23 Mar 09 Taxpayer's appeal on dividend stripping dismissed - LawrenceThe Full Federal Court (Ryan, Stone and Edmonds JJ) has dismissed the taxpayer's appeal from the decision of Jessup J, who had upheld the Commissioner's assessments on the taxpayer pursuant to s 177E ITAA 1936 ("stripping of company profits"). The taxpayer had entered into an elaborate set of arrangements in relation to two companies, the effect of which was that profits which were held for distribution by the two companies (in which the applicant was the only shareholder) were effectively converted into capital sums held by another company on trust for a class of discretionary beneficiaries which was confined to the applicant and members of his family.
Jessup J had held that the schemes, although not "by way of or in the nature of dividend stripping", as required by the first limb of s 177E(1)(a), nevertheless had "substantially the effect of a scheme by way of or in the nature of dividend stripping", within the second limb of s 177E(1)(a). The Full Court agreed, rejecting the taxpayer's argument that a scheme would not fall within the second limb of s 177E(1)(a) unless it would have fallen within the first limb of s 177E(1)(a) but for the fact that the profits of the target company were not distributed by way of dividend but by some other means. The Full Court described the schemes as "paradigm examples of a scheme to which the second limb was intended to apply" (para 52): Lawrence v FCT  FCAFC 29 (Full Federal Court; Ryan, Stone and Edmonds JJ; 20 March 2009).
For a copy of the decision, go here.