Private ruling: Dividend access share arrangement
Published: June 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Will section 725-90 of the Income Tax Assessment Act 1997 (ITAA 1997) (about direct shifts that are reversed) apply to prevent any consequences under Division 725 of the ITAA 1997 for any direct value shift that happens upon the issue of the dividend access shares? | A1: Yes. | Q2: Will section 725-90 of the ITAA 1997 (about direct shifts that are reversed) apply to prevent any consequences under Division 725 of the ITAA 1997 for any direct value shift that happens upon the declaration and payment of a dividend to the holder of the dividend access shares? | A2: Yes. | Q3: Will the payment of dividends on the dividend access shares be considered dividend stripping for the purposes of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: No. | Q4: Will Part IVA of the ITAA 1936 apply to the proposed arrangement? | A4: No.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling involves dividend access shares. The arrangement is set out in the following documents: • the application for private ruling • further documentation, including emails, received in relation to the application; and • records of conversation with respect to the application.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 725-90. | Income Tax Assessment Act 1997 Section 207-155. | Income Tax Assessment Act 1936 Section 177E. | Income Tax Assessment Act 1936 Section 177D. | Income Tax Assessment Act 1936 Section 177F.

Reasons for decision: Summary: All subsequent legislative references are to the ITAA 1936 unless otherwise stated. | Detailed Reasoning - Direct value shifts: There can be consequences under Division 725 of the ITAA 1997 where there is a direct value shift involving the equity or loan interests in an entity. However, a reversal exception is provided by section 725-90 of the ITAA 1997. It applies where the state of affairs that is brought about by the things done under the scheme: • will more likely than not cease to exist within four years after the time that the first of those things is done; and • does not still exist at the earlier of the end of those four years or when a realisation event happens to an affected interest for the direct value shift. The legislative context shows that the term 'state of affairs' is used to refer to the factual circumstance that is the trigger or cause for the value shift. The state of affairs is one but for which the direct value shift would not have happened: paragraph 725-90(1)(a) of the ITAA 1997. The example that follows subsection 725-90(1) of the ITAA 1997 reads: Under a scheme, the voting rights attached to a class of shares in a company are changed. As a result, the market value of shares in that class decreases, and the market value of other classes of shares in the company increases. The company's constitution provides that the change is to last for only 3 years. Issue of the DASs With respect to any direct value shift that may happen upon the issue of the DASs, the relevant state of affairs is that the Companies have accumulated profits, and there is a further class of shares on issue with discretionary dividend rights. It is more likely than not that this state of affairs will cease to exist within four years. Consequently, the reversal exception will apply to any direct value shift on the issue of the DASs if the arrangement is carried out as proposed. Declaration and payment of a dividend to the holder of the DASs With respect to any direct value shift that may happen upon the declaration of a dividend to the holder of the DASs, the relevant state of affairs is that a dividend is payable to the holder. This state of affairs will cease to exist when the dividend is paid, an event that will happen within the four year period. Consequently, the reversal exception will apply to any direct value shift upon the declaration of a dividend with respect to the DASs. | Detailed Reasoning - Part IVA: Part IVA contains a number of anti-avoidance provisions. It gives the Commissioner the discretion to cancel a 'tax benefit' that, but for the operation of the Part, has been, or would be, obtained by a taxpayer in connection with a scheme to which Part IVA applies (subsection 177F(1)). The Commissioner considers that two anti-avoidance provisions have potential application to the particular facts of this case: • Section 177D - Schemes to which Part IVA applies • Section 177E - Dividend stripping schemes to which Part IVA applies As section 177E is the more specific provision, it will be considered first. | Detailed Reasoning - Section 177E - Dividend stripping schemes to which Part IVA applies: In order for a scheme to be one by way of dividend stripping, six elements must be established. The sixth element required is that the scheme was carefully planned, with all the parties acting in concert, for the predominant if not the sole purpose of the vendor shareholder/s, in particular, avoiding tax on a distribution of dividends by the target company. In considering this element, it is necessary to examine all of the evidence of the arrangement and to consider the relevant objective features of the arrangement to determine whether the arrangement has been carried out with the sole or dominant purpose of avoiding tax on distributions of profits from the company. Importantly, an arrangement that has a non-tax purpose may be undertaken for the dominant purpose of avoiding tax. In this case there are several significant objective matters which provide evidence of a non-tax purpose for the scheme. Consideration has also been taken of whether alternative arrangements would be able to achieve that non-tax purpose. In light of all the specific facts of the taxpayer's individual circumstances, it has been accepted that the arrangement does not have, as its dominant purpose, the avoidance of tax on the distribution of dividends by the company. It follows that the sixth element is not present in this case. As a conclusion, the arrangement does not constitute a scheme 'by way of or in the nature of dividend stripping' within the meaning of section 177E. Section 207-155 of the ITAA 1997 defines 'dividend stripping operation' in similar terms to section 177E. As the proposed arrangement is not considered to be a scheme 'by way of or in the nature of dividend stripping' for the purposes of section 177E, it follows that it is also not a 'dividend stripping operation' for the purposes of section 207-155 of the ITAA 1997. | Detailed Reasoning - Section 177D - Schemes to which Part IVA applies: A scheme will be one to which Part IVA applies by operation of section 177D if a taxpayer has obtained a tax benefit in connection with the scheme and it would be concluded that the dominant purpose of a person who entered into or carried out the scheme (or a part of the scheme) was to obtain a tax benefit. As discussed further above, it has been accepted that in the particular facts of this case, a dominant purpose of tax avoidance is not present. Consequently, the proposed arrangement is not a scheme to which Part IVA applies by operation of section 177D.