Taxpayer Alert
TA 2004/3
Dividend Stripping / Distribution of Surplus Profits Arrangements
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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.
FOI status: may be released
Taxpayer Alerts are intended to be an \"early warning\" of significant new and emerging tax planning issues or arrangements that the ATO has under risk assessment.
Taxpayer Alerts will provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform ATO officers of new and emerging tax planning issues.Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO.
Taxpayer Alerts will give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and will highlight the features which the ATO considers give rise to taxation issues. These issues will generally require more detailed analysis to provide an ATO view to taxpayers.
The developers and marketers of an arrangement which is the subject of a Taxpayer Alert should provide the full facts of the arrangement to the ATO to enable the ATO to finalise its view.
Taxpayers who have entered into or are contemplating entering into an arrangement similar to that described in this Taxpayer Alert can seek a formal determination of the ATO's position through a Private Ruling. Such taxpayers might obtain their own advice and/or contact the ATO officer named in the Alert.
This Taxpayer Alert is issued under the authority of the Commissioner.
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.
DESCRIPTION
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.
FEATURES WHICH THE ATO CONSIDERS GIVE RISE TO TAXATION ISSUES
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.
The Australian Taxation Office is examining these and similar arrangements.
Date of Issue: 28 January 2004
Date of Effect: 28 January 2004
Related Rulings/Determinations:
IT 2627
TD 95/37
Related Practice Statements:
PS 2008/15
Subject References:
Retained earnings
deemed dividends
dividend strip
schemes to reduce income
share value shifting arrangements
Legislative References:
ITAA 1936 Division 7A
ITAA 1936 Division 19B
ITAA 1936 Part IVA
ITAA 1997 Division 140 (Repealed)
ITAA 1997 Division 725
Mr Des Maloney, First Assistant Commissioner
| Contact Officer: | Mr Gary Wicks |
| Business Line: | Serious Non Compliance |
| Section: | |
| Phone: | (07) 475 37465 |
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