year.

Ruling: Q1: Will the Commissioner make a determination pursuant to Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to cancel any tax benefit obtained under paragraph 177C(1)(b) of the ITAA 1936, or that would but for section 177F of the ITAA 1936 be obtained, in connection with the Australian integration? | A1: No.

Relevant facts and circumstances: Background 1. Overseas Co 1 acquired 100% of the shares of Overseas Co 2. Both Overseas Co 1 and Overseas Co 2 held indirect investments in Australia at the acquisition time (Australian Business 1 and Australian Business 2, respectively). 2. Following its acquisition of Overseas Co 2, Overseas Co 1 undertook a reorganisation project to better align the two businesses and to realise expected commercial synergies from the merger. 3. The reorganisation of Australian Business 1 and Australian Business 2 (the Australian integration), which is the subject of this ruling, is part of this reorganisation. Relevant entities MEC Group 2 Head Co 4. MEC Group 2 Head Co was incorporated in the income year ended 30 June 2010 and is an Australian resident for income tax purposes. 5. MEC Group 2 Head Co is wholly owned by Overseas Co 3 (a foreign resident company) and is indirectly owned by Overseas Co 1. 6. MEC Group 2 Head Co is the provisional head company of MEC Group 2 in accordance with Division 719 of the Income Tax Assessment Act 1997 (ITAA 1997). Partnership A 7. Partnership A is a limited partnership formed in the income year ended 30 June 2010. Partnership A is a corporate limited partnership in accordance with section 94D of the ITAA 1936 and is considered a company for Australian income tax purposes. 8. Partnership A is an eligible tier-1 company of Overseas Co 1 and is a member of MEC Group 2. Investment Holdings Co 9. Investment Holdings Co was incorporated in the income year ended 30 June 2010 and is an Australian resident for income tax purposes. 10. Investment Holdings Co is wholly owned by Overseas Partnership. 11. Investment Holdings Co is an eligible tier-1 company of Overseas Co 1 and is a member of MEC Group 2. Company A 12. Company A is an Australian incorporated company and an Australian resident for income tax purposes. Company A was the head company of Consolidated Group 1 (which ran Australian Business 1) prior to its acquisition by Partnership A in the income year ended 30 June 2011. 13. Company A is now a subsidiary member of MEC Group 2 following the Australian integration. Company B 14. Company B is an Australian incorporated company and an Australian resident for income tax purposes. Company B was the provisional head company of MEC Group 1 (which ran Australian Business 2) prior its acquisition by Company A in the income year ended 30 June 2011. 15. Company B is now a subsidiary member of MEC Group 2 following the Australian integration. Overseas Co 4 16. Overseas Co 4 is a non-resident company, ultimately wholly owned by Overseas Co 1. Both Overseas Co 4 and Overseas Co 3 own the respective partnership interests in Partnership A. The Australian integration transaction steps Formation of new MEC group 17. MEC Group 2 Head Co and Investment Holdings Co were incorporated in the income year ended 30 June 2010. 18. In the same income year, MEC Group 2 Head Co and Investment Holdings Co formed MEC Group 2 (with MEC Group 2 Head Co as the provisional head company). 19. Also in the income year ended 30 June 2010, Partnership A was formed and elected to join MEC Group 2 effective that day. Transfer of Australian businesses 20. In the income year ended 30 June 2010, Company A was transferred by Overseas Co 6 to Overseas Co 3 (it was earlier transferred to Overseas Co 6 from its original owner, Overseas Co 5) 21. The day after the transfer, Company A and Company B were converted to proprietary limited companies. 22. Overseas Co 7 subsequently transferred Company B to Overseas Partnership in exchange for partnership equity in Overseas Partnership. 23. Overseas Partnership then transferred Company B to Overseas Co 3. Integration of Australian businesses 24. At the start of the income year ended 30 June 2011, Overseas Co 3 transferred Company B to Company A in exchange for shares in Company A and for a loan note (Note 1). 25. Given that Company B was, at the time of this transfer, the provisional head company of MEC Group 1, the result of Company B being transferred to Company A was that MEC Group 1 joined Consolidated Group 1. 26. The entry ACA calculation in respect of this first consolidation was completed in accordance with Subdivision 705-C of the ITAA 1997. The resetting of the tax costs of Company B resulted in an uplift in the tax cost base of Company B's inventory, plant and equipment, and investment assets. Consolidated Group 1 acquired by Partnership A 27. On the same day that MEC Group 1 joined Consolidated Group 1, Overseas Co 3 transferred 100% of the membership interests in Company A to Partnership A in exchange for partnership equity. Consequently, Company A (and Consolidated Group 1, which now included Company B) joined MEC Group 2 and another tax entry consolidation calculation was required to be performed in accordance with Subdivision 705-C of the ITAA 1997. 28. The tax entry consolidation calculation was completed for this second consolidation and resulted in a uplift in the tax cost base of Company A's inventory, plant and equipment, land and buildings and investment assets. Sale of overseas investments 29. Also on the same day that MEC Group 1 joined Consolidated Group 1, Overseas Partnership issued a loan note (Note 2) to Investment Holdings Co. Investment Holdings Co also issued shares to Overseas Partnership in exchange for additional funds. 30. The former owner (a foreign subsidiary of Company B) of two offshore investments transferred those offshore investments to Investment Holdings Co in exchange for the funds Investment Holdings Co received from Overseas Partnership. As a result of this transfer, the offshore investments were removed from Overseas Co 3's shareholding chain. Refinancing of acquisition debt 31. On the same day that MEC Group 1 joined Consolidated Group 1, Partnership A borrowed from Overseas Co 8, a wholly owned subsidiary of Overseas Co 3, in the form of two loan notes (Note 3 and Note 4). 32. Also on that day, Partnership A used the funds received from Notes 3 and 4 borrowed from Overseas Co 8 to subscribe for additional shares in Company A. Company A then used those funds in addition to its existing cash reserves to repay Note 1 to Overseas Co 3. Note 1 was therefore repaid in full by Company A on the same day in which the funds were lent. Australian internal transfers 33. On the same day that MEC Group 1 joined Consolidated Group 1, Company B was transferred to Partnership A and Company A was transferred to Company B. All subsidiaries of Company B were later transferred to Company A on the same day. Acquisition of overseas business 34. Overseas Co 9 is a non-resident company incorporated in the income year ended 30 June 2010. 35. On the day after MEC Group 1 joined Consolidated Group 1, Overseas Co 9 borrowed funds by way of a loan note (Note 5) from Company C, a subsidiary member of MEC Group 2. Overseas Co 9 also issued shares to Company C in exchange for additional funds. Overseas Co 9 used the funds obtained to acquire certain overseas businesses. Reasons for the transaction 36. The Australian integration was carried out for the following commercial reasons: · to integrate the local businesses so as to reduce overheads/staff numbers, promote product innovation and to enable a single sales representation in the market for the now combined businesses; · to create a structure ensuring that the operating businesses are in the same ownership chain (a vertical integration) so as to enable the Australian operations to realise the commercial benefits from the newly combined purchasing power and simplified legal structure; · to have Australian Business 1 acquire Australian Business 2 in a manner consistent with the broader international reorganisation project; · to have Australian Business 1 acquire Australian Business 2 at the start of the income year so as to cause the least possible disruption and administrative burden from a financial reporting and tax compliance perspective; · for Australian Business 1 to debt fund the acquisition of Australian Business 2 in accordance with Overseas Co 1's economic rationale to spread its acquisition debt across multiple jurisdictions. It was further desirable that such debt ultimately reside with an entity that additionally afforded a beneficial overseas tax outcome; · to move certain combined overseas businesses underneath the Australian businesses to align the corporate structure with business reporting and the regional management structure; · to move the combined Australian businesses underneath a foreign jurisdiction - a preferred global holding jurisdiction as it was large enough to acquire the considerable combined operation and had funds available to finance the acquisition; · to convert a number of entities into proprietary limited companies; · to move the offshore investments out from underneath Overseas Co 3's ownership (following Company B's initial transfer to Overseas Co 3). The later transfer of the offshore investments to Investment Holdings Co as part of subsequent steps to the Australian integration was to prevent any risk of attributable income arising in a foreign jurisdiction in respect of these passive investments; and · to move Company B (as a standalone legal entity) on top of the Australian employer businesses for workers compensation self insurance purposes. This required Company B to be moved above Company A following the combining of the two businesses within the same ownership chain. Other matters 37. As a result of the Australian integration, additional debt was introduced into MEC Group 2. The debt remaining post the Australian Integration includes the amounts owed by Investment Holdings Co to Overseas Partnership under Note 2 and the amount owed by Partnership A to Overseas Co 8 under Notes 3 and 4 (the Remaining Acquisition Debt). 38. All the assets of Company A and Company B were acquired post 20 September 1985 or are deemed to have been acquired post 20 September 1985 by virtue of former section 160ZZS of the ITAA 1936 or Division 149 of the ITAA 1997. Assumptions 39. The interest deductions claimed by MEC Group 2 in respect of the Remaining Acquisition Debt will not exceed the thin capitalisation safe harbour limits in accordance with Division 820 of the ITAA 1997. 40. At no stage during the steps of the Australian integration did the sum of the market values of Company A's or Company B's assets that are taxable Australian real property under section 855-20 of the ITAA 1997 exceed the sum of the market values of its assets that are not taxable Australian real property.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 Subsection 177C(1) | Income Tax Assessment Act 1936 Paragraph 177C(1)(b) | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Section 177F | Income Tax Assessment Act 1936 Subsection 177F(1) | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 70 | Income Tax Assessment Act 1997 Subdivision 705-C | Income Tax Assessment Act 1997 Section 719-40 | Income Tax Assessment Act 1997 Paragraph 719-5(1)(b) | Income Tax Assessment Act 1997 Division 820 | Income Tax Assessment Act 1997 Section 855-20

Reasons for decision: Summary: Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the discretion to cancel 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. This discretion is found in subsection 177F(1) of the ITAA 1936. Before the Commissioner can exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA of the ITAA 1936 must be satisfied. These requirements are that: i. a 'tax benefit', as identified in section 177C of the ITAA 1936, was or would, but for section 177F, have been obtained; ii. the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A of the ITAA 1936; and iii. having regard to section 177D of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies. Scheme A scheme, for the purposes of Part IVA of the ITAA 1936, is broadly defined in section 177A of the ITAA 1936 and includes: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. The scope of this definition has been considered in a number of judgments, most notably being the judgment of the High Court in Hart v FC of T 2005 ATC 5022. This case confirmed the view that the definition of 'scheme' in section 177A of the ITAA 1936 is extremely wide. According to the judgment in this case, a scheme can be narrowly defined as a single step or event and it is not relevant to ask whether that scheme is capable of standing on its own. In the present case, the scheme for the purposes of Part IVA of the ITAA 1936 comprises of the transaction steps outlined at paragraphs 17 to 33 of this ruling. Namely, this includes the transaction steps involved in the formation of MEC Group 2, the transfer of Company B to Company A, and the subsequent transfer of Company A to Partnership A. | Detailed Reasoning - The tax benefit: For Part IVA of the ITAA 1936 to apply, a taxpayer must have obtained, or would, but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. Subsection 177C(1) of the ITAA 1936 defines four kinds of tax benefit, relating broadly to: · an amount not being included in the assessable income of the taxpayer of a year of income; · a deduction being allowable to the taxpayer in relation to a year of income; · a capital loss being incurred by the taxpayer during a year of income; and · a foreign income tax offset being allowable to the taxpayer. Subsection 177C(1) of the ITAA 1936 allows two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out. This necessarily requires consideration of the income tax consequences, but for the operation of Part IVA of the ITAA 1936, of an 'alternative hypothesis' or an 'alternative postulate' (referred to as the counterfactual). This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. In this case, the uplift in the tax cost of Company A's inventory and plant and equipment assets gave rise to tax benefits in the form of deductions being allowable to MEC Group 2 under Divisions 40 and 70 of the ITAA 1997. The uplift in the tax cost of Company A's investments and land and building assets could also potentially give rise to a tax benefit in the form of a capital loss, or lower capital gains, on the subsequent disposal of the asset. A number of counterfactuals have been considered in determining whether the potential tax benefit has been obtained in connection with the identified scheme. It is considered that after having regard to the possible counterfactuals, and based on the available evidence, it is reasonable to accept that the identified tax benefit has been obtained in connection with a scheme that achieves wider commercial objectives and it would be reasonable to expect that those commercial objectives would have been pursued by means of an alternative transaction which would have given rise to similar tax benefit(s). As such, it cannot be concluded that the relevant tax benefit would not have been obtained, or might reasonably be expected not to have been obtained, but for the scheme. In these circumstances, the Commissioner will not make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained in connection with the Australian integration.

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