Private ruling: Part IVA - trust losses
Date of advice: 26 June 2023
Published: 21 August 2023
Date scheme commenced: XX XX XX

Ruling: Q1: Will a dividend taken to be paid by the Company (if any) under section 109D or 109E of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of Proposed Arrangement be reduced to nil? | A1: As the Company's distributable surplus will not exceed zero, it is unnecessary to consider the application of section 109D or 109E of the ITAA 1936 other than that any dividend, if it did arise, would be reduced to nil under section 109Y of the ITAA 1936. | Q2: Will Subdivision 267-B of Schedule 2F to the ITAA 1936 apply to deny the Main Trust a deduction for its prior year tax losses in respect of the Proposed Arrangement? | A2: No. | Q3: Will the income injection test in Division 270 of Schedule 2F to the ITAA 1936 deny the Main Trust a deduction for its prior year tax losses in respect of the Proposed Arrangement? | A3: No. | Q4: Will the Commissioner apply section 177F of the ITAA 1936 to the Proposed Arrangement to determine that: • An amount equal to all or part of the Dividend is included in the assessable income of the Main Trust in any of the scheme years; and/or • Some or all of the Main Trust's deductions for prior year tax losses for any of the scheme years is denied? | A4: No. This private ruling applies for the following periods: Income year ending 30 June 20XX Income year ending 30 June 20XX The scheme commenced on: XX XX XX

Relevant facts and circumstances: This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. All references are to the Income Tax Assessment Act 1936 unless otherwise specified. 1. Person A is the founder and managing director of assorted business and property-holding entities, known collectively as the Group. 2. As the number of entities and properties comprising the Group have expanded, surplus funds from one investment would be used to supplement the external finance for other projects requiring funding. Initially, this was through the utilisation of profits made by the Building Trust flowing to other Group entities to subsidise new developments. This was done by replenishing capital lost by these entities in the early stages of their development. 3. Although the number of entities had expanded significantly as more properties were acquired, all the entities in the Group have been operated and funded as one whole. This has allowed for significant flexibility in intra-group financing, as all of the wealth in the Group is ultimately for the benefit of Person A and their family. 4. It has long been the practice of the Group for there to be a large number of intra-group loans, trust distributions to other Group entities, and unpaid present entitlements, to secure the liquidity and working capital needs of the Group as a whole and to replenish the capital of entities in the Group that were deriving losses. 5. Generally, one trust operates as the main banker for the Group. That is, even though there are many intra-group loans and unpaid present entitlements, this trust is the entity that obtains external borrowings and has a facility with the Bank and on-lends bank-borrowings to the Group as required. The fact that there is a single entity that has the bank facility has necessitated that the other Group entities provide cross-guarantees to secure the bank loan. 6. Recently, Person A has conducted a review of the estate plan, the Group structure, as well as their role on the Group's board, with succession planning a key motivating factor. The number of entities in the Group and the number of related-party loans has grown vastly over the years. This has made administration of the Group complex and costly. 7. The present structure requires significant care and attention to fully comply with Division 7A and the Group prefers to eliminate all Division 7A issues by fully repaying all loans owed to private companies within the Group. 8. It is with the background facts set out in mind that Person A seeks to simplify and rationalise the Group structure to remove as many of the intra-group liabilities as possible by consolidating loans. 9. The Main Trust as at XX XX XX has an estimated carried forward loss of approximately $X, with tax losses first arising in the XX income year. 10. The Main Trust and the Trust have previously made family trust elections specifying Person B as the specified individual. 11. The Main Trust has had a family trust election in force from XX XX XX. 12. The Company is a private company that only has ordinary shares on issue and is wholly owned by the Trust. 13. The Main Trust is an associate (as defined in section 318) of the Trust. 14. As at 30 June 20XX, the Company had the following approximate balances outstanding on loans it had made to other entities in the Group: • $X owed by the Main Trust (Existing Loans) • $X owed by the Trust • $X owed by Other Trusts in the Group • $X owed by Other Companies within the Group. 15. The Company, Main Trust, Trust, Other Trusts and Other Companies are collectively referred to as the Group Entities. 16. The Group Entities will be residents of Australia for the purpose of subsection 6(1) or subsection 95(2) of the ITAA 1936 throughout the entirety of the period of the ruling. 17. Due to the potential operation of section 109T and the administrative burden required to ascertain the full extent of its application, the Group is unable to definitively say which loans were placed on section 109N terms because otherwise Division 7A would have applied to treat a dividend(s) as having been paid. However, the group has been managing its affairs on the assumption that all of the Former Loans and Existing Loans were on Division 7A terms. Proposed arrangement (Proposed Arrangement) 18. The steps in the Proposed Arrangement are as follows: • Step 1: The Company will declare an unfranked dividend (the Dividend) to the Trust. • Step 2: The Trust will distribute 100% of its income to the Main Trust. • Step 3: The Main Trust will borrow from the Bank. • Step 4: With the exception of any Permitted Use Loans, the Main Trust will then lend the necessary funds on commercial terms (Commercial Loans) to all entities within the Group (the Group Entities) to allow them to fully repay all outstanding loans (the Former Loans) owed to the Company and between other Group Entities. ­ In respect of the Former Loans owed by the Main Trust specifically, it will also use the funds borrowed from the Bank to repay all of its Former Loans payable to the Group Entities, including the outstanding Division 7A loan payable by the Main Trust to the Company (hereafter referred to as the Existing Loan), excluding the outstanding Division 7A loan payable to the Trust. ­ The repayments of the Former Loans and the Existing Loans are collectively referred to as the Repayments. • Step 5: The Company will then use the funds it receives from the preceding steps (plus an estimated $X of cash reserves) to partially pay the Dividend owing to the Trust. For other Group Entities (where applicable), they will then lend any surplus funds it receives from the preceding steps (plus an estimated $X of cash reserves) to the Main Trust, on interest-free terms. • Step 6: The loan owing from the Trust to the Company will be offset in full against the dividend owing to the Trust. • Step 7: The Trust will make an interim distribution of the Dividend to the Main Trust. • Step 8: The Trust offsets its loan receivable from the Main Trust against the interim distribution payable to the Main Trust and the Trust also uses the funds it received from the Company as well as from repayments of its other loans receivable from various entities in the Group to fully repay its UPE to the Main Trust. ­ The loans owing to the Trust will be funded via the use of funds borrowed from the Bank (via the Main Trust) and any cash reserves the borrower may have. • Step 9: The Main Trust will use the interim distribution to repay the Bank in full. 19. The Trust will distribute 100% of its income for the 20XX income year to the Main Trust. 20. With the exception of the Permitted Use Loan, all loans on Division 7A terms will be repaid. 21. The commercial loans are on terms comparable to key terms of the Bank Finance Agreement that the Group currently holds. 22. The Company will not be undertaking any activities other than those set out in the Proposed Arrangement, with the exception of potentially being wound up. 23. With the exception of Property Company, it is envisaged that the Other Companies will either become dormant or be wound up. 24. No trust distributions will be made to a company in the Group in the 20XX or 20XX income year. 25. The Proposed Arrangement is not part of a broader scheme or arrangement. 26. The Company's distributable surplus, as defined in section 109Y, will not exceed nil for the relevant income years. 27. The Company will not forgive the debts owing on either the Former Loans or the Existing Loans in any way contemplated by section 109F. 28. The Main Trust will not at any point: • forgive the Commercial Loans, or • assign the right to receive payment on those loans to an associate, or • not insist on the entity complying with their obligations under the loan, i.e. repaying the loans, or not insist on the entity making any of the required interest payments or principal repayments in respect of the Commercial Loans.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 99 | Income Tax Assessment Act 1997 Section 100A | Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1936 Section 109D | Income Tax Assessment Act 1936 Subsection 109D(1AA) | Income Tax Assessment Act 1936 Section 109E | Income Tax Assessment Act 1936 Subsection 109E(1) | Income Tax Assessment Act 1936 Subsection 109E(2) | Income Tax Assessment Act 1936 Section 109Y | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Subsection 177A(1) | Income Tax Assessment Act 1936 Subsection 177C(1) | Income Tax Assessment Act 1936 Paragraph 177D(b) | Income Tax Assessment Act 1936 Section 177F | Income Tax Assessment Act 1936 Section 267-20 of Schedule 2F | Income Tax Assessment Act 1936 Subsection 267-20(1) of Schedule 2F | Income Tax Assessment Act 1936 Division 270 of Schedule 2F | Income Tax Assessment Act 1936 Section 270-10 of Schedule 2F | Income Tax Assessment Act 1936 Paragraph 270-10(1)(e) of Schedule 2F | Income Tax Assessment Act 1936 Subsection 270-25(1) of Schedule 2F | Income Tax Assessment Act 1936 Subsection 270-75(1) of Schedule 2F | Income Tax Assessment Act 1936 Section 272-65 of Schedule 2F | Income Tax Assessment Act 1936 Subdivision 267-B of Schedule 2F | Income Tax Assessment Act 1936 Section 272-70 of Schedule 2F | Income Tax Assessment Act 1936 Subsection 272-80(6B) of schedule 2F | Income Tax Assessment Act 1936 Subsection 272-90(3A) of Schedule 2F | Income Tax Assessment Act 1936 Subsection 272-90(5) of Schedule 2F | Income Tax Assessment Act 1936 Subsection 272-100(a) of Schedule 2F

Reasons for decision: Summary: As the Company's distributable surplus will not exceed zero, it is unnecessary to consider the application of section 109D or 109E other than that any dividend, if it did arise, would be reduced to nil under section 109Y. | Detailed Reasoning - Detailed reasoning: 29. Broadly, a company will be taken to pay a dividend • under section 109D to a shareholder or an associate of a shareholder where it makes a loan to those entities that is not put on terms that comply with section 109N and is not repaid in full by the Company's lodgment day of the year it made the loan, or • under subsection 109E(1) where there is a shortfall of the minimum yearly repayment (MYR) on a loan the company made to a shareholder or associate of a shareholder in a prior year that complied with the requirements of section 109N. 30. The total amount taken to have been paid as dividends under section 109D and 109E by a private company is limited to that company's distributable surplus (subsection 109D(1AA) and subsection 109E(2) in conjunction with section 109Y). 31. Consequently, if the Company's distributable surplus does not exceed zero, any dividends that arise under section 109E or 109D will be reduced to nil under section 109Y. 32. As the Company's distributable surplus will not exceed zero, it is unnecessary to consider the application of section 109D or 109E, other than that any dividend, if it did arise, would be reduced to nil under section 109Y. | Detailed Reasoning - Question 2: Will Subdivision 267-B of Schedule 2F to the ITAA 1936 apply to deny the Main Trust a deduction for its prior year tax losses in respect of the Proposed Arrangement? | Summary: No. | Detailed Reasoning - Detailed reasoning: 33. Subdivision 267-B of Schedule 2F sets out the circumstances when a non-fixed trust can claim a prior year tax loss or certain debt deductions. 34. A trust is a non-fixed trust if it is not a fixed trust (section 272-70 of Schedule 2F). 35. A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust (section 272-65 of Schedule 2F). If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital. 36. Section 267-20 specifically deals with prior year tax losses. Subsection 267-20(1) of Schedule 2F provides Subdivision 267-B of Schedule 2F will apply to a trust that: a) can deduct in the income year a tax loss from a loss year; and b) was a non-fixed trust at any time in the period (the test period) from the beginning of the loss year until the end of the income year; and c) was not an excepted trust at all times in the test period. 37. An excepted trust includes a trust at any time when a family trust election in respect of the trust is in force (subsection 272-100(a) of Schedule 2F) 38. The XX income year is the first loss year for the Main Trust. The test period will be the beginning of the loss year until the end of the income year in which the loss is incurred. 39. The Main Trust has had a FTE in place since XX, which can no longer be varied or revoked (subsection 272-80(6B) of schedule 2F). 40. Accordingly, the Main Trust will be an excepted trust and Subdivision 267-B of Schedule 2F will not apply to its ability to claim a deduction for a prior year tax loss. | Detailed Reasoning - Question 3: Will the income injection test in Division 270 of Schedule 2F to the ITAA 1936 deny the Main Trust a deduction for its prior year tax losses in respect of the Proposed Arrangement? | Summary: No. | Detailed Reasoning - Detailed reasoning: 41. Section 270-10 of Schedule 2F sets out the conditions for when the income injection test applies: • the trust has an allowable deduction for the income year, and • under a scheme ­ the trust derives 'scheme assessable income' in the income year, and ­ an outsider to the trust directly or indirectly provides a benefit to the trustee or a beneficiary (or an associate of either), and • the trustee or a beneficiary (or an associate of either) directly or indirectly provides a benefit to the outsider to the trust or an associate of the outsider to the trust, other than an associate covered by any of paragraphs 270-25(1)(a) to (f)) of Schedule 2F (an outsider to a family trust) and. • it must be reasonable to conclude that any one or more of the following has happened under the scheme ­ the trust derived the scheme assessable income wholly or partly, but not merely incidentally, because the deduction would be allowable. (Whether a benefit has been provided merely incidentally because a deduction is allowable to the trust depends on the particular facts and circumstances of the scheme) ­ the outsider to the trust provided the benefit to the trustee or a beneficiary (or an associate of either) wholly or partly, but not merely incidentally, because the deduction would be allowable ­ the trustee or a beneficiary (or an associate of either) provided the benefit wholly or partly, but not merely incidentally, because the deduction would be allowable; and • the income injection test does not apply to excepted trusts other than family trusts (paragraph 270-10(1)(e) of Schedule 2F). 42. An outsider to a family trust is a person other than the persons listed in 43. subsection 270-75(1) of Schedule 2F. The persons listed in subsection 270-75(1) include a trust with the same individual specified in its FTE, and a company where one or more of the individual's family has fixed entitlement to the income and capital of the company (subsection 272-90(5) of Schedule 2F). 44. A trust with the same primary individual specified in its family trust election is a member of the primary individual's family group in relation to the conferral or distribution (subsection 272-90(3A) of Schedule 2F). 45. Both the Main Trust and the Trust have previously made FTEs specifying Person B as the specified individual. 46. The Company is wholly-owned by the Trust. 47. Accordingly, the Trust and the Company are not outsiders to the Main Trust and any benefit provided by them or to them is excluded from the income injection test. | Detailed Reasoning - Question 4: Will the Commissioner apply section 177F of the ITAA 1936 to the Proposed Arrangement to determine that: • An amount equal to all or part of the Dividend is included in the assessable income of any of the applicants in any of the scheme years; and/or • Some or all of the Main Trust's deduction for prior year tax losses for any of the scheme years is denied. | Summary: No. | Detailed Reasoning - Detailed reasoning: 48. Part IVA is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. 49. Part IVA applies to an arrangement where the following elements exist: • there is a scheme as defined in subsection 177A(1); • there is a tax benefit as defined in subsection 177C(1) obtained by a taxpayer in connection with a scheme; • it would be concluded having regard to the eight matters listed in paragraph 177D(b) that a person who entered into or carried out the scheme did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme; and • the Commissioner makes a determination under section 177F to cancel the relevant tax benefit. | Detailed Reasoning - Application of the law: 50. Having regards to all the facts and the commercial objectives sought to be achieved by the Group, the Commissioner accepts that having regard to the factors in subsection 177D(2) the proposed arrangement is not a scheme entered into for the dominant purpose of obtaining a tax benefit.

Question 1: Will a dividend taken to be paid by the Company (if any) under section 109D or 109E of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of the Proposed Arrangement be reduced to nil?