Private ruling: Dividend Stripping and Franking Credits
Published: February 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the arrangement a scheme by way of, or in the nature of, or have substantially the effect of, dividend stripping under section 177E of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: Is the arrangement a franking credit scheme, as defined in section 177EA of the ITAA 1936, such that the Commissioner would be permitted to deny you a franking credit benefit? | A2: No.

Relevant facts and circumstances: Company A will enter into transactions that will earn it substantial income on which it will pay income tax. That is, the company expects to have significant tax paid accumulated profits. The transactions will be with an unrelated party and conducted for market value. Company A will continue to operate its business. Company A is currently owned by a number of unrelated parties with you being one of the shareholders. In order to protect its assets from potential claims that could arise under its continuing operations, company A wishes to transfer its accumulated profit to a new entity. It is proposed that company B is formed to become a holding company and acquires all the shares in company A on a scrip for scrip basis such that the original shareholders of company A become the shareholders in company B (the holding company) with the same rights and entitlements. Effectively no change in beneficial ownership occurs. To transfer its accumulated profit to company B, company A declares a fully franked dividend to company B and transfers the cash to be used by company B for its own purposes which may include investment and payment of dividends to the original shareholders.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 177E and | Income Tax Assessment Act 1936 Section 177EA.

Reasons for decision: Detailed Reasoning - Section 177E: Section 177E of the ITAA 1936 is an anti-avoidance provision that is designed to prevent tax benefits being obtained as part of a dividend stripping scheme or a scheme with substantially the same effect as a dividend stripping scheme. The term 'dividend stripping' has no precise legal meaning. In its traditional form, a dividend stripping operation occurs when shares in a company with retained profits are acquired, usually by a share trader who pays the existing shareholders a capital sum reflecting the value of the retained profits. The new shareholders then liberate those profits through the payment of a dividend post acquisition. Generally, the new shareholders who derive dividend income from the company would not be liable to tax upon those dividends. Therefore, a scheme by way of, or in the nature of, dividend stripping, or one that has substantially the effect of a scheme by way of, or in the nature of, dividend stripping, would be one that has the effect of delivering a shareholder's entitlement to a dividend in a tax advantaged manner. Based on a consideration of all relevant facts it is not considered that section 177E of the ITAA 1936 can be applied to this arrangement. | Detailed Reasoning - Section 177EA: Section 177EA of the ITAA 1936 is primarily directed to franking credit trading which is the process of transferring franking credits on a dividend from investors who cannot fully use them, to investors who can fully use them. If the section applies, the Commissioner may debit the company's franking account or deny the franking credit benefit to the recipient of the dividend. The arrangement is not considered to be a scheme to which section 177EA of the ITAA 1936 can apply.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.