Private ruling: Liquidation distribution
Date of advice: 21 April 2023
Published: 5 June 2023
Ruling period: 1 July XXXX to 30 June XXXX

Ruling: Q1: Will any part of the Capital Distribution paid to the Taxpayers in respect of their C Class shares in the Company be deemed to be a dividend under section 47 of the Income Tax Assessment Act 1936 ("ITAA 1936")? | A1: No. | Q2: Will the Commissioner make a determination pursuant to subsection 45B(3) of the ITAA 1936 that any part of the Capital Distribution paid to the Taxpayers in respect of their C Class shares will be treated as an unfranked dividend? | A2: No. | Q3: Will section 177D of the ITAA 1936 apply to the proposed scheme? | A3: No. | Q4: Will Capital Gains Tax ("CGT") event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen on cancellation of the Taxpayers' C Class shares in the Company? | A4: Yes. | Q5: For the purposes of subsection 104-25(3) of the ITAA 1997, will the amount of each Taxpayers' Capital Distribution be the amount of the Taxpayers' capital proceeds? | A5: Yes. | Q6: Will the Taxpayers' capital gains from the C Class shares be disregarded pursuant to paragraph 104-25(5)(a) of the ITAA 1997? | A6: Yes. | Q7: Will CGT event K6, in section 104-225 of the ITAA 1997 happen on cancellation of the Taxpayers' C Class shares in the Company? | A7: No.

Relevant facts and circumstances: 1.The Company was incorporated on XX XX XXXX and was a member of the XX Group established by the late Individual A and Individual B. 2. By XXXX, the Company had largely ceased its activities, with only small amounts of interest income and administration expenses being derived and incurred in each year. From XXXX, a small amount of dividends were paid to Individual A and Individual B. 3. Prior to the death of Individual A in XXXX, the shareholders of the Company comprised Individual A and Individual B, and their four children (collectively described at the Taxpayers) as follows: Table 1: Shareholders of the Company Shareholder A Class B Class C Class D Class E Class Individual A XX Individual B XX Child 1 XX XX X Child 2 XX XX Child 3 XX XX X Child 4 XX X Total Shares XX XX XXX XX X 4. Each of the shareholders listed above had acquired their respective A Class, B Class and C Class shares (as relevant) in or prior to 1985. 5. XXXX 6. The D Class and E Class shares were issued to their respective shareholders listed above sometime after 1985. 7. On Individual A's death, their A Class shares in the Company passed to Individual B pursuant to the will. 8. In June 20XX, the Company declared a dividend of all retained earnings other than an amount referable to the 'Pre-CGT Profit'. 9. On XX XX XXXX, the directors of the Company passed a special resolution to adopt 'the Constitution', as the Constitution of the Company, in substitution for, and to the exclusion of, all the existing Memorandum and Articles of Association. 10. The Schedule to the Constitution sets out the rights of each class of shares as follows: Table 2: Rights of each class of shares Class Rights A Rights to dividends as determined by the Constitution. Are identified as ordinary shares. B, C, D and E Rights to dividends as determined under the Constitution. No rights other than those conferred by the Corporations Act 2001 . No rights to attend or vote at general meetings. No rights to receive notices, accounts, reports or balance sheets. No rights powers and duties conferred on members elsewhere in the Constitution. 11. The adoption of the Constitution did not alter any rights or obligations attaching to any shares on issue. 12. On Individual B's death in XX XX XXXX, their A Class and B Class shares formed part of their deceased estate. The administration of the estate is ongoing. Proposed liquidation 13. The current shareholders of the Company can be summarised as follows: Table 3: Current shareholders of the Company Shareholder A Class B Class C Class D Class E Class Estate XX XX Child 1 XX XX X Child 2 XX XX Child 3 XX XX X Child 4 XX X Total Shares XX XX XXX XX X 14. All shareholders are Australian residents for Australian income tax purposes. 15. The Company currently has a small amount of cash and a term deposit. 16. To simplify their affairs and wind up the Company, the shareholders wish to liquidate the Company and will engage a liquidator to do so. The purpose of liquidating the Company is so that the children can release the capital in the Company in an equitable way and continue on individually, rather than conduct another business venture together. The shareholders have determined that the Company ought to be wound up and the net proceeds within the Company be distributed to the shareholders. To facilitate this in the most equitable and straight-forward manner, it is proposed that the liquidator's distribution will be predominantly paid on the C Class shares as this is the only class of shares that is held equally by each of children. 17. Clause 94 of the Constitution provides the following in relation to the winding up of the Company: 94. Winding up (1) If the Company is wound up, the liquidator may, with the sanction of a special resolution, divide among the members in kind the whole or any part of the property of the Company and may for that purpose set such value as he considers fair upon any property to be so divided and may determine how the division is to be carried out as between the members or different classes of members. (2) The liquidator may, with the sanction of a special resolution, vest the whole or any part of any such property in trustees upon such trusts for the benefit of the contributories as the liquidator thinks fit, but so that no member is compelled to accept any shares or other securities in respect of which there is any liability. 18. The liquidator has the discretion to make a determination as to which class or classes of shares are entitled to a distribution on winding up. 19. It is proposed that the liquidator's distribution with respect to C Class shares will comprise the paid-up capital of those shares and the XXXXXXXX. 20. It is proposed that the liquidator's distribution to holders of all other classes of shares will comprise the paid-up capital of their shares. 21. The A Class and B Class shares will not be transferred in specie to the Taxpayers at any point. 22. Based on the Company's trial balance as at 30 June 20XX, it is anticipated that a liquidator would pay a cash distribution (the 'Capital Distribution') to the four Taxpayers in respect of their C Class shares according to the following formula: Table 4: Capital Distribution Total Equity at 30 June 20XX $$ Each C Class Shareholder will receive: XX% of retained earnings at liquidation $ Paid up capital of C Class shares (XX shares @ $X each) $ Capital Distribution $$ 23.The Company will not have any property before the company ceases to exist in accordance with the Corporations Act 2001(Cth) Composition of the Company's Retained Earnings 24. The Capital Distribution will be sourced from the Company's retained earnings. 25. The Company received a trust distribution from a related trust, which comprised : • $X Pre-CGT Profits, and • $$$$$$ of other income. 26. The "net income" of the Trust on which the Company was assessed pursuant to section 97 of the ITAA 1936 in the XXXX income year did not include any capital gains from the Property on the basis that the property was acquired by the Trust on or before 20 September 1985 (i.e. pre-CGT) and that it was held as capital asset, and not as an item of trading stock or as a revenue asset. 27. The profit of $$$ is a pre-CGT capital gain and disregarded for income tax purposes. 28. The Company did not record the amount of the Pre-CGT Profit in a separate account to its retained earnings. However, since its distribution: • the Company's retained earnings balance has always exceeded the amount of the Pre-CGT Profit until the 20XX income year; • in the 20XX income year, following Individual A's death, the Company declared a dividend equal to all of its retained earnings other than the Pre-CGT Profit; and • in the 20XX and subsequent income years, the Company's retained earnings balance has been reduced each year as a consequence of net expenses incurred by the Company to finalise its affairs. 29. As at 30 June 20XX, the Company's retained earnings balance is wholly referable to the Pre-CGT Profit. 30. On liquidation of the Company, it is anticipated that a liquidator would be able to identify the Pre-CGT Profit as the source of the Company's retained earnings balance in making the Capital Distribution to the C Class shareholders. 31. Dividends history has been provided. 32. The 75 A Class and 75 B Class shares held by the executor for the Estate of Individual B will form part of the residue of the Estate. The beneficiaries of the residue of the deceased estate in equal shares are the children. The A and B Class shares have a combined cost base of the market value of the shares at the date of Individual A's death and Individual B's death. If the Estate were to receive a distribution on the A and B Class shares, the total distribution would not exceed the cost base of the A and B Class shares. That is, no overall capital gain would arise if CGT event C2 were to happen. Assumption At the time of the disposal of the Property, the Property was a pre-CGT asset as set out in section 149-10 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1936 subsection 45B(1) | Income Tax Assessment Act 1936 subsection 45B(2) | Income Tax Assessment Act 1936 subsection 45B(3) | Income Tax Assessment Act 1936 subsection 45B(5) | Income Tax Assessment Act 1936 subsection 45B(8) | Income Tax Assessment Act 1936 subsection 45C(3) | Income Tax Assessment Act 1936 section 47 | Income Tax Assessment Act 1936 subsection 47(1) | Income Tax Assessment Act 1936 subsection 47(1A) | Income Tax Assessment Act 1936 section 160ZZS | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 subsection 177A(5) | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 paragraph 177F(1)(a) | Income Tax Assessment Act 1936 subsection 177F(2) | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-10(5) | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-25(1) | Income Tax Assessment Act 1997 paragraph 104-25(1)(a) | Income Tax Assessment Act 1997subsection 104-25(2) | Income Tax Assessment Act 1997 subsection 104-25(3) | Income Tax Assessment Act 1997 subsection 104-25(5)(a) | Income Tax Assessment Act 1997 section 104-230(1) | Income Tax Assessment Act 1997paragraph 104-230(1)(a) | Income Tax Assessment Act 1997 section 104-230(2) | Income Tax Assessment Act 1997 section 104-225 | Income Tax Assessment Act 1997 section 104-135 | Income Tax Assessment Act 1997 section 104-135(1) | Income Tax Assessment Act 1997 section 104-135(5) | Income Tax Assessment Act 1997 section 104-135(6) | Income Tax Assessment Act 1997 subsection 109-5(1) | Income Tax Assessment Act 1997 subsection 116-20(1) | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 section 149-10 | Income Tax Assessment Act 1997 subsection 149-30(1) | Income Tax Assessment Act 1997 section 855-10 | Income Tax Assessment Act 1997 section 855-45 | Income Tax Assessment Act 1997 section 855-45(1) | Income Tax Assessment Act 1997 section 995-1(1)

Reasons for decision: Detailed Reasoning - Detailed reasoning: At common law, a distribution to a shareholder by a liquidator is capital, not income, in the hands of the shareholder since it is a realisation of the shareholder's interest in the company (Commissioner of Taxation (NSW) v Stevenson (1937) 59 CLR 80) . However, section 47 of the ITAA 1936 deems certain amounts paid to shareholders of a company to be dividends paid to shareholders out of the profits derived by the Company. Subsection 47(1) of the ITAA 1936 provides that: Distributions to shareholders of a company by a liquidator in the course of winding-up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it. The use of the term 'income' in the context of subsection 47(1) of the ITAA 1936 has been interpreted in Gibb v FCT (1966) 118 CLR 628 as meaning income according to ordinary concepts rather than 'assessable income'. In response to the uncertainty surrounding the term 'income', subsection 47(1A) of the ITAA 1936 was introduced to extend the definition of 'income' in subsection (1) and states: A reference in subsection (1) to income derived by a company includes a reference to: (a) an amount (except a net capital gain) included in the company's assessable income for a year of income; or (b) a net capital gain that would be included in the company's assessable income for a year of income if the Income Tax Assessment Act 1997 required a net capital gain to be worked out as follows: Method statement Step 1. Work out each capital gain (except a capital gain that is disregarded) that the company made during that year of income. Do so without indexing any amount used to work out the cost base of a CGT asset. Step 2. Total the capital gain or gains worked out under Step 1. The result is the net capital gain for that year of income. Liquidator distributions sourced from assets acquired prior to 20 September 1985 are, in some circumstances, not taxable as either a deemed dividend under section 47 of the ITAA 1936, or a net capital gain under section 104-25 of the ITAA 1997. If the assets were acquired prior to 20 September 1985 and a capital gain is disregarded, then these assets maintain the tax-free status of the distribution from the capital profits reserve account. | Detailed Reasoning - The Archer Brothers Principle: Taxation Determination TD 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions? (TD 95/10) discusses the significance of the "Archer Brothers principle" in the context of liquidation distributions and section 47 of the ITAA 1936: The principle is that if a liquidator appropriates (or 'sources') a particular fund of profit or income in making a distribution (or part of a distribution), that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 and other provisions of the Income Tax Assessment Act 1936 (the Act). Generally, we accept that a liquidator may rely on the Archer Brothers principle, except where a specific provision in the Act produces a different result (e.g., the rules in section 160ZLA that specify the order in which different types of funds are distributed). TD 95/10 paragraph 4 states that the Archer Brothers principle applies if: The company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and It is clear from either the accounts or statement of distribution that the liquidator has appropriated the specific profit or fund in making the distribution. Importantly, TD 95/10 also notes that the maintenance of 'separate accounts' is not essential to identify a fund or profit from which a distribution is made: It has been suggested that the Archer Brothers principle operates only if separate accounts have been kept for each specific fund or profit so that a liquidator's appropriation from any account is unequivocally from a particular fund or profit. Although the maintenance of separate accounts makes it easier to identify the source of a distribution, and is, in our opinion, preferable from a practical point of view, we do not consider that separate accounts are essential provided the liquidator is able to identify a fund or profit from which a distribution is made. For example, if pre-CGT non-assessable profits and post-CGT capital gains have been accumulated in the same reserve, but can still be separately identified, we will accept a liquidator's nominated appropriation. In the present circumstances, in accordance with the assumption, the Pre-CGT Profit represents an amount of pre-CGT disregarded capital gains which was received by the Company as a consequence of the distribution received from the Trust in 20XX. Notwithstanding that the Pre-CGT Profit has not been maintained in a separate account by the Company the amount can nevertheless be separately identified on the basis that: • The Company's retained earnings balance since 20XX has always exceeded the amount of Pre-CGT Profit until the 20XX income year; • In the 20XX income year, the Company declared a dividend equal to all of its retained earnings other than the pre-CGT Profit; and • In the 20XX and subsequent income years, the Company's retained earnings balance has been reduced each year as a consequence of net expenses incurred by the Company to finalise its affairs. Based on the above, it is accepted that a liquidator would be able to identify the Pre-CGT Profit as the entire source of the Company's retained earnings balance in making the Capital Distribution. Consequently, by application of the Archer Brothers principle , the character of the Capital Distribution will be of: • capital of the Company to the extent that it is sourced from share capital; and • disregarded capital gains to the extent that it sourced from the Company's retained earnings. The disregarded capital gains received by the Company as a consequence of a trust distribution is not income according to ordinary concepts. This amount would therefore not be 'income' for the purposes of applying subsection 47(1) of the ITAA 1936. The effect of subsection 47(1A) of the ITAA 1936 is that capital gains that are disregarded or otherwise not a 'net capital gain included in the assessable income' of the Company, such as the XXXXXX, will also not be 'income' for the purposes of subsection 47(1) of the ITAA 1936. Based on the above, no part of the Capital Distribution to be paid to the Taxpayers in respect of their C Class shares represents income derived by the Company. Accordingly, no part of the Capital Distribution is deemed to be a dividend by operation of subsection 47(1) of the ITAA 1936. Question 2 | Detailed Reasoning - Detailed reasoning: Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends. Section 45B of the ITAA 1936 concerns the relationship between company and shareholder. It is an anti-avoidance provision which seeks to ensure that certain payments, allocations and distributions made in substitution for a dividend by a company to its shareholder, relevantly referred to in subsection 45B(5) of the ITAA 1936 as the 'provision of a capital benefit', are instead treated as a dividend for taxation purposes. Section 45B of the ITAA 1936 sets out threshold and definitional matters which, if met, empower the Commissioner to make a determination, the effect of which is to deem, pursuant to section 45C of the ITAA 1936, the return of capital to be an unfranked dividend. The section does not premise that a dividend would otherwise have been paid by the company if the 'capital benefit' had not been provided. Rather, the reference in subsection 45B(1) of the ITAA 1936 to dividend substitution is a reference to the 'capital benefit' or a part of it being in substance attributable to the company's profits. Subsection 45B(2) of the ITAA 1936 provides that section 45B applies if: (a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and (b) under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and (c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit. Subsection 45B(5) of the ITAA 1936 defines being 'provided with a capital benefit' as a reference to any of the following: (a) the provision of ownership interests in a company to the person; (b) the distribution to the person of share capital or share premium; (c) something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person. Subsection 45B(8) of the ITAA 1936 outlines the relevant circumstances of the scheme as including: (a ) the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company; (b) the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company; (c) whether the relevant taxpayer has capital losses that, apart from the scheme, would be unutilised (within the meaning of the Income Tax Assessment Act 1997) at the end of the relevant year of income; (d) whether some or all of the ownership interests in the company or in an associate (within the meaning in section 318) of the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985; (e) whether the relevant taxpayer is a non-resident; (f) whether the cost base (for the purposes of the Income Tax Assessment Act 1997 ) of the relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit; (h) if the scheme involves the distribution of share capital or share premium--whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium; (i) if the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests: (i) the period for which the ownership interests are held by the holder of the interests; and (ii) when the arrangement for the disposal of the ownership interests was entered into; ... (k) any of the matters referred to in subsection 177D(2). The matters referred to in subsection 177D(2) of the ITAA 1936 are: a) the manner in which the scheme was entered into or carried out b) the form and substance of the scheme c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out d) the result in relation to the operation of the Act that would be achieved by the scheme, if not for section 45B e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result, or may reasonably be expected to result, from the scheme g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). The intent of section 45B of the ITAA 1936 is to ensure relevant amounts are treated as dividends for taxation purposes if certain payments, allocations and distributions are made in substitution for dividends. Further, paragraphs 30-32 of Practice Statement Law Administration PSLA 2008/10 state: In essence, the second object of section 45B is concerned with ensuring that companies do not distribute what are effectively profits to shareholders as preferentially-taxed capital rather than dividends. The substituted dividend rule of section 45B requires that the Commissioner identify and weigh all of the relevant circumstances surrounding the provision of a 'capital benefit' to the relevant taxpayer, in order to determine whether the object of delivering a tax preferred receipt to the shareholders constitutes a more than incidental purpose of the scheme. Section 45B does not premise that a dividend would have been paid if the share capital had not been distributed, unlike Part IVA which operates on the basis of reasonable expectation of the alternative. Rather, the reference in section 45B to dividend substitution is a reference to the distribution being more readily attributable to the company's profits than its share capital. As noted at paragraph 59 in PS LA 2005/21, section 45B is concerned not only with capital benefits provided in substitution for an ordinary dividend, but also the substitution of capital benefits for extraordinary dividends. Taking into account the various considerations, it is reasonable to accept that any tax benefits (incidental or otherwise) would not lead to the conclusion that the proposed arrangement would be entered for a more than incidental purpose of obtaining a tax benefit. These considerations include: • The dividend distribution history (i.e. there is no evidence that profits have been accumulated to take advantage of the capital benefits that arise from liquidation of a company); and • The cessation of business activities prior to the proposed liquidation of the Company, which reflects that the Taxpayers were not engaged in jointly conducting the business to derive profits (the Pre-CGT Profit is the main source of the retained earnings). Given the commercial reasons for the proposed liquidation of the Company, it is considered that an essential object of the proposed liquidation is to achieve closure reasons outlined above. Therefore, the tax benefit that the C Class shareholders would receive is an incidental object of the liquidation and it is considered that the manner of the scheme does not point toward there being a more than incidental purpose of obtaining the tax benefit. Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the proposed Capital Distribution. | Detailed Reasoning - GENERAL ANTI-AVOIDANCE: Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision. Broadly, it allows the Commissioner the discretion to cancel a tax benefit obtained by a taxpayer in relation to a scheme where the sole or dominant purpose of the scheme was to obtain a tax benefit. | Detailed Reasoning - Scheme: Part IVA requires the consideration of a 'scheme', which is defined in subsection 177A(1) of the ITAA 1936 as: Guidance of the meaning of the term 'scheme' can be found in case law. In Federal Commissioner of Taxation v. Hart (2004) 55 ATR 712 ( Hart ), per Gummow and Hayne JJ: [43] [The] definition is very broad. It encompasses not only a series of steps which together can be said to constitute a "scheme" or a "plan" but also (by its reference to "action" in the singular) the taking of but one step. | Detailed Reasoning - Tax Benefit: There must be a tax benefit obtained by the taxpayer in order for Part IVA to potentially apply. Section 177C of the ITAA 1936 broadly provides that a tax benefit in relation to a scheme relates to: • amounts not being included in assessable income that would otherwise have been included in assessable income • amounts included as an allowable deduction that would otherwise not have been included as an allowable deduction • capital losses incurred that would otherwise not have been incurred • foreign income tax offsets being allowable that would otherwise not have been allowable, and • no liability to withholding tax on an amount that would otherwise have had a liability. | Detailed Reasoning - Dominant purpose: Part IVA also requires consideration of the purpose for which the scheme was entered into. Specifically, section 177D of the ITAA 1936 refers to the purpose of the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. The person need not be the taxpayer. The meaning of the purpose is clarified by subsection 177A(5) of the ITAA 1936, which explains that, where there are two or more purposes, the purpose includes the dominant purpose: A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose. When determining whether the purpose of the scheme was to enable a tax benefit, the Commissioner must also have regard to the following eight factors specified in subsection 177D(2): • the manner in which the scheme was entered into or carried out • the form and substance of the scheme • the time the scheme was entered into and the length of time during which the scheme was carried out • the result that, but for the operation of Part IVA, would be achieved by the scheme • any change (being a change that has resulted from, will result of or may reasonably be expected to result from, the scheme). in the financial position of the relevant taxpayer that has resulted, or will result from, the scheme • any change (being a change that has resulted from, will result of or may reasonably be expected to result from, the scheme)in the financial position of any person who has, or has had, any connection with the relevant taxpayer • any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f) of the scheme having been entered into or carried out, and • the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph(f). Focussing on the various elements of Part IVA should not obscure the way in which the Part as a whole is intended to operate. What constitutes a scheme is ultimately meaningful only in relation to the tax benefit that has been obtained since the tax benefit must be obtained in connection with the scheme. Likewise, the dominant purpose of a person in entering into or carrying out the scheme, and the existence of the tax benefit, must be considered against a comparison with reasonable alternative schemes capable of carrying out the commercial objectives of the arrangement. In summary, section 177D of the ITAA 1936 provides that Part IVA applies to a scheme in connection with which a taxpayer has obtained a tax benefit if, after having regard to the eight specified factors, it would be concluded that any person who entered into or carried out the scheme, or any part of it, did so for the dominant purpose of enabling the relevant taxpayer to obtain the tax benefit. The identification of a tax benefit requires consideration of the tax consequences of a 'counterfactual', or alternative hypothesis, that would have resulted had the scheme not been entered into. As stated by Gummow and Hayne JJ Hart: [66] When [section 177C(1)] is read in conjunction with [former] s177D(b) it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in [former] s177D(b) will require consideration of what other possibilities existed. Guidance for identifying the counterfactuals of the scheme can be found in Practice Statement PS LA 2005/24: Application of the General Anti-Avoidance Rules (PS LA 2005/24). In particular, paragraph 74 lists the following considerations for determining the counterfactuals: • the most straightforward way of achieving the commercial and practical outcomes • commercial norms, such as standard industry behaviour • social norms, such as family obligations • behaviour of the parties around the time of the scheme compared with the period of the scheme's operation, and • actual cash flow. PSLA 2005/24 further explains that if: • the scheme had no effect other than obtaining the tax benefit, it is reasonable to assume that nothing would have happened if it was not carried out (paragraph 75), and • a tax benefit is obtained in connection with the scheme which also achieves a wider commercial objective, then it would be reasonable to expect that in absence of the scheme the wider commercial objectives would have been pursued by an alternative arrangement (paragraph 76). In Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 the Court explained that although the Commissioner has to consider each of the factors provided by former subsection 177D(b), this doesn't mean that each of the factors must point to the dominant purpose, stating that: Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against that [former] s177D requires in order to reach the conclusion to which 177D refers. The Commissioner's support of this view is provided in PS LA 2005/24 which states at paragraph 88 that all factors of subsection 177D(2) need to be taken into account with regard to the relevant evidence, and weighed together, to identify the dominant purpose of the scheme. | Detailed Reasoning - Cancellation of tax benefit: Where the Commissioner has made a determination under paragraph 177F(1)(a) of the ITAA 1936 that an amount is to be included in a taxpayer's assessable income, subsection 177F(2) provides that this amount shall be deemed to be included in the taxpayer's assessable income. | Detailed Reasoning - Application in these circumstances: The proposed arrangement would satisfy the requirements for a scheme pursuant to subsection 177A(1) of the ITAA 1936. | Detailed Reasoning - Tax benefit: To establish whether there is a tax benefit associated with the proposed arrangement, it is necessary to consider what is reasonably expected to occur, including the tax outcomes, if the scheme is not entered into. Taking into account the factors listed in paragraph 74 of PS LA 2005/24, a tax benefit would arise from streaming the liquidator's distribution predominantly (i.e. apart from the return of paid up capital on the other classes of shares) to the C Class shares. It is noted the fact that a taxpayer pays less tax if one form of the transaction rather than another is adopted, does not by itself demonstrate that Part IVA applies (paragraph 109 of PS LA 2005/24). | Detailed Reasoning - Dominant purpose: Whether your purpose in entering into the arrangement is to obtain a tax benefit, is determined with reference to the eight factors specified in subsection 177D(2) of the ITAA 1936: • The manner in which the scheme is entered into or carried out • The form and substance of the scheme • The time at which the scheme was entered into and the length of the period during which the scheme will be carried out • The result in relation to the operation of this Act, but for this part, would be achieved by the scheme • Any change in the financial position of the relevant taxpayer that has resulted, will result, or may be reasonably expected to result, from the scheme • Any change in the financial position of any person who has, or has had, any connection with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme • Any other consequences for the relevant taxpayer or person connected • The nature of any connection between the relevant taxpayer and any person referred to in subparagraph (vi). | Detailed Reasoning - Conclusion: Based on the available information and having regard to the eight factors in section 177D of the ITAA 1936, a reasonable person would more likely than not conclude that there are 'benefits' in entering into this scheme - the benefit of streaming the liquidator's distributions to the pre-CGT C Class shares. Taking into account the various considerations, it is reasonable to accept that any tax benefits (incidental or otherwise) would not lead to the conclusion that the proposed arrangement would be entered into for the sole or dominant purpose of obtaining a tax benefit. This is an ordinary family dealing, the main purpose of which is achieve the equitable distribution of the proposed liquidator's distribution between the Shareholders - noting that this in accordance with the wishes of Individual B as reflected in their will (the 75 A Class and 75 B Class will form part of the residue of the Estate and the beneficiaries of the residue of the deceased estate in equal shares are the Shareholders). The simplest way to achieve this is through the utilisation of C Class shares; any distributions to A Class and B Class shares would result in the same net outcome (should the Liquidator make a distribution to equally in relation to the A Class, B Class and C Class shares, it would not result in a capital gain with respect to the A Class and B Class shares). Consequently, Part IVA of the ITAA 1936 will not apply to the scheme. | Detailed Reasoning - Detailed reasoning: CGT event C2 in subsection 104-25(1) of the ITAA 1997 happens if your ownership of an intangible capital gains tax asset ends by the asset expiring or by it being released, discharged, redeemed, cancelled, abandoned, surrendered, or forfeited. As per Taxation Determination TD 2001/27 Income tax: capital gains: how do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997') treat:(a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend; and (b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)? , after the winding up of a company, CGT event C2 happens to the shares when the company ceases to exist in accordance with the Corporations Act 2001 (Cth) . CGT Event C2 will happen on cancellation of the Taxpayers' shares in the Company and pursuant to subsection 104-25(2) of the ITAA 1997 this will happen when the Company ceases to exist. | Detailed Reasoning - Detailed reasoning: When the liquidator cancels the shareholders' shares CGT event C2, in paragraph 104-25(1)(a) of the ITAA 1997, happens in relation to those shares. The capital proceeds of that CGT event, pursuant to subsection 116-20(1) of the ITAA 1997, is the total of the money received (or entitled to be received) and the market value of property received (or entitled to be received) in respect of the event happening. TD 2001/27 states at paragraph 1 that: The full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 (about cancellation, surrender and similar endings) in section 104-25 of the ITAA 1997. For the purposes of subsection 104-25(3) of the ITAA 1997, the 'capital proceeds' that the Taxpayers will receive is the liquidator's distribution, which includes, for the C Class shareholders, their share of the Pre-CGT Profit. | Detailed Reasoning - Detailed reasoning: Subsection 104-25(5)(a) of the ITAA 1997 provides that a capital gain arising from CGT event C2 is disregarded if the taxpayer "acquired" the asset before 20 September 1985. The term "acquire" has the meaning as set out in section 995-1(1): (a) a CGT asset: you acquire a CGT asset (in its capacity as a CGT asset) in the circumstances and at the time worked out under Division 109 (including under a provision listed in Subdivision 109-B); Further, subsection 109-5(1) states that: you acquire a CGT asset when you become its owner. In this case, the time when you acquire the asset is when you become its owner. The Taxpayers acquired their C Class shares before 20 September 1985. The capital gain or loss made on the cancellation of the C Class shares upon the winding up of the Company will be disregarded in accordance with paragraph 104-25(5)(a) of the ITAA 1997 as the shares were acquired by each Taxpayer before 20 September 1985. | Detailed Reasoning - Detailed reasoning: Under subsection 104-230(1) of the ITAA 1997, CGT event K6 happens if you own shares in a company that were acquired before 20 September 1985 (pre-CGT shares), a CGT event as set out in paragraph 104-230(1)(b) of the ITAA 1997 happens in relation to the shares, there is no roll-over for the 'other CGT event' and the requirement in subsection 104-230(2) of the ITAA 1997 is satisfied. The time of CGT event K6 is when the 'other CGT event' happens. The C Class shares were acquired before 20 September 1985 and hence paragraph 104-230(1)(a) of the ITAA 1997 is satisfied. In this case there is no roll-over for the happening of CGT event C2 happening to the shares. However, CGT event K6 only happens if, just before the other CGT event happened, the market value of post-CGT property (other than trading stock) of the company or the market value of interests the company owned through interposed companies in post-CGT property is at least 75% of the net value of the company (subsection 104-230(2) of the ITAA 1997). That is, the amount by which the market value of the assets of the company exceed the sum of the market value and liabilities of the company. Taxation Ruling TR 2004/18 Income tax: capital gains: application of CGT event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997 considers whether CGT event K6 can happen when pre-CGT shares end under CGT event C2 on deregistration of a company in liquidation following its winding up and explains that: 48. Although CGT event K6 is theoretically capable of happening, it is most unlikely that the company would have any property of the kind referred to in subsection 104-230(2) just before the time CGT event C2 happens. That is, the company is highly likely to be a 'shell' at that stage In this case, any property (cash) that the Company had will have been distributed. Therefore, CGT event K6 will not apply.

any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable by legal process; and | any scheme, plan, proposal, action, course of action or course of conduct.