Taxation Determination TD 2003/3
Date of effect: 19 March 2003







The number, subject heading, date of effect and paragraphs 1, 3 and 4 of this Taxation Determination are a 'public ruling' for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the Determination is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain how a Determination is legally or administratively binding. | Capital Gains Tax reduction arrangements: 2. While Capital Gains Tax (CGT) reduction arrangements may vary widely in the precise steps used, and the provisions of the income tax law relied upon, they all have similar economic and purported tax effects, and make use of very similar techniques. The commercial substance of these arrangements is that a corporate group disposes of a CGT asset to an unrelated third party. However, this disposal does not give rise to tax consequences of the same type, or extent, that would normally be expected upon such a disposal. | 3. A Capital Gains Tax reduction arrangement will usually exhibit all or most of the features set out below. An arrangement that achieves similar economic and tax effects through the use of broadly similar techniques to those set out below may also be described as a Capital Gains Tax reduction arrangement. | The following diagram illustrates an arrangement in which assets in a subsidiary are transferred generating accounting profits. These profits are used to pay a dividend which is satisfied by the company declaring the dividend issuing shares in itself, hence capitalising the dividend. | Does Part IVA of the 1936 Act apply?: 4. The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. Therefore, in the absence of all relevant information it is not possible to state definitively whether a particular arrangement or transaction will attract Part IVA. However, arrangements of the type described in paragraph 3 above, and arrangements having similar economic and tax effects, are considered likely to attract the operation of Part IVA. | 5. The precise definition of the scheme for the purposes of section 177A of the 1936 Act will depend on the facts of the particular case. However, the steps of the scheme will normally include the key elements of the arrangement described in paragraph 3 of this Determination. | 6. In this type of scheme it is likely that, but for the scheme, a CGT asset would have been sold to the third party for its market value. This disposal would have resulted in a capital gain for tax purposes, and potentially an amount being included in the assessable income of the taxpayer (being the net capital gain after allowing for capital losses). The relevant tax benefit is the amount of net capital gain that has not been included in the assessable income of the relevant taxpayer. | 7. In some cases where a capital loss is obtained in connection with the scheme, the disposal of the asset directly results commercially in a capital profit, but does not give rise to assessable income. In these cases there may be: | 8. While the types of arrangements described in paragraph 3 may have as their ultimate commercial effect the disposal of a business, or asset, to an unrelated third party, the relevant question, for Part IVA purposes, is whether the identified scheme has been entered into or carried out in this particular way for the dominant purpose of obtaining a tax benefit ( FC of T v Spotless Services Ltd & Anor 96 ATC 5201; (1996) 34 ATR 183). The relevant purpose is the objective purpose to be predicated of the scheme by reference to the factors set forth in section 177D of the 1936 Act. In this context the following general observations can be made. | 9. It will therefore be apparent from the overt steps by which the scheme is implemented that it was 'shaped' in a particular form solely or dominantly for the purpose of obtaining a tax benefit that would not have been obtained if that particular scheme had not been entered into or carried out. Accordingly, a reasonable person would conclude, having regard to the matters set out in section 177D of the 1936 Act, that one or more of the parties that entered into the scheme did so for the dominant purpose of enabling the company disposing of the shares to the unrelated third party to obtain a tax benefit. | 10. If the Commissioner determines that Part IVA applies to a particular arrangement, then consideration will be given to making compensating adjustments under subsection 177F(3) of the 1936 Act where it is fair and reasonable to do so. | Note: 11. In this Taxation Determination it is assumed that the scheme is effective to obtain the tax benefit but for the operation of Part IVA. However the particular arrangement may be such that: | Example: 12. A large multinational corporate group (the 'ABC Group' ) intends to dispose of part of its US operations. Aus Parent Co owns all of the shares in US Holding Co (a US resident corporation), and US Holding Co initially owns all of the shares in US Operations Co (a US resident corporation). US Operations Co carries on the US operations that the ABC Group intends to sell. | 13. The ABC Group has already entered into negotiations with an unrelated third party to sell those operations and is close to reaching a final agreement under which all of the shares in US Holding Co will be sold to the unrelated third party. | 14. Several weeks prior to the sale being finalised, US Holding Co transfers all of the shares in US Operations Co to US Co , a newly incorporated US resident company. US Holding Co receives all of the shares of US Co as consideration for the transfer of the shares in US Operations Co. US Holding Co makes an accounting profit in respect of the transfer of shares in US Operations Co as the shares are transferred for their market value. | 15. The accounting profit made by US Holding Co from the transfer of the shares has been used to fund a dividend that is paid to Aus Parent Co , the Australian resident parent company of US Holding Co. The dividend is paid by way of promissory notes, and is exempt from income taxation in Australia as a consequence of section 23AJ of the 1936 Act. | 16. Prior to the declaration of the dividend, US Holding Co and Aus Parent Co enter into an agreement under which Aus Parent Co agrees to use the dividend to subscribe for shares in US Holding Co. The promissory notes received from US Holding Co are used for this purpose. The new shares are acquired for their market value. The payment of the dividend and the re-investment of that dividend occur one week before the sale of all of the shares in US Holding Co to the unrelated third party. | 17. The payment of the dividend and its reinvestment has not altered the underlying economic position of the companies. The market value of US Holding Co immediately after the reinvestment is exactly the same as it was immediately before the declaration of the dividend. The total market value of Aus Parent Co's investment in US Holding Co is exactly the same immediately after the reinvestment as it was immediately before the declaration of the dividend. Aus Parent Co continues to own 100% of the issued shares in US Holding Co , there are simply more US Holding Co shares owned by Aus Parent Co. However, from the point of view of the Australian income tax law, it is asserted that the total cost bases of Aus Parent Co's shareholding in US Holding Co has been increased by the amount of the dividend reinvested. | 18. Just prior to the sale of the shares in US Holding Co to the unrelated third party, Aus Parent Co sells all of the shares in US Holding Co to Aus Co, another Australian resident member of the ABC Group. Both Aus Parent Co and Aus Co elect for CGT rollover relief under Subdivision 126-B of the 1997 Act to apply. Consequently, Aus Co has the same CGT cost base in respect of the shares in US Holding Co as Aus Parent Co had. | 19. Aus Co sells the shares in US Holding Co to the unrelated third party for their market value. | 20. The Commissioner is of the opinion that having regard to all of these circumstances, Part IVA applies. | Date of effect: 21. This Determination applies to years commencing both before and after its date of issue. However, this Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20). | Commissioner of Taxation 19 March 2003 | Previously released as TD 2003/D1.


Related rulings: TR 92/1 TR 92/20 TR 97/16
Legislative references: ITAA 1936 23AJ ITAA 1936 46 ITAA 1936 46E ITAA 1936 46G ITAA 1936 46M ITAA 1936 Part IVA ITAA 1936 177A ITAA 1936 177D ITAA 1936 177F(3) ITAA 1997 Subdiv 126-B TAA 1953 Part IVAAA
Case references: FC of T v Spotless Services Ltd & Anor 96 ATC 5201 (1996) 34 ATR 183
Subject references: tax avoidance tax benefits under tax avoidance shemes