06 Jun 13 Dividend access share and s 177E - TD 2013/D5
On 5 June 2013, the ATO released for public comment by 19 July 2013 draft Taxation Determination TD 2013/D5 entitled "Income tax: is the 'dividend access share' arrangement of the type described in this Taxation Determination a scheme 'by way of or in the nature of dividend stripping' within the meaning of section 177E of Part IVA of the Income Tax Assessment Act 1936?"
The answer to the question, although qualified, is given as Yes.
The arrangement described in para 2 of the draft Determination is complex and is designed to ensure that ordinary shareholders of a private company and/or their associates derive the economic benefit of significant taxed profits accumulating in the private company in a substantially (if not entirely) tax-free form through the issue of Z Class shares having the following rights:
- a right to receive a dividend distribution at the discretion of the target company's director(s);
- no voting rights or rights to participate in the surplus assets of the target company upon its winding up; and
- a right by the target company to redeem the Z class shares within four years of the share's issue date. If the Z class shares are not redeemed, they will cease to exist at the expiration of four years from their issue.