Dividend access shares – have the rules changed?21 October 2008 Topics: Tax and revenue
Dividend access shares are used by many clients for a variety of reasons, including asset protection or estate or tax planning.
A significant issue which is often of concern is whether the issue of a dividend access share and the subsequent declaration of dividends will trigger a share value shift.
Cooper Grace Ward obtained a private binding ruling several years ago in which the ATO indicated that the share value shifting provision should not apply to the issue of dividend access shares or the declaration of dividends on those shares (PBR 66948).
It is also necessary to consider the dividend streaming provision in sub-division 204-D of the 1997 Tax Act and the dividend stripping and dividend streaming provisions in Part IVA (Section 177E and 177EA).
Until now most commentators considered that the use of dividend access shares does not constitute a dividend stripping scheme to which section 177E would apply because, while the concept of “dividend stripping” is not defined in the tax legislation, it was a generally considered that a necessary prerequisite to have a dividend stripping scheme was that some of the shares in the company were disposed of (see IT 2627 and FT v Consolidated Press Holdings Ltd 91 FCR 524).
However, a Federal Court decision, handed down on 10 October 2008, found that a dividend stripping scheme could occur even though none of the original shares in the company are disposed of (Lawrence v FCT VID199 of 2008).
If this case remains good law, strategies involving the issue of dividend access shares will have to be very carefully thought out, as the possible application of section 177E substantially increases the risk involved with this strategy.
It is still necessary that a party involved in a dividend stripping scheme must have the dominant purpose of obtaining the tax benefit, but one message that emerges clearly from the decision in Lawrence is that it is not enough to merely say there is some other purpose, the extrinsic facts must support the taxpayer’s contention that there is another purpose – and that it is the dominant purpose.
In that case the taxpayer moved value out of a trading company under a complex scheme involving the issue of different classes of shares and conversion of share rights. This resulted in the company having a net deficit at the end of the relevant financial year, which allowed the taxpayer to borrow from the company without triggering Division 7A.
The taxpayer argued they had significant risk profile in their business activities and that the main object in implementing the scheme was asset protection.
The court rejected this for a number of reasons. Some facts which the court considered were relevant were that:
- there was “no objective evidence”:
- to support the argument that asset protection was the dominant purpose of the transactions;
- of the applicant ever being sued or threatened with proceedings in relation to their business activities;
- of any risky business activities at the time of the transaction;
- the transaction was recommended to the taxpayer by a tax consultant and it was clear from the taxpayer’s evidence that he had little understanding of the actual effect and consequences of the arrangements.
If you have any queries you can contact a member of our team on (07) 3231 2444.