Edited version of your written advice

Authorisation Number: 1013019630780

Date of advice: 19 May 2016

Ruling

Subject: Private company payment - whether assessable as dividend

Question 1

Does subsection 109C(1) of the Income Tax Assessment Act 1936 (ITAA 1936) apply when X Company Pty Ltd (X Co) makes a cash payment to Y pursuant to a Family Court order under the Family Law Act 1975 (FLA 1975)?

Answer

No.

Question 2

Does section 109J of the ITAA 1936 apply when X Co makes a cash payment to Y pursuant to a Family Court order under the FLA 1975?

Answer

Yes.

Question 3

Will the payment by X Co to Y be a dividend within the meaning of subsection 6(1) of the ITAA 1936?

Answer

No.

Question 4

Will the payment by X Co to Y be a statutory income under subsection 44(1) of the ITAA 1936?

Answer

No.

Question 5

Will the Commissioner apply the general anti-avoidance provision under Part IVA of the ITAA 1936 to the payment by X Co to Y?

Answer

No.

This ruling applies for the following periods

Income year ending 30 June 20xx

Income year ending 30 June 20xx

Relevant facts and circumstances

You, Y and your former de facto partner Z were de facto domestic partners for approximately 20 years.

You and Z separated in 200x.

Your relationship with Z was not registered and there were no binding financial agreement.

Both you and Z were directors of X Co and owned shares in X Co.

X Co owned 50% interest in Property 1 and 50% interest in Property 2 (jointly the Properties).

You and Z initiated a Family Court proceeding.

Around the same time you applied for a private binding ruling on whether a cash payment, by X Co to you pursuant to a Family Court order under the FLA 1975:

a. would be dividend under section 109C of the ITAA 1936

b. would be exempt from section 109C of the ITAA 1936 pursuant to section 109J of the ITAA 1936

c. would be dividend within the meaning of subsection 6(1) of the ITAA 1936

d. would be statutory income under subsection 44(1) of the ITAA 1936

e. would be subject to the Part IVA of the ITAA 1936 general anti-avoidance rules.

At the time of the private ruling application, no orders as to the property settlement have been made in the Family Court proceeding.

The Commissioner issued private ruling to you that a cash payment by X Co to you pursuant to a Family Court order under the FLA 1975:

a. would not be dividend under section 109C of the ITAA 1936

b. would be exempt from section 109C of the ITAA 1936 pursuant to section 109J of the ITAA 1936

c. would not be dividend within the meaning of subsection 6(1) of the ITAA 1936

d. would not be statutory income under subsection 44(1) of the ITAA 1936

e. would not be subject to general anti-avoidance rules under Part IVA of the ITAA 1936.

The ruling was based on the facts that X Co will be made a party to the Family Court proceeding relating to the property settlement between you and Z and X Co will pay you the net sale proceeds from the sale of the Properties.

In reliance on the ruling you entered into consent orders confirmed by the Family Court pursuant to the FLA 1975 which ordered:

a. X Co be joined as a party to the proceedings;

b. X Co in conjunction with the other co-owners sell Property 1

c. X Co sell at market price to you and Z Property 2

d. Within 30 days of settlement of Property 2, you transfer to Z the share you held in X Co for no consideration

e. X Co pay to you the net proceeds from the sale of the Properties pursuant to the orders in accordance with section 109J of the ITAA 1936 and Private Ruling.

Following the court order, two real estate agents were appointed to facilitate the sale of Property 1. A sale price was set based on Agent's estimated selling price and a sale program ensued.

Despite Property 1 being constantly on the market, a sale did not occur during the period of the private ruling.

On the recommendation of the real estate agents, repairs and works were undertaken on Property 1 so it was in a condition to be on the market.

You have provided documents substantiating your claim of the slow real estate market and lack of buyers' interest during the sale period in the form of email exchanges between you and the real estate agents.

You have also provided newspaper article to substantiate your claim of the slow property market during this period.

After about four years from the court order, Property 1 was sold at one third of the initial estimated price.

The co-owner of Property 2 wanted to sell it to you and Z as the Family Court ordered but you were unable to finance the purchase of the interest. Therefore, it was necessary for X Co to sell its interest in Property 2 to a third party.

Two real estate agents were appointed to facilitate the sale of Property 2 for a reserve listing price and a sale program ensued.

Property 2 was sold after about a year for half of the initial estimated price.

Pursuant to the Family Court order, X Co could not pay to you the net proceeds from the sale of the Properties until after four years from the Court order as the sale of Property 2 took about four years. The Private ruling issued to you in relation to this arrangement also expired few years by this time.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 109C

Income Tax Assessment Act 1936 section 109J

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Reasons for decision

Question 1 and 2

Summary

Payment of money by X Co to you pursuant to a Family Court order under the FLA 1975 is not treated as dividend under subsection 109C(1) of the ITAA 1936 because of the operation of section 109J of the ITAA 1936.

Detailed reasoning

According to subsection 109C(1) of the ITAA 1936,

A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

(a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or

(b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.

X Co is a private company. You and Z were de facto partners and held shares in X Co. You and Z started Family Court proceeding by consent to resolve property settlement issues as part of dissolution of your de facto relationship. The Family Court ordered that you will transfer your share to Z at no consideration within 30 days of settlement of Property 2. Once that is done and some other steps undertaken for reporting, accounting and taxation purposes for X Co, it will make a payment to you of the net proceeds of the Properties.

Therefore you will not be a shareholder at the time when X Co will make the payment to you of the net proceeds of the Properties. Neither will you be an associate of Z within the meaning of section 318 of the ITAA 1936 which states that an associate of a natural person includes a relative of that person. Pursuant to subsection 6(1) of the ITAA 136 and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), a relative of an individual includes their spouse and the spouse of an individual includes individuals who although not legally married, live together on a genuine basis in a relationship as a couple. As a former partner, you therefore were an associate 'at some time' of Z. You were also a former shareholder of X Co prior to you transferring your share to Z as ordered by the Family Court. Thus, a reasonable person would conclude that X Co payment will be made to you because you were an associate of Z as well as a shareholder of X Co 'at some time'.

Therefore, a payment by X Co to you would be dividend under subsection 109C(1) of the ITAA 1936.

However, section 109J of the ITAA 1936 prevents a payment from being treated as a dividend under subsection 109C(1) of the ITAA 1936 if such payment is in relation to the private company discharging an obligation and if the payment is in the form of money and made at arm's length.

According to section 109J of the ITAA 1936:

A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment:

(a) discharges an obligation of the private company to pay money to the entity; and

(b) is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length.

The term, 'obligation', is not expressly defined for the purposes of section 109J of the ITAA 1936 and therefore adopts its ordinary meaning. The Macquarie Dictionary 2003 rev. 3rd edn., The Maquarie Library Pty Ltd NSW defines 'obligation' as follows:

a binding requirement as to action; the binding power or force of a promise, law, duty, agreement, etc.; a binding promise or the like.

An order of the Family Court under section 79 of the FLA 1975 for a private company to pay money to a shareholder or an associate of a shareholder imposes a binding requirement in law for the payment to be made.

In your case, the Family Court proceeding included X Co as a party and the Family Court order imposes an obligation on X Co to make you the cash payment following the sale of the Properties after payment of all expenses, taxes and outgoings. Therefore, the payment to you by X Co will be in discharge of that obligation.

Paragraph 109J(b) of the ITAA 1936 requires consideration of whether the payment made is more than would be required to discharge the obligation had the private company and shareholder (or their associate) been dealing at arm's length.

Paragraph 109J(b) of the ITAA 1936 therefore requires a testing of both the nature and extent of the underlying obligation as well as the payment. That is, a consideration of what would have been the payment had the parties been dealing with each other at arm's length (as paragraph 109J(b) directs us to do), necessarily involves an enquiry as to what would have been the obligation agreed between such parties.

The meaning of arm's length is well settled. In The Trustee for the Estate of the late AW Furse No 5 Will Trust v. FC of T 91 ATC 4007;, Hill J, in relation to the expression "not dealing with each other at arm's length" for the purposes of subsection 102AG(3) of the ITAA 1936, said:

What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.

Further, in Granby Pty Ltd v. FC of T 95 ATC 4240; 30ATR 400, Lee J said in the context of the former paragraph 160ZH(9)(c) of the ITAA 1936 that the phrase 'at arm's length' means:

at least, that the parties to a transaction have acted severally and independently in forming their bargain.

It follows that if the parties are acting severally and independently in forming their bargain that each must be bargaining in their respective best interests.

This is consistent with the extrinsic materials which make it clear that what was in contemplation is what would have arisen between the parties in a commercial setting. The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 3) 1998 which inserted section 109J of the ITAA 1936 expressly states:

An amount paid to discharge a pecuniary obligation owed by a private company to a shareholder or associate will not be treated as a dividend to the extent that the payment is not more than the amount the pecuniary obligation would have been if the private company and shareholder or associate had been dealing with each other at arm's length [new section 109J]. This section ensures that such commercial dealings are not unfairly taxed ……..

(emphasis added)

Prior to November 2013, the Commissioner held the position that transfer of money from a private company to a shareholder or an associate of a shareholder under Family Court order means the parties are at arm's length and therefore would not attract subsection109C (1) of the ITAA 1936.

Accordingly, the Commissioner issued a private ruling to you on dd/mm/yyyy stating that payment by X Co to you pursuant to the Family Court order will not be considered dividend under subsection109C(1) of the ITAA 1936 by virtue of section 109J of the ITAA 1936.

Later the Commissioner considered in depth what 'arm's length' transaction would be among the parties in actual commercial dealing had there not been a Family Court order and changed his previous position as how section 109J of the ITAA 1936 operated. Accordingly on 13 November 2013, he issued the Draft Taxation Ruling TR 2013/D6 Income tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate) (TR 2013/D6) where he stated at paragraph 6 that:

Section 109J of the ITAA 1936 does not prevent the payment from being treated as a dividend under subsection 109C(1) of the ITAA 1936…

The reason being that the Commissioner considers that in a Family Court proceeding, the private company is never at arm's length from the matrimonial parties and there is no dealing or bargaining in such proceeding which imposes the obligation. Again in a commercial setting, the payment would ordinarily need to be in consideration for something of value provided in return by the non-shareholder. This, the Commissioner considers more in line with the policy intention as stated in The Explanatory Memorandum to Taxation Laws Amendment (2007 Measures No. 3) Bill 2007:

Under the current law, transfer of property and other 'payment' in respect of marriage or relationship breakdown are caught by Division 7A even they may not be voluntary (e.g. by court order)…..

However in relation to court orders before 13 November 2013, TR 2013/D6 states at paragraph 38:

…… In any case where the view set out in paragraph 6 and/or Example 5 of this draft Ruling is less favourable to a taxpayer than the Commissioner's previous practice in respect of such orders against a private company, the Commissioner proposes not to undertake active compliance activities so as to apply that view in respect of any such orders made before the date the final Ruling is issued. However, if the Commissioner is asked or required to state a view in respect of such orders (for example in a private ruling or in submissions in a litigation matter), the Commissioner will do so consistent with the views set out in this draft Ruling (including paragraph 6).

However, when the final ruling was issued on 30 July 2014 as Taxation Ruling TR 2014/4 Income tax: matrimonial property proceedings and payments of money or transfer of property by a private company to a shareholder (or their associate) (TR 2014/6), the Commissioner took a less restrictive approach where he stated at paragraph 42 that:

To the extent that the view set out in paragraph 6 and / or Example 5 of this Ruling is less favourable to a taxpayer than the Commissioner's previous practice in respect of such orders against a private company, it will not apply in respect of any such orders made before the date of issue of this Ruling.

Since the application of paragraph 6 will be less favourable to you if section 109J of the ITAA 1936 does not prevent the payment to you from X Co as dividend under subsection 109C(1) of the ITAA 1936, and since you have received the Family Court order prior to the issue of TR 2014/6, the Commissioner will not apply his position stated at paragraph 6 of the TR 2014/5.

Moreover you have received a favourable private ruling in relation to the arrangement based on the previous administrative practice and have entered into the Family Court proceedings based on such favourable position of the Commissioner. While the private ruling issued to you was effective for couple of years, you could not sell the Properties within this period because of the need to repair, slow economy and poor property market conditions. You have provided documentary evidence substantiating these claims.

Considering the above, it is the Commissioner's position that the payment to you by X Co pursuant to the Family Court order will not be considered as dividend under subsection 109C(1) of the ITAA 1936 because of the operation of section 109J of the ITAA 1936.

Question 3

Summary

The payment by X Co to you will not be a dividend within the meaning of subsection 6(1) of the ITAA 1936.

Detailed reasoning

The definition of dividend in section 6(1) of the ITAA 1936 includes:

• any distribution made by a company to any of its shareholders, whether in money or other property;

• any amount credited by a company to any of its shareholders as shareholders;

• a distribution of capital to a shareholder to the extent that it exceeds the amount debited to the share capital account

• a distribution to a shareholder by way of redemption or cancellation of a redeemable preference share to the extent that the value of the distribution exceeds the amount paid-up on the share.

Thus each paragraph in the definition of dividend requires a distribution or credit to a shareholder of the company.

Section 6(1) defines shareholder as including 'member or stockholder'.

Therefore, there are two elements in dividend that need to be satisfied, namely whether it is a distribution by the company and whether it is distributed to a member or stockholder.

The definition of dividend does not include former shareholder or an associate of a shareholder.

A number of taxation cases have established that a shareholder of a company is a person whose name is entered in the register of members as the holder of shares in it.

In Patcorp Investments Ltd & Ors v. FC of T, 76 ATC 4225, the Full Court of the High Court considered the meaning of shareholder in the context of dividend stripping arrangement where Gibb J. stated (at pp 4233-4234)

I now turn to consider whether the appellant companies were shareholders in the stripped companies at the respective times when the dividends in those companies were declared and paid. By sec. 6(1) of the Act, ``shareholder'' is defined to include ``member or stockholder'', but that definition provides no assistance in the present case, because in the case of a company limited by shares a member must be a shareholder. For present purposes, the terms ``shareholder'' and ``member'' are synonymous. Their meaning must be sought in the rules of company law….

These decisions affirm the general principle that entry on the register is necessary to constitute membership of a company, and clearly establish that the beneficial ownership of shares, without registration, does not make a person a shareholder….

Jacobs J. in the same case held at pp 4238-4239 that:

When the word ``shareholder'' is used in the Income Tax Assessment Act it refers to a person who is regarded as a shareholder under the general law governing the relationship of a person so described to the association in which he has a share. It has been so held in the case of a shareholder in a corporation the capital of which is divided into shares. See particularly Dalgety Downs Pastoral Company Pty. Limited v. F.C. of T. (1952) 86 C.L.R. 335 at pp. 341-343. By the definition in sec. 6 the word ``shareholder'' includes a member or a stockholder. The inclusion of the former word covers a subscriber to the memorandum of association and a member of a corporation the capital of which is not divided into shares and a member of an unincorporated association, not being a partnership, whether or not the capital is intended to be so divided. See the definition of ``company'' in sec. 6.

However, to say that in the law governing incorporated companies a person is only a ``shareholder'' at any particular date if his name appears on the register of members at that date is an over-simplification. For some purposes, e.g. qualification as a director, it has been decided (prior to the enactment of what is now sec. 116 of the Companies Act, 1961 (N.S.W.)) that a person is only the holder of shares if at the date of his appointment as director he appears on the register of members. Spencer v Kennedy (1926) Ch. 125. On the other hand it is fundamental to company law that despite the language of such sections as sec. 16(5) and sec. 151(1) the register of members is not conclusive. Indeed, sec. 151(4) makes it clear that the register is no more than prima facie evidence of the matters which it is required or authorised to contain. The provision in sec. 155 that the register may be rectified embodies the concept that, once it is rectified, the rights of the person whose name is entered therein or removed therefrom are determined as at the date at which the rectification is ordered to have effect. It appears to me that the question which arises in the present case is whether the meaning of ``shareholder'' in the Income Tax Assessment Act is confined to a person whose name appears on the register of members. In my opinion it is not. It also includes a person who is entitled as against the company to be registered and whom the company is absolutely entitled to register as a member of the company. If a company is at the relevant date absolutely entitled to register the person concerned and he is absolutely entitled to have the register rectified so that his name appears thereon as a shareholder at that date, such a person has more than a beneficial interest in the shares enforceable primarily against the vendor. He is in a direct relationship with the company involving reciprocal rights and duties between them.

Section 231 of the Corporations Act 2001 states:

A person is a member of a company if they:

(a) are a member of the company on its registration; or

(b) agree to become a member of the company after its registration and their name is entered on the register of members; or

(c) become a member of the company under section 167 (membership arising from conversion of a company from one limited by guarantee to one limited by shares).

In your case, the Family Court order requires that you transfer your share in X Co to Z following the settlement of Property 2. Once the transfer takes effect, namely your name is removed from the share register of X Co, and some other formalities are undertaken in relation to accounting, reporting and taxation, X Co will pay you the net sale proceeds from the Properties to you. Therefore, when X Co will make the payment to you, you are not a shareholder of X Co.

Again, the payment by X Co to you pursuant to the Family Court order is not a distribution within the definition of section 6(1) of the ITAA 1936 as the payment is made pursuant to court proceedings.

Thus, based on the above, the payment by X Co to you is not a distribution and therefore, does not constitute a dividend for the purposes of subsection 6(1) of the ITAA 1936.

Question 4

Summary

The payment by X Co to you will not be a statutory income under subsection 44(1) of the ITAA 1936.

Detailed reasoning

Paragraph 44(1)(a) of the ITAA 1997 states that the assessable income of a shareholder in a company includes dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source and all non-share dividends paid to the shareholder by the company.

Subsection 44(1) of the ITAA 1936 only applies to shareholders of the company that pays the dividend.

When X Co will make the payment to you, you are not a shareholder of X Co as you would have already transferred the share to Z.

As discussed under question 3, since the payment made by X Co to you will not be dividend for the purposes of subsection 6(1) of the ITAA 1936, section 44(1) will also have no application to the payment.

Question 5

Summary

The Commissioner will not apply the general anti-avoidance provision under Part IVA of the ITAA 1936 to the payment by X Co to you as no scheme has been determined.

Detailed Reasoning

Part IVA gives the Commissioner the discretion to cancel a tax benefit that has been, or would be obtained by a taxpayer in connection with a scheme. This discretion is found in subsection 177F(1) of the ITAA 1936.

Before the Commissioner can exercise the discretion contained in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA of the ITAA 1936 must be satisfied. These requirements are:

(i) A tax benefit, as identified in section 177C, was or would, but for subsection 177F(1), have been obtained.

(ii) The tax benefit was or would have been obtained in connection with a scheme as defined in section 177A.

(iii) Having regard to section 177D, the scheme is one to which Part IVA applies.

Regards must be had to the individual circumstances of each case in making a determination under section 177F of the ITAA 1936 to cancel a tax benefit.

Scheme section 177A

For Part IVA of the ITAA 1936 to apply, the identified scheme must fall within the broad definition of a scheme as provided in subsection 177A(1) of the ITAA 1936, which states:

scheme means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct

Federal Commissioner of Taxation v. Hart [2004] HCA 26; 217 CLR 216; 206 ALR 207; 2004 ATC 4599; 55 ATR 712 at [43] per Gummow and Hayne JJ:

The definition is very broad. It encompasses not only a series of steps which together can be said to constitute a "scheme" or a "plan" but also (by its reference to "action" in the singular) the taking of but one step.

The definition of scheme also includes a unilateral scheme or failure to do something.

The Commissioner may advance alternative schemes including a narrower scheme within a wider scheme in support of a Part IVA determination.

In Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 382; (1994) 28 ATR 344 at 351; 94 ATC 4663 at 4670 (Peabody case) it was held that:

But the Commissioner is entitled to put his case in alternative ways. If, within a wider scheme which has been identified, the Commissioner seeks also to rely upon a narrower scheme as meeting the requirement of Part IVA, then in our view there is no reason why the Commissioner should not be permitted to do so, provided it causes no undue embarrassment or surprise to the other side. If it does, the situation may be cured by amendment, provided the interests of justice allow such a course.

Whatever steps or circumstances the Commissioner relies on in defining the scheme must be capable, by themselves, of constituting a scheme for the purposes of Part IVA. In the Peabody case, it was further observed that

But Part IVA does not provide that a scheme includes part of a scheme and it is possible, despite the very wide definition of a scheme, to conceive of a set of circumstances which constitutes only part of a scheme and not a scheme in itself. That will occur where the circumstances are incapable of standing on their own without being robbed of all practical meaning.

Tax benefit section 177C

Part IVA of the ITAA 1936 cannot apply unless a taxpayer has obtained, or would, but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. Subsection 177C(1) defines four types of tax benefit, relating broadly to:

(i) an amount not being included in the assessable income of the taxpayer of a

(ii) year of income;

(iii) a deduction being allowable to the taxpayer in relation to a year of income;

(iv) a capital loss being incurred by the taxpayer during a year of income;

(v) a foreign tax credit being allowable to the taxpayer.

Subsection 177C(1) of the ITAA 1936 allows two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out. If it is possible to say that a tax benefit would have been obtained, it is not necessary to refer to the reasonable expectation test.

In the Peabody case, the High Court stated:

A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.

Purpose section 177D

The test in subsection 177D(2) of the ITAA 1936 is the core of Part IVA and is frequently referred to as the statutory prediction test.

The statutory prediction test is applied by carefully weighing the matters contained in subsection 177D(2) of the ITAA 1936 having regard to all the relevant evidence. Section 177D of the ITAA 1936 requires the Commissioner to have regard to each of the matters in subsection 177D(2) of the ITAA 1936. However, not all of the matters will be equally relevant in every case.

According to subsection 177D(1) of the ITAA 1936:

This part applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of:

(a) enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme; or

(b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme;

whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.

According to subsection 177D(2) of the ITAA 1936:

For the purpose of subsection (1), have regard to the following matters:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

In Federal Commissioner of Taxation v. Peabody (1993) 25 ATR 32 at 41-42; 93 ATC 4104 at 4113-4114 Hill J. (with whom Ryan and Copper JJ. agreed) stated:

In arriving at his conclusion, the Commissioner must have regard to each and every one of the matters referred to in section 177D(b). This does not mean that each of those matters must point to the necessary purpose referred to in section 177D. Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against, that section 177D requires in order to reach the conclusion to which section 177D refers.

Section 177D of the ITAA 1936 refers to the purpose of the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. Two points will be made at this stage. First, the reference to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons: subsection 177A(4) of the ITAA 1936.

Second, the particular purpose referred to in the section is the dominant purpose: subsection 177A(5) of the ITAA 1936. The dominant of two or more purposes is the ruling, prevailing or most influential purpose: Federal Commissioner of Taxation v. Spotless Services Limited (1996) 186 CLR 404 at 416; 34 ATR 183 at 188; 96 ATC 5201 (Spotless case) at 5206.

It is possible for Part IVA of the ITAA 1936 to apply, notwithstanding that the dominant purpose of obtaining the tax benefit was consistent with the pursuit of a commercial gain. In the Spotless case at 5206 it was stated that:

A person may enter into or carry out a scheme, within the meaning of Part IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business.

The conclusion to be reached under section 177D of the ITAA 1936 is the conclusion of a reasonable person. In the Spotless case, the High Court stated.

[T]he conclusion reached, having regard to the matters in paragraph (b) as to the dominant purpose of a person or one of the persons who entered into or carried out the scheme or any part thereof, is the conclusion of a reasonable person.

The consideration of purpose or dominant purpose under subsection 177D(2) of the ITAA 1936 requires an objective conclusion to be drawn. In the Spotless case, the High Court, citing the Peabody case stated:

The eight categories set out in paragraph (b) of section 177D as matters to which regard is to be had are posited as objective facts.

The Full Federal Court in Federal Commissioner of Taxation v. Consolidated Press Holdings (No 1) (1999) 42 ATR 575 at 601; 99 ATC 4945 at 4971 stated:

The section requires the decision-maker, be it the Commissioner or the Court, to have regard to each of these matters. It does not require that they be unbundled from a global consideration of purpose and slavishly ticked off. The relevant dominant purpose may be so apparent on the evidence taken as a whole that consideration of the statutory factors can be collapsed into a global assessment of purpose.

To determine if Part IVA applies it is necessary for us to work through paragraph 177D(2) of the ITAA 1936:

The scheme

Payment of net proceeds to you from the sale of the Properties pursuant to the Family Court order should not result in an adverse conclusion. You and the related entities of the Family Court proceedings have dealt with each other at arm's length. Each, have pursued their own interests with the assistance of respective lawyers. The manner of effecting the transaction is not unusual, convoluted or complicated. The arrangement entered into and carried out in the manner in which similarly ordinary families have conducted transactions in their dissolution of matrimonial or de facto relationship and property division.

The form and substance

The arrangement effected the separation and finalisation of the financial interests of the parties as a result of domestic relationship breakdown. There are no inequalities between the form of the arrangement and its substance. The ending of the relationship and the finality of financial interests in the parties is normal practice. The arrangement is not suspicious or unusual.

The time

Whilst there has been some delay from the date of the Family Court order and the sale of the Properties, there is no tax benefit derived from it. The Properties were sold at much less than the expected price because of slow real estate market for high end properties. You have provided substantiating documents that the Properties were put in the market as soon as the Court order was delivered and the real estate agents made continuous effort to procure a sale. The delay in the sale of the Properties did not benefit any of the parties.

The result

Had it not been for the circumstances and the situation, payment of the net proceeds to you may have resulted in Division 7A loans being triggered. However the exceptions to the provisions under section 109J of the ITAA 1936 applied to you because of the exercise of the Commissioner's discretion as discussed in answer to questions 1 and 2.

Change in financial position

There will be a substantial change in your financial position from the receipt of the net proceeds but not due to avoidance of tax but because of property division pursuant to the Family Court order.

Any change in the financial position of anyone associated with the taxpayer

The only parties involved in your case are you and your former partner. No other person will receive a benefit or have a change in their financial position. Therefore this factor does not have any relevance to your case.

Other consequences for the taxpayer or any other person

The consequences or the end result will be the finality of financial interests involving you and your former partner as a result of the Family Court order.

The nature of any connection between the taxpayer and any other person mentioned

The connection between you and your former partner is that of any family facing a relationship breakdown. There is nothing unusual about the connection of the parties or the proceedings.

Considering the above, the Commissioner will not apply the general anti-avoidance provision under Part IVA of the ITAA 1936 to the payment by X Co to you as no scheme has been determined.

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