Summary of issues raised and responses
UK Co has decided that the group will acquire a new business in Australia and has determined that the business will be held by Aus Co. In order to finance the acquisition, Aus Co requires $300 million. 7. UK Co directs UK Parent Co to incorporate a special purpose company in the Netherlands, Dutch Co. 8. UK Parent Co contributes $300 million to acquire all the issued shares in Dutch Co. 9. Dutch Co uses the funds contributed by UK Parent Co to make a loan with interest to Aus Co for a 9.5 year term. 10. UK Co, UK Parent Co and Dutch Co are connected entities of Aus Co as defined in subsection 995-1(1). 11. Aus Co incurs interest to Dutch Co pursuant to the loan agreement between Dutch Co and Aus Co. 12. Dutch Co in turn pays dividends to UK Parent Co. 13. UK Parent Co pays dividends to UK Co out of a pool of dividends received from subsidiaries, including Dutch Co. 14. UK Co pays dividends to its shareholders.
Paragraph 974-80(1)(d) will not be satisfied. Whilst interest payments from Aus Co to Dutch Co (a connected entity of Aus Co) will be a source of funds for Dutch Co which will ultimately be used as part of a pool of funds by UK Parent Co to pay dividends to UK Co which in turn pays dividends to shareholders in UK Co (the only ultimate recipients in relation to this scheme) , it is an insufficient basis for a conclusion that the scheme or series of schemes is designed to operate so that the return to Dutch Co is used indirectly to fund dividends to UK Parent Co the returns to the ultimate recipients. In order for paragraph 974-80(1) to be satisfied there must be a stronger connection between the payments of interest by Aus Co and payment of dividends to shareholders in UK Co which is evident from the way the scheme is structured such that it is reasonable to conclude that the dividends paid to shareholders in UK Co are indirectly a return from Aus Co.
Paragraph 974-80(1)(d) will not be satisfied. Whilst interest payments from Aus Co to Dutch Co will be a source of funds for Dutch Co which will ultimately be used as part of a pool of funds by UK Parent Co to pay dividends to UK Co (which in turn pays dividends to its shareholders ) , it is an insufficient basis for a conclusion that the scheme or series of schemes is designed to operate so that the return to Dutch Co is used to fund dividends to UK Co 's shareholders. In order for paragraph 974-80(1)(d) to be satisfied there must be a stronger connection between the payments of interest by Aus Co and payment of dividends to shareholders in UK Co which is evident from the way the scheme is structured such that it is reasonable to conclude that the dividends paid to shareholders in UK Co are indirectly a return from Aus Co. 2
Compendium
The ATO published responses to 6 submissions on this ruling in TD 2015/2EC. Outcome labels are heuristic — read the ATO response for the detail.
1More than one 'ultimate recipient' We agree with the draft Determination [1] subject to clarifying whether there can be more than one 'ultimate recipient' for the purpose of paragraph 974-80(1)(d). [2] Paragraph 23 of the draft Determination seems to focus on the scenario where the 'ultimate recipient' is the shareholders of UK Co. However, the draft Determination is unclear on whether the 'ultimate recipient' could also be construed as the UK Parent Co or even UK Co, lower down the chain of the scenario in paragraph 2 of the draft Determination. The draft Determination could be enhanced by addressing the issue of whether there is more than one ultimate recipient in Example 1.accepted
ATO response
The subject of the draft Determination and the final Determination [3] is the application of section 974-80 in the circumstances where a non-resident entity decides to invest indirectly in an Australian resident company through one or more interposed entities and the final leg in the chain is a debt interest. Whether there can be more than one 'ultimate recipient' for the purposes of paragraph 974-80(1)(d) is a separate issue which the Commissioner will in this instance only address to the extent to which that is necessary to clearly address the issue subject of this Taxation Determination. On the facts in the Example 1 and 2, the 'ultimate recipient' within the meaning of paragraph 974-80(1)(d) is the shareholders of the ultimate parent entity, that is, the shareholders of UK Co. To make this clear, paragraphs 6 to 13 of the Example 1 in the draft Determination have in the final Determination been replaced with the following: 6. UK Co has decided that the group will acquire a new business in Australia and has determined that the business will be held by Aus Co. In order to finance the acquisition, Aus Co requires $300 million. 7. UK Co directs UK Parent Co to incorporate a special purpose company in the Netherlands, Dutch Co. 8. UK Parent Co contributes $300 million to acquire all the issued shares in Dutch Co. 9. Dutch Co uses the funds contributed by UK Parent Co to make a loan with interest to Aus Co for a 9.5 year term. 10. UK Co, UK Parent Co and Dutch Co are connected entities of Aus Co as defined in subsection 995-1(1). 11. Aus Co incurs interest to Dutch Co pursuant to the loan agreement between Dutch Co and Aus Co. 12. Dutch Co in turn pays dividends to UK Parent Co. 13. UK Parent Co pays dividends to UK Co out of a pool of dividends received from subsidiaries, including Dutch Co. 14. UK Co pays dividends to its shareholders. To ensure consistency with the Example 1, minor changes have been made to paragraph 16 of the Example 2 of the final Determination. Paragraph 14 of the final Determination has also been amended (see the ATO Response/Action taken in Issue 3 of this Compendium for detail).