Issue
Does a sale of shares in the taxpayer company constitute a franking credit scheme, as defined in section 177 EA of the Income Tax Assessment Act 1936 (ITAA 1936), which permits the Commissioner to debit the taxpayer's franking account or deny the franking credit benefit to the recipient of the dividend?
Decision
No, the sale of shares in the taxpayer company does not constitute a franking credit scheme and accordingly section 177EA of the ITAA 1936 does not apply.
Facts
The taxpayer is a family company. The two directors of the taxpayer company are a husband and wife. The husband has commenced a new business venture.
In order to protect the husband's shares in the taxpayer company from creditors of the new business venture, the husband proposes to sell his shares at market value to his wife and to his family trust.
Reasons for Decision
Section 177EA of the ITAA 1936 is directed to franking credit trading which is the process of transferring franking credits on a dividend from investors who cannot fully use them, to investors who can fully use them.
In order for section 177EA of the ITAA 1936 to apply to a disposition of shares, the Commissioner must be able to conclude, amongst other things, that the purpose of at least one of the participants to the disposition of shares was to obtain a franking credit benefit. A franking credit benefit includes a franking credit rebate under section 160AQU of the ITAA 1936. It is not necessary that this purpose is the dominant purpose but it must be more than merely incidental.
The disposal of shares by the husband is for commercial purposes. Any franking credit benefit obtained by the wife or trust is merely incidental to the commercial purpose.