Private ruling: Business - consolidated group and Division 7A
Published: June 2015
Ruling period: 1 July 2014 to 30 June 2015

Ruling: Questions and answers | 1. Does Division 615 of the Income Tax Assessment Act 1997 | 2. apply to proposed restructure? | Yes. | 3. Does a deemed dividend arise under Division 7A of the Income Tax Assessment Act 1936 for a loan made by a related private company to the unit trust during the financial year that consolidation occurs, and made before the consolidation time, that is not fully repaid before the relevant lodgment day? | 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. The unit trust was established by trust deed, with company 1 as its corporate trustee. The current unitholders of the trust are unitholder 1 and unitholder 2. Unitholder 1 and 2 are Australian tax residents. The current unit holdings are as follows; Class Unitholder 1 Unitholder 2 Unitholder 1 & 2 (tenants in common, U%/V%) Total Ordinary X Y Z 100% All units have equal rights to voting, income and capital distributions, and were acquired by the respective unitholders post 20 September 1985. There is some limited discretion with respect to income distribution, being that the trustee has the power to determine that the unitholders of a particular class of units can be made presently and absolutely entitled to a proportion or all of the income of the trust for a particular financial year over the unitholders of other classes of units. Prior to the end of the financial year it is proposed to restructure the trust by way of interposing an incorporated company, company 2, directly between the trust and its unitholders. Prior to the end of the financial year company 2 will be incorporated, unitholder 1 will own X ordinary nonredeemable fully paid shares and unitholder 2 will own Y ordinary nonredeemable fully paid shares. Unitholder 1 and 2, as tenants in common will own Z ordinary nonredeemable fully paid shares, unitholder 1 with a U% interest and unitholder 2 with V% interest. The rights attached to the ordinary shares in company 2 will align with the rights of the units. Owners of ordinary shares will have a right to vote and participate in capital distributions, and the right to dividends, subject to dividends being declared to the class of ordinary shareholders over the shareholders of other classes of shares. Prior to the end of the financial year, the trust will issue W new ordinary units to company 2 and all other units in the trust will be redeemed on that date. The unit holdings in the trust post-restructure are as follows; Class Company 2 Total Ordinary W 100% Unitholder 1 will be issued X ordinary non-redeemable fully paid shares in company 2 and unitholder 2 will be issued Y ordinary nonredeemable fully paid shares in company 2. Unitholder 1 and 2 as tenants in common will be issued with Z ordinary nonredeemable fully paid shares in company 2, unitholder 1 with U% interest and unitholder 2 with V% interest. The current unitholders of the trust will receive only these shares, nothing else. Prior to the end of the financial year, company 2 will elect to form a tax consolidated group. The consolidated group will consist of company 2 (the head company) and its only wholly owned subsidiary, the trust. The unitholders and company 2 will choose to apply Division 615 rollover relief within 2 months after the completion time to disregard any capital gain or capital loss arising from the restructure. For the financial year ended 30 June xx, related private company loans are likely to be made to the trust prior to consolidation but prior to the end of the financial year. The respective distributable surpluses of each related private company making loans to the trust exceed the amount of the respective loan. These loans are unlikely to be repaid prior to the related private company's lodgment day. There will be no loans leaving the consolidated group.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 109D | Income Tax Assessment Act 1936 Section 109K | Income Tax Assessment Act 1936 Section 318 | Income Tax Assessment Act 1997 subdivision 124-H | Income Tax Assessment Act 1997 subdivision 124-N | Income Tax Assessment Act 1997 s ubsection 615-10(1) | Income Tax Assessment Act 1997 subsection 615-20(1) | Income Tax Assessment Act 1997 Subsection 615-20(2) | Income Tax Assessment Act 1997 subsection 615-20(3) | Income Tax Assessment Act 1997 subsection 615-25(1) | Income Tax Assessment Act 1997 subsection 615-25(2) | Income Tax Assessment Act 1997 subsection 615-25(3) | Income Tax Assessment Act 1997 subsection 618-30(1) | Income Tax Assessment Act 1997 subsection 615-30(2) | Income Tax Assessment Act 1997 subsection 615-30(3) | 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: Under subdivision 124-H of the Income Tax Assessment Act 1997 (ITAA 1997) a trust with fixed capital and discretionary income entitlements may be considered a 'unit trust' under the ordinary meaning of the term. The National Tax Liaison Group Losses and Capital Gains Tax (CGT) minutes of 9 November 2011 discussed unit trust rollover to a company under subdivision 124-H and 124-N of the ITAA 1997 where the units have fixed capital rights and discretionary income rights. The availability of roll-over under subdivision 124-N of the ITAA 1997 requires, among other things, that CGT event E4 is capable of applying to all the units in the trust. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 2002 , which introduced the subdivision describes this requirement as follows; A condition of roll-over is that CGT event E4 (capital payments for trust interest) must be capable of applying to all of the interests in the trust [Schedule 2, item 1, paragraph 124-855(1)(b)]. A trust where all the beneficiaries' interests have a fixed capital component and a discretionary income component will satisfy this requirement. A trust where all the beneficiaries' interests have a discretionary capital component and a fixed income component will not be eligible for the roll-over. It follows that the roll-over does not apply where the trust is a discretionary trust. It is the opinion of the National Tax Liaison Group Losses and CGT that units in a trust with a fixed capital entitlement and a discretionary entitlement to income would satisfy the requirement of subdivision 124-H of the ITAA 1997. Therefore, as Division 615 of the ITAA 1997 operates largely the same way as 124-H of the ITAA 1997 a reasonable person would conclude that Division 615 of the ITAA 1997 would also apply, subject to the passing of the relevant conditions. Under Division 615-A of the ITAA 1997roll-over relief for business restructuring may be available in respect of the redeeming or cancelling interests in one entity for shares in a company if the conditions for the roll-over relief and the requirements in subdivision 615-B of the ITAA 1997 are satisfied. Subsection 615-10(1) of the ITAA 1997 provides the following: You can choose to obtain a roll-over if you are a member of a company or a unit trust ( the original entity) , and under a scheme for reorganising its affairs: (a) a company (the interposed company ) acquires no more than 5 shares or units in the original entity; and (b) these are the first shares or units that the interposed company acquires in the original entity; and (c) you and at least one other entity (the exchanging members ) own all the remaining shares or units in the original entity; and (d) those remaining shares or units are redeemed or cancelled; and (e) each exchanging member receives shares (and nothing else) in the interposed company in return for their shares or units in the original entity being redeemed or cancelled; and the requirements in Subdivision 615-B are satisfied. Subdivision 615-B of the ITAA 1997 sets out other requirements which must be satisfied in order to be eligible for roll-over under Division 615 of the ITAA 1997. Subdivision 615-B provides that under section 615-15 of the ITAA 1997 that; The interposed company must own all the shares or units in the original entity immediately after the time (the completion time ) all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the scheme. Under subsection 615-20(1) of the ITAA 1997 it states; Immediately after the completion time, each exchanging member must own: (a) a whole number of shares in the interposed company; and (b) a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares in the original entity that were: (i) owned by the member; and (ii) disposed of, redeemed or cancelled under the scheme. Subsection 615-20(2) of the ITAA 1997 states; The following ratios must be equal (a) the ratio of: (i) the market value of each exchanging member's shares in the interposed company; to (ii) the market value of the shares in the interposed company issued to all exchanging members (worked out immediately after the completion time); (b) the ratio of: (i) the market value of that member's shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme; to (ii) the market value of all the shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation). Under subsection 615-20(3) of the ITAA 1997; Either: (a) you are an Australian resident at the time your shares or units in the original entity are disposed of, redeemed or cancelled under the scheme; or (b) if you are a foreign resident at that time: (i) your shares or units in the original entity were taxable Australian property immediately before that time; and (ii) your shares in the interposed company are taxable Australian property immediately after the completion time. Subsection 615-25(1) of the ITAA 1997 states; The shares issued in the interposed company must not be redeemable shares. Under subsection 615-25(2) of the ITAA 1997 it states; Each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued until at least the completion time. Subsection 615-25(3) of the ITAA 1997 provides that; Immediately after the completion time: (a) the exchanging members must own all the shares in the interposed company; or (b) entities other than those members must own no more than 5 shares in the interposed company, and the market value of those shares expressed as a percentage of the market value of all the shares in the interposed company must be such that it is reasonable to treat the exchanging members as owning all the shares. Under subsection 618-30(1) of the ITAA 1997 it states; Unless subsection (2) applies, the interposed company must choose that section 615-65 applies. Subsection 615-30(2) of the ITAA 1997 states; The interposed company must choose that a *consolidated group continues in existence at and after the completion time with the interposed company as its *head company, if: (a) immediately before the completion time, the consolidated group consisted of the original entity as head company and one or more other members (the other group members ); and (b) immediately after the completion time, the interposed company is the head company of a consolidatable group consisting only of itself and the other group members. Subsection 615-30(3) of the ITAA 1997 provides that; A choice under subsection (1) or (2) must be made: (a) within 2 months after the completion time, if the choice is under subsection (1); or (b) within 28 days after the completion time, if the choice is under subsection (2); or (c) within such further time as the Commissioner allows. The choice cannot be revoked. | Detailed Reasoning - Application to your circumstances: Subsections 615-10(1)(a) and 615-10(1)(b) of the ITAA 1997 are satisfied as company 2 (interposed company) will acquire W units in In the trust and these are the first units that company 2 will acquire in the trust. Subsections 615-10(1)(c), 615-10(1)(d) and 615-10(1)(e) of the ITAA 1997 are satisfied as the current unitholders, exchanging members unitholder 1 unitholder 2, of the trust under the proposed restructure will own all the remaining units in the trust, these units will be redeemed, and unitholder 1 and 2 will receive shares and nothing else in company 2 in return for their units in the trust being redeemed. Section 615-15 ITAA1997 is satisfied as company 2 will own all the units in the trust immediately after the time (completion time) that all current unitholders have had their units in the trust redeemed. Subsection 615-20(1)(a) of the ITAA 1997 is satisfied immediately after the completion time as each current unitholder will own a whole number of shares in company 2. Subsection 615-20(1)(b) of the ITAA 1997 is satisfied immediately after the completion time as each current unitholder will own a percentage of shares in company 2 that were issued as part of the restructure that is equal to the percentage of units in the trust that were owned by the current unitholder and redeemed under the scheme. Subsection 615-20(2) of the ITAA 1997 is satisfied as the ratios of (a)(i) to (a)(ii), and (b)(i) to (b)(ii), are equal time their units in the trust are redeemed under the restructure. Subsection 615-25(1) of the ITAA 1997 is satisfied as the shares issued in company 2 will not be redeemable shares. Subsection 615-25(2) of the ITAA 1997 is satisfied as each current unitholder will own their shares in company 2 from the time they are issued to after the completion time. Subsection 615-25(3) of the ITAA 1997 is satisfied as immediately after the completion time the current unitholders will own all the shares in company 2. Section 615-30 of the ITAA 1997 is satisfied as company 2 will make a choice within two months after the completion time. Accordingly Division 615 of the ITAA 1997 will apply to the proposed restructure and the conditions in Subdivision 615-B are satisfied as evidenced by the above. | Detailed Reasoning - Question 2: Under section 109D of the Income Tax Assessment Act 1936 (ITAA 1936) a private company is taken to pay a dividend to an entity at the end of one of the private company's years of income if the private company makes a loan to the entity during the current year and the loans is not fully repaid before the lodgment day for the current year and subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year, and the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made. Section 109K of the ITAA 1936 states; A private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan the private company makes to another company. Subsection 701-1(1) of the ITAA 1997 provides that; If an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the head company of the group, rather than separate entities, during that period. Taxation Ruling TR 2004/11, paragraph 4, explains that the Single Entity Rule (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. | Detailed Reasoning - Application to your circumstances: For the financial year ended 30 June xx, related private company loans are likely to be made to the trust prior to consolidation but before the end of the financial year. Prior to the end of the financial year, company 2 will elect to form a tax consolidated group. The consolidated group will consist of company 2 (the head company) and its only wholly owned subsidiary, the trust. If the operation of section 109D of the ITAA 1936 was to be triggered it would occur on The last day of the financial year, however this is post company 2's election to form a tax consolidated group. Consequently, after the restructure, company 2 will be treated as the recipient of any payment or loan from a related private company pursuant to the SER, as long as the consolidation occurs prior to the end of the financial year. Please note: if the money that is to be paid or loaned is 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.

Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not considered the application of Part IVA to the arrangement you asked us to rule on.