Tax Laws Amendment (2004 Measures No. 6) Act 2005 (23 of 2005)

Schedule 3   Simplified Imputation System

Part 1   Anti-avoidance rules in relation to exempt institutions

Income Tax Assessment Act 1997

4   At the end of Subdivision 207-E

Add:

207-119 Entity not treated as exempt institution eligible for refund in certain circumstances

For the purposes of this Act:

(a) an entity must not be treated as an *exempt institution that is eligible for a refund in relation to a *franked distribution if section 207-120, 207-122 or 207-124 applies to the entity in relation to the distribution; and

(b) a beneficiary of a trust must not be treated as an exempt institution that is eligible for a refund in relation to a franked distribution made in an income year if section 207-126 applies to the beneficiary in relation to that income year.

207-120 Entity may be ineligible because of a distribution event

(1) This section applies to an entity (the ineligible entity ) if:

(a) a *franked distribution is made, or *flows indirectly under subsection 207-50(3) or (4), to the entity; and

(b) subsection (2) of this section applies because of a *distribution event in relation to the distribution.

(2) Subject to subsection (3) and to section 207-128, this subsection applies if, because of a *distribution event in relation to the *franked distribution:

(a) the ineligible entity or another entity:

(i) makes, becomes liable to make, or may reasonably be expected to make or to become liable to make, a payment to any entity; or

(ii) transfers, becomes liable to transfer, or may reasonably be expected to transfer or to become liable to transfer, any property to any entity; or

(iii) incurs, becomes liable to incur, or may reasonably be expected to incur or to become liable to incur, any other detriment, disadvantage, liability or obligation; or

(b) if the distribution is made to the ineligible entity - the amount or value of the benefit derived by the ineligible entity from the distribution is, will be, or may reasonably be expected to be, less than the amount or value of the distribution as at the time the distribution is made; or

(c) if the distribution *flows indirectly to the ineligible entity - the amount or value of the benefit derived by the ineligible entity from the ineligible entity's *trust share amount in relation to the distribution is, will be, or may reasonably be expected to be, less than the amount or value of the ineligible entity's trust share amount in relation to the distribution as at the time when that amount arises; or

(d) any of the following entities has obtained, will obtain or may reasonably be expected to obtain, a benefit, advantage, right or privilege:

(i) the entity making the distribution;

(ii) an entity through which the distribution flows indirectly to the ineligible entity;

(iii) an *associate of any of those entities.

Note: For when paragraph (d) is satisfied, see also subsection 207-132(2).

Exception to paragraph (2)(b) or (c)

(3) Paragraph (2)(b) or (c) does not apply if:

(a) that paragraph would otherwise apply only because of expenses the ineligible entity has incurred, will incur, or may reasonably be expected to incur, for the purpose of obtaining the *franked distribution or *trust share amount mentioned in that paragraph; and

(b) the Commissioner considers the expenses to be reasonable.

Trust share amount

(4) An entity's trust share amount in relation to a *franked distribution that *flows indirectly to the entity under subsection 207-50(3) or (4) is the entity's share amount that is mentioned in that subsection.

Distribution event

(5) A distribution event in relation to a *franked distribution is an act, transaction or circumstance that has happened, will happen, or may reasonably be expected to happen, as part of, in relation to or as a result of:

(a) the payment or receipt of the distribution; or

(b) if the distribution *flows indirectly to an entity under subsection 207-50(3) or (4) - the arising of, or the distribution or receipt of, the entity's *trust share amount in relation to the distribution; or

(c) an *arrangement entered into in association with a matter mentioned in paragraph (a) or (b).

207-122 Entity may be ineligible if distribution is in the form of property other than money

This section applies to an entity (the ineligible entity ) to whom a *franked distribution is made, or *flows indirectly under subsection 207-50(3) or (4), if:

(a) one of the following is in the form of property other than money:

(i) if the distribution is made to the ineligible entity - all or part of the distribution;

(ii) if the distribution flows indirectly to the ineligible entity through the trustee of a trust under subsection 207-50(3) or (4) - all or a part of a distribution (the trust distribution ) made by the trustee of the trust that relates to the ineligible entity's *trust share amount in relation to the franked distribution; and

(b) the terms and conditions on which the franked distribution or trust distribution is made are such that the ineligible entity:

(i) does not receive immediate custody and control of the property; or

(ii) does not have the unconditional right to retain custody and control of the property in perpetuity; or

(iii) does not obtain an immediate, indefeasible and unencumbered legal and equitable title to the property.

207-124 Entity may be ineligible if other money or property also acquired

Subject to section 207-128, this section applies to an entity (the ineligible entity ) to whom a *franked distribution is made, or *flows indirectly under subsection 207-50(3) or (4), if:

(a) the ineligible entity or another entity has entered into an *arrangement as part of, or in association with:

(i) the distribution; or

(ii) if the distribution flows indirectly to the ineligible entity - the ineligible entity's *trust share amount in relation to the distribution; and

(b) because of the arrangement, the ineligible entity or another entity has acquired or will acquire (whether directly or indirectly) money or property, other than money or property comprising the distribution or the ineligible entity's trust share amount, from:

(i) the entity making the distribution; or

(ii) an entity through which the distribution flows indirectly to the ineligible entity; or

(iii) an *associate of any of those entities (other than the ineligible entity).

207-126 Entity may be ineligible if distributions do not match trust share amounts

(1) This section applies to a beneficiary of a trust in relation to an income year if:

(a) the sum of the distributions:

(i) made to the beneficiary during the income year by the trustee of the trust; and

(ii) that relate to the beneficiary's *trust share amount in relation to a *franked distribution made during the income year;

is less than:

(b) that trust share amount.

Commissioner's power to treat trust share amount as having been distributed during the income year

(2) Subsection (1) does not apply if the Commissioner, having regard to all the circumstances, considers that it would be reasonable to treat the *trust share amount as having been distributed to the beneficiary in the income year.

207-128 Reinvestment choice

(1) If, apart from this section, paragraph 207-120(2)(a) or (d) or section 207-124 would apply to an entity (the receiving entity ) to whom a *franked distribution is made or *flows indirectly, that paragraph or section is taken not to apply to the receiving entity if:

(a) instead of receiving the distribution, or the *trust share amount concerned, by a payment of money, the receiving entity chooses to be issued with:

(i) if the distribution is made to the receiving entity - *shares in the *corporate tax entity making the distribution; or

(ii) if the distribution flows indirectly to the receiving entity - a fixed interest in the trust in relation to which the trust share amount arises; and

(b) the choice is genuine and furthers the purpose for which the entity was established; and

(c) the choice is not made for the purpose, or purposes that include the purpose, of benefiting the corporate tax entity, trust or any of their *associates (other than the receiving entity); and

(d) any benefit derived by the corporate tax entity, trust or any of their associates (other than the receiving entity) because of that choice is one which is an ordinary incident of issuing the shares or interests to the receiving entity or of the receiving entity's holding of those shares or interests; and

(e) the parties that were involved in the *distribution event or *arrangement concerned deal with one another on an arm's length basis in relation to the event or arrangement.

A vested and indefeasible interest constitutes a fixed interest

(2) The receiving entity's interest in a trust is a fixed interest if the interest is a vested and indefeasible interest in the trust's capital.

Special rule about whether interests in unit trusts are defeasible

(3) If:

(a) the trust is a unit trust and the receiving entity holds units in the unit trust; and

(b) the units are redeemable or further units are able to be issued; and

(c) the units held by the receiving entity will be redeemed, or any further units will be issued:

(i) if units in the unit trust are listed for quotation in the official list of an *approved stock exchange - for the price at which other units of the same kind in the unit trust are offered for sale on the exchange at the time of the redemption or issue; or

(ii) if the units are not listed as mentioned in subparagraph (i) - for their market value at the time of the redemption or issue;

then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the receiving entity's interest, as a unit holder, in the trust's capital is defeasible.

Commissioner's power to treat an interest in a trust as being a fixed interest

(4) If:

(a) the receiving entity has an interest in the trust's capital; and

(b) apart from this subsection, the interest would not be a vested or indefeasible interest; and

(c) the Commissioner considers that the interest should be treated as being vested and indefeasible, having regard to:

(i) the circumstances in which the interest is capable of not vesting, or the defeasance can happen; and

(ii) the likelihood of the interest not vesting or the defeasance happening; and

(iii) the nature of the trust; and

(iv) any other matter the Commissioner thinks relevant;

the Commissioner may determine that the interest is to be taken to be vested and indefeasible.

(5) A determination made under subsection (4) has effect according to its terms.

207-130 Controller's liability

(1) A *controller (for imputation purposes) of an entity (the controlled entity ) is liable to pay an amount under this section in respect of a refund paid to the controlled entity under Division 67 if:

(a) the controlled entity claimed the refund wholly or partly on the basis that:

(i) the controlled entity was entitled to a *tax offset under section 207-20, 207-45 or 207-110 in relation to a *franked distribution; and

(ii) the controlled entity was an *exempt institution that is eligible for a refund; and

(b) because of the operation of section 207-120, 207-122, 207-124 or 207-126 in respect of a *distribution event or an *arrangement in relation to the distribution, the controlled entity is not entitled to the tax offset; and

(c) the controller or an *associate of the controller benefited from that event or arrangement; and

(d) some or all of the amount that the controlled entity is liable to pay in respect of the refund remains unpaid after the day on which the amount becomes due and payable; and

(e) the Commissioner gives the controller written notice:

(i) stating that the controller is liable to pay an amount under this section; and

(ii) specifying that amount.

Except as provided for in subsection (5), this subsection does not affect any liability the controlled entity has in relation to the refund.

Note 1: Section 207-134 also provides that the controlled entity's present entitlement to a trust share amount is disregarded for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936.

Note 2: For when paragraph (c) is satisfied, see also subsection 207-132(3).

(2) The amount that the *controller (for imputation purposes) is liable to pay under subsection (1):

(a) is the amount specified under subparagraph (1)(e)(ii); and

(b) becomes due and payable at the end of the period of 14 days that starts on the day on which the notice mentioned in paragraph (1)(e) is given.

(3) The amount that the *controller (for imputation purposes) is liable to pay under subsection (1) must not exceed the total amount or value of the benefit that the controller and its *associates obtained from the *distribution event or *arrangement.

(4) The total of:

(a) the amounts that the Commissioner recovers under subsection (1) in relation to the refund from all of the controlled entity's *controllers (for imputation purposes); and

(b) the amounts that the Commissioner recovers in relation to the refund from the controlled entity;

must not exceed the amount that the controlled entity was liable to pay as mentioned in paragraph (1)(d).

Controller of a company

(5) An entity is a controller (for imputation purposes) of a company if the entity is a *controller of the company (for CGT purposes).

Controller of an entity other than a company - basic meaning

(6) Subject to subsections (7) and (8), an entity is a controller (for imputation purposes) of an entity other than a company (the controlled entity ) if:

(a) a group in relation to the entity has the power, by means of the exercise of a power of appointment or revocation or otherwise, to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the controlled entity; or

(b) a group in relation to the entity is able (directly or indirectly) to control the application of the capital or income of the controlled entity; or

(c) a group in relation to the entity is capable, under a *scheme, of gaining the beneficial enjoyment mentioned in paragraph (a) or the control mentioned in paragraph (b); or

(d) the controlled entity or, if the controlled entity is a trust, the trustee of the trust:

(i) is accustomed; or

(ii) is under an obligation; or

(iii) might reasonably be expected;

to act in accordance with the directions, instructions or wishes of a group in relation to the entity; or

(e) if the controlled entity is a trust - a group in relation to the entity is able (directly or indirectly) to remove or appoint the trustee of the trust; or

(f) a group in relation to the entity has more than a 50% stake in the income or capital of the controlled entity; or

(g) entities in a group in relation to the entity are the only entities that, under the terms of:

(i) the constitution of the controlled entity or the terms on which the controlled entity is established; or

(ii) if the controlled entity is a trust - the terms of the trust;

can obtain the beneficial enjoyment of the income or capital of the controlled entity.

Group in relation to an entity

(7) For the purposes of subsection (6), each of the following constitutes a group in relation to an entity:

(a) the entity acting alone;

(b) an *associate of the entity acting alone;

(c) the entity and one or more associates of the entity acting together;

(d) 2 or more associates of the entity acting together.

Commissioner's power to take an entity not to be a controller (for imputation purposes)

(8) If:

(a) at a particular time, an entity (the first entity ) would, but for this subsection, be a *controller (for imputation purposes) of an entity other than a company (the second entity ); and

(b) the Commissioner, having regard to all relevant circumstances, considers that it is reasonable that the first entity be taken not to be such a controller of the second entity at the particular time;

the first entity is taken not to be a controller (for imputation purposes) of the second entity at the particular time.

(9) Without limiting paragraph (8)(b), if the second entity is a trust, the Commissioner may have regard under that paragraph to the identity of the beneficiaries of the trust at any time (whether before or after the first entity began to be a *controller (for imputation purposes) of the second entity).

207-132 Treatment of benefits provided by an entity to a controller

(1) This section applies in relation to a benefit (the relevant benefit ) given by an entity to a *controller (for imputation purposes) of the entity, or to an *associate of such a controller, if:

(a) the controller or associate:

(i) makes a *franked distribution to the entity; or

(ii) is the trustee of the trust in relation to which a *trust share amount of the entity arises in relation to a franked distribution that *flows indirectly to the entity; and

(b) the benefit is, or was, given to the controller or associate at any time during the period that starts 3 years before, and ends 3 years after, the distribution is made or the trust share amount arises (as appropriate).

(2) For the purposes of paragraph 207-120(2)(d), the controller or *associate is taken to have obtained the relevant benefit because of a *distribution event in relation to the *franked distribution or *trust share amount.

(3) For the purposes of paragraph 207-130(1)(c), and at least to the extent of the relevant benefit, the controller or *associate is taken to have benefited from a *distribution event or *arrangement that caused section 207-120 to apply in relation to the *franked distribution or *trust share amount.

Commissioner's power not to apply subsection (2) or (3)

(4) Subsection (2) or (3) does not apply in relation to a benefit if the Commissioner is satisfied, having regard to all the circumstances, that it would be unreasonable to apply that subsection.

207-134 Entity's present entitlement disregarded in certain circumstances

The present entitlement of a beneficiary of a trust to a share of trust income is disregarded for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 if:

(a) the beneficiary has claimed a *tax offset under section 207-45 or 207-110 of this Act on the basis that the beneficiary was an *exempt institution that was eligible for a refund in relation to a *trust share amount that is that share of trust income; but

(b) the beneficiary was not entitled to that tax offset because of the operation of section 207-120, 207-122, 207-124 or 207-126 in respect of a *distribution event, or an *arrangement, to which the trust share amount is related.

Note: This means that the trustee of the trust is liable to pay income tax on that share of the trust income.

207-136 Review of certain decisions

An entity that is dissatisfied with a decision of the Commissioner under any of the following provisions may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953:

(a) paragraph 207-120(3)(b);

(b) subsection 207-126(2);

(c) subsection 207-128(4);

(d) paragraph 207-130(1)(e);

(e) paragraph 207-130(8)(b);

(f) subsection 207-132(4).