Taxation Determination

TD 95/4

Income tax: does the simple disposition of an income producing asset by a natural person to a wholly owned private company constitute the carrying out of a scheme to which Part IVA of the Income Tax Assessment Act 1936 will be applied?

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FOI status:

may be releasedFOI number: I 1016334

1. No. Of itself, the simple disposition of an income producing asset by a natural person to a wholly owned private company is not an arrangement to which the Commissioner will seek to apply Part IVA of the Income Tax Assessment Act 1936 (the Act). Examples are outlined below.

2. It should be noted however that where there are other associated transactions, transfers or arrangements, whether antecedent or subsequent, the disposition will be examined within that broader context, and it may be concluded that Part IVA of the Act should be applied.

Example 1:

Geoff holds a significant portfolio of shares in a number of public companies. Most of these pay out fully franked dividends. Geoff disposes of his shares to a wholly owned private company which has been newly incorporated for that purpose. The intention is that the earnings from the shares will be retained in the company until such time as it is considered appropriate to declare and pay a dividend to Geoff.

Example 2:

Anna holds a rental property. The initial intention was that the property would be negatively geared. However, because of an unexpected reduction in interest rates a net profit is now being returned. Anna disposes of the property to a wholly owned private company which has been newly incorporated for that purpose. The intention is that the rental earnings from the property will be retained in the company until such time as it is considered appropriate to declare and pay a dividend to Anna.

Example 3:

Karl holds a parcel of shares in XYZ Pty Ltd which currently have an indexed cost base of $10,000, and a market value $15,000. The shares were acquired by Karl after 19 September 1985. Karl wishes to sell the shares to finance another investment, and prior to arranging the sale, he disposes of the shares to his wholly owned family company (or alternatively disposes of them to a wholly owned private company which has been newly incorporated for that purpose). The company sells the shares, retains the gain, and makes the new investment. The Commissioner will not seek to apply Part IVA to these facts alone.

However, if for example there were objective evidence of an antecedent arrangement to sell the shares, suggesting that the use a private company was no more than a late contrivance the dominant purpose of which was simply to reduce the level of tax on that sale, it is likely that Part IVA would be applied.

Note: In the above examples, it is assumed for the purposes of this Determination, that the capital gains tax rollover relief provisions (section 160ZZN of the Act) would apply to the disposal of the assets to the wholly owned company.

Commissioner of Taxation
16/03/95

References

ATO references:
NO NAT 94/8276-8

Related Rulings/Determinations:

IT 2267;
IT 2330;
IT 2373;
IT 2456

Subject References:
income tax;
investment income;
private company;
schemes to reduce income tax;
tax avoidance;
tax planning

Legislative References:
ITAA Pt IVA;
ITAA 160ZZN