Taxpayer Alert TA 2004/3: Dividend Stripping / Distribution of Surplus Profits Arrangements
Date of issue: 28 January 2004
Status: Current


Description: This Alert contains references to Division 140 of the Income Tax Assessment Act 1997 , which has been remade into Division 725 of the Income Tax Assessment Act 1997 . | This Taxpayer Alert describes arrangements involving the transfer of retained earnings and/or current year profits of a company to the shareholders or their associates in a non-taxable form. | The alert applies to arrangements having the following features: 1. An associate of a company with retained earnings and/or current year profits (the 'target company') acquires 'A' class shares in New Co at a nominal value, for example $1. The shareholders of the associate are also shareholders (or associates of shareholders) of the target company. 2. The target company acquires 'B' class shares in New Co at a considerable premium. 3. The rights of the 'B' class shares in New Co are varied to restrict the amount payable on liquidation, with the result that: • the value of the 'B' class shares is reduced; and • there is a commensurate increase in the value of 'A' class shares. 4. The target company makes a book loss on the acquisition of the 'B' class shares in New Co, which is offset against the retained earnings and/or current year profits. 5. The assets of New Co are distributed on liquidation to the associate holding the 'A' class shares. Broadly, the assets of New Co consist of the amount paid by the target company for the 'B' class shares. | 1. An associate of a company with retained earnings and/or current year profits (the 'target company') acquires 'A' class shares in New Co at a nominal value, for example $1. The shareholders of the associate are also shareholders (or associates of shareholders) of the target company. 2. The target company acquires 'B' class shares in New Co at a considerable premium. 3. The rights of the 'B' class shares in New Co are varied to restrict the amount payable on liquidation, with the result that: • the value of the 'B' class shares is reduced; and • there is a commensurate increase in the value of 'A' class shares. 4. The target company makes a book loss on the acquisition of the 'B' class shares in New Co, which is offset against the retained earnings and/or current year profits. 5. The assets of New Co are distributed on liquidation to the associate holding the 'A' class shares. Broadly, the assets of New Co consist of the amount paid by the target company for the 'B' class shares. | • the value of the 'B' class shares is reduced; and • there is a commensurate increase in the value of 'A' class shares. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) Whether the provisions of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) apply. (b) Whether the scheme is by way of or in the nature of dividend stripping, or has substantially the effect of a scheme by way of or in the nature of dividend stripping such that section 177E of the ITAA 1936 applies. (c) Whether the provisions of Part IVA of the ITAA 1936 apply as; • The arrangements appear contrived and artificial in their method of execution; • There is little or no underlying business activity or purpose in the arrangement. | (a) Whether the provisions of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) apply. (b) Whether the scheme is by way of or in the nature of dividend stripping, or has substantially the effect of a scheme by way of or in the nature of dividend stripping such that section 177E of the ITAA 1936 applies. (c) Whether the provisions of Part IVA of the ITAA 1936 apply as; • The arrangements appear contrived and artificial in their method of execution; • There is little or no underlying business activity or purpose in the arrangement. | • The arrangements appear contrived and artificial in their method of execution; • There is little or no underlying business activity or purpose in the arrangement. | The Australian Taxation Office is examining these and similar arrangements.





Related documents: IT 2627 | TD 95/37 | PS 2008/15 | ITAA 1936 Part IVA | ITAA 1997 Division 725