Taxation Determination TD 2011/22
Date of effect: 24 August 2011

What this ruling is about: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. Ruling 1. Yes. Whilst the application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) [1] to any particular arrangement depends on a careful weighing of all the relevant circumstances, Part IVA is likely to have application to arrangements similar to that described in paragraphs 2 to 6 of this Determination. Example 2. AusCo, an Australian resident company that is a subsidiary of an authorised deposit taking institution, borrows from an external source to acquire 100 % of the ordinary shares issued by OffshoreCo, a non Australian resident company specifically incorporated for the transaction in question. OffshoreCo uses the funds it receives from the issue of its shares to make a loan to ForCo, a non Australian resident company unrelated to AusCo. ForCo uses those funds in its business activities. OffshoreCo's only function is to lend money . 3. AusCo ordinarily derives profits by lending money at a margin over its borrowing cost. Its previous dealings with ForCo involved the lending of monies and its objective in completing the transaction is to maintain its activities with ForCo on similar terms as those conducted in the past. The objective of ForCo is to obtain a loan to use in its business. ForCo is indifferent as to whether it makes interest repayments direct to AusCo or OffshoreCo. The operation of various aspects of the transaction are as follows : 4. Although dividends on the shares are payable at the discretion of the directors, OffshoreCo pays dividends, being the same amount as its interest receipts on the loan to ForCo, immediately after it receives the loan payments. These dividends allow AusCo to service its external borrowing and retain its lending margin . 5. It is assumed that the Australian tax result, but for the operation of Part IVA, is : [2] 6. The use of OffshoreCo in the arrangement is partly explained by reference to AusCo's commercial objective, which is to set up a business to conduct lending activities offshore. In pursuing that objective, it is therefore necessary for OffshoreCo to be capitalised with ordinary equity which, by its nature is long term. It is noted however that OffshoreCo's only activity to date has been the lending of monies to ForCo and there has been no contemplation of future activities. Further, AusCo's equity in OffshoreCo can be liquidated at market value at short notice should the ForCo loan be repaid or a loan default event occur . Date of effect 7. This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). Commissioner of Taxation 24 August 2011




Appendix: 8. Part IVA allows the Commissioner to cancel all or part of 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. Part IVA applies if: 9. 'Scheme' is defined widely in section 177A to include any agreement, arrangement, understanding, promise or undertaking and any plan, proposal, action, course of action or course of conduct. The scheme in question would consist of the following: 10. Identifying the relevant tax benefit [4] necessarily requires consideration of what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This is commonly described as the 'counterfactual'. In applying this 'reasonable expectation' test, it is useful to consider the most straightforward and usual way of achieving the intended commercial outcome of the scheme. 11. The objective of AusCo in entering the scheme is to derive a return from lending money. The objective of ForCo is to obtain a loan to use in its business activities and ForCo is indifferent as to whether it makes interest repayments direct to AusCo or OffshoreCo. Whilst the interposition of OffshoreCo in the arrangement may be partly explained by AusCo's objective of establishing a business to conduct lending activities offshore, the following aspects also exist: 12. These aspects support the conclusion that there are only minimal commercial reasons for the interposition of OffshoreCo in the ownership chain. The absence of significant commercial reasons for the interposition of OffshoreCo suggests its presence in the ownership chain is not the most straightforward way of achieving the objectives of AusCo in relation to the scheme. 13. Having regard to the objectives of the parties to the transaction, it might be reasonable to conclude that if the scheme had not been entered, AusCo would have made a loan directly to ForCo (rather than acquiring the issued shares in OffshoreCo) and consequently the interest received on the loan made by OffshoreCo would have been received directly by AusCo. It is therefore considered that the scheme would give rise to a tax benefit under paragraph 177C(1)(a), being the amount of interest received by OffshoreCo on the loan to ForCo which was not included in the assessable income of AusCo because of the scheme. [5] 14. Section 177D [6] provides that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to the eight specified matters, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit. 15. Whether the section 177D purpose test is satisfied depends on all the facts and circumstances. However, it would be reasonable to conclude, having regard to the matters set out in section 177D, that the sole or dominant purpose of AusCo in entering into or carrying out the scheme was to obtain a tax benefit. In this context the following observations can be made: 16. Overall, the factors mentioned in subparagraphs 177D(b)(i), (ii), (iv) and (viii) point to a sole or dominant purpose of AusCo entering into the scheme to obtain a tax benefit. Subparagraph 177D(b)(iii) is neutral and the factors in subparagraphs 177D(b)(v), (vi) and (vii) are seemingly not relevant. Given this, it would be reasonable to conclude the sole or dominant purpose of AusCo in entering the transaction was to obtain a tax benefit. 17. In these circumstances the Commissioner would exercise his powers under subsection 177F(1) to cancel the tax benefit and determine that the whole of the income of derived by OffshoreCo in connection with its loan to the ForCo is assessable to AusCo. Previous draft: TD 2011/D2




Related rulings: TR 2006/10
Legislative references: ITAA 1936 ITAA 1936 Pt IVA ITAA 1936 Pt XI ITAA 1936 23AJ ITAA 1936 177A ITAA 1936 177C ITAA 1936 177C(i)(a) ITAA 1936 177D ITAA 1936 177D(b)(i) ITAA 1936 177D(b)(ii) ITAA 1936 177D(b)(iii) ITAA 1936 177D(b)(iv) ITAA 1936 177D(b)(v) ITAA 1936 177D(b)(vi) ITAA 1936 177D(b)(vii) ITAA 1936 177D(b)(viii) ITAA 1936 177F ITAA 1936 177F(1) ITAA 1936 317 ITAA 1936 449 ITAA 1997 25-90
Subject references: anti avoidance arrangement controlled foreign company foreign investment fund non-assessable non-exempt income non-portfolio dividend Part IVA
Other references: Law Administration Practice Statement PS LA 2005/24 Taxpayer Alert TA 2009/9