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NATIONAL SUPERANNUATION CONFERENCE Session 10B Smsfs and Dividend Stripping and Dividend Washing Arrangements

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NATIONAL SUPERANNUATION CONFERENCE Session 10B Smsfs and Dividend Stripping and Dividend Washing Arrangements NATIONAL SUPERANNUATION CONFERENCE Session 10B SMSFs and Dividend Stripping and Dividend Washing Arrangements Written by: Presented by: Phil Broderick Phil Broderick Principal Principal Sladen Legal Sladen Legal and Melissa Brazzale Associate Sladen Legal National Division 25-26 August 2016 Crown Conference Centre, Melbourne © Phil Broderick and Melissa Brazzale, Sladen Legal 2016 Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests. Phil Broderick and Melissa Brazzale SMSFs and Dividend Stripping and Dividend Washing Arrangements CONTENTS Introduction ............................................................................................................................................ 4 SMSFs and dividend stripping ............................................................................................................. 5 Structure of this paper ......................................................................................................................... 5 Background facts for the case study ................................................................................................... 5 General Anti Avoidance Provisions (Part IVA) .................................................................................... 7 Legislative introduction and the Commissioner’s approach ............................................................. 7 Scheme ............................................................................................................................................ 8 Tax benefit........................................................................................................................................ 8 Alternative postulate/counterfactual ................................................................................................. 9 Dominant purpose .......................................................................................................................... 10 Purpose to be considered before tax benefit ................................................................................. 12 Section 177E (dividend stripping) ...................................................................................................... 12 Section 177EA (franking credit schemes) ......................................................................................... 14 Section 207-145 ................................................................................................................................. 16 The Application of the General Part IVA to the Case Study Facts .................................................... 16 Scheme .......................................................................................................................................... 16 Dominant purpose .......................................................................................................................... 16 Conclusion as to dominant purpose ............................................................................................... 21 Tax benefit...................................................................................................................................... 21 Application of section 177E ............................................................................................................... 21 Application of section 177EA ............................................................................................................. 22 Application of Section 207-145 ITAA 97 ............................................................................................ 23 NON-ARM’S LENGTH INCOME ....................................................................................................... 23 Application of section 295-550(3) to the current facts ....................................................................... 26 Conclusion as to “arm’s length dealings” ........................................................................................... 26 Conclusion as to non-arm’s length income ........................................................................................ 27 EXEMPT CURRENT PENSION INCOME ......................................................................................... 27 © Phil Broderick and Melissa Brazzale, Sladen Legal 2016 2 Phil Broderick and Melissa Brazzale SMSFs and Dividend Stripping and Dividend Washing Arrangements SMSFs and dividend washing ............................................................................................................ 28 © Phil Broderick and Melissa Brazzale, Sladen Legal 2016 3 Phil Broderick and Melissa Brazzale SMSFs and Dividend Stripping and Dividend Washing Arrangements Introduction Dividend stripping and dividend washing arrangements have been on the Australian Taxation Office’s (ATO) radar in recent years. This includes the release of TA 2015/1 and TD 2014/10, and more recently the offer of an “amnesty” to SMSF trustees allegedly involved in dividend stripping arrangements relating to investments in private companies. This paper will examine: The ATO’s attack on dividend stripping arrangements under the “general” Part IVA rules as well as under ss 177E, 177EA, 207-145 and the non-arm’s length income rules; and The ATO’s investigation into dividend washing arrangements, including the recent AAT decision in The Trustees of the WT & A Norman Superannuation Fund v FTC. In this paper references to legislation are to provisions contained in the Income Tax Assessment Act 1936 (ITAA 36), the Income Tax Assessment Act 1997 (ITAA 97), the Taxation Administration Act 1953 (TAA), the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Superannuation Industry (Supervision) Regulations 1994 (SIS Regs) unless otherwise noted. All section references are references to sections of the ITAA 36 unless indicated otherwise. © Phil Broderick and Melissa Brazzale 2016 4 Phil Broderick and Melissa Brazzale SMSFs and Dividend Stripping and Dividend Washing Arrangements SMSFs and dividend stripping The ATO has made a number of announcements in recent years in relation to the transfer of shares from a private company to a self managed superannuation fund (SMSF) and the subsequent payment of franked dividends to the SMSF. The announcements include: Taxpayer Alert TA 2015/1; Letters sent to SMSF trustees in November 2015 offering an amnesty for SMSFs in situations similar to those outlined in TA 2015/1; and The recent public offer by the ATO for SMSF trustees to address dividend stripping arrangements.1 In summary, the ATO has raised the potential to attack such arrangements with the following provisions in the tax acts: The anti-avoidance provisions of Part IVA, including: o “general Part IVA” contained in sections 177A to 177D; o Dividend stripping arrangements under section 177E; o Imputation benefit arrangements under section 177EA; Dividend stripping arrangements under section 295-550 ITAA 97; The non-arm’s length income rules under section 295-550(2) ITAA 97; and Whether the dividends qualify for an exempt current pension deduction under section 295- 385(1) ITAA 97. Structure of this paper The provisions outlined above are complicated. We have therefore designed this paper by examining those provisions with the assistance of a case study. Background facts for the case study The facts of this case study are as follows: John and Mary are the only members of the JM Super Fund (JM SMSF); John and Mary owned all of the shares in Property Co Pty Ltd (the Company); The Company owns a property in Victoria (Property) worth $1.5 million that satisfies the definition of business real property;2 John and Mary have a discretionary trust (Trust) that operates a business (Business); 1 See - https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/Offer-to-SMSF-trustees-to-address-dividend- stripping-arrangements/ 2 Section 66 of the SIS Act © Phil Broderick and Melissa Brazzale 2016 5 Phil Broderick and Melissa Brazzale SMSFs and Dividend Stripping and Dividend Washing Arrangements The Property is leased from the Company to the Trust in the Business; In addition to the Property, the Company has a small amount of cash, retained earnings and franking credits (worth about $200K); The Company satisfies the requirements of reg 13.22C of the SIS Regs; The shares in the Company (Shares) were contributed by John and Mary to the JM SMSF as non-concessional contributions; The contribution of the Shares did not breach section 66(1) of the SIS Act as the exception in section 66(2A)(b) of the SIS Act applied (ie the Company satisfied the requirements of reg 13.22C); In the year the Shares were contributed to the JM SMSF, John and Mary were nearing retirement and sought advice from their financial planner and accountant; John and Mary were advised that moving the Property into the JM SMSF was recommended. They were advised that they had a number of options to effect that, including: o John and Mary transfer the Shares to the JM SMSF – under this option they could access the small business tax concessions and no duty would be triggered; o Transfer of the Property in payment of a dividend to John
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