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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).