An assessment of purpose in light of the s.177D(2) matters is impacted by the objective facts.
Accordingly, the potential impact of a number of additional matters beyond the bare bones fact pattern are discussed below.
Notably, the RCI decision on the purpose element of Part IVA is unaffected by the 2013 amendments.
5.6.1 The s.177D(2) matters
It is necessary to consider the s.177D(2) matters in turn.
Matter #1: manner in which the scheme was entered into/carried out
There is nothing in the bare bones facts that suggests that this matter inclines either for or against the requisite dominant purpose being present.
The main ATO contention regarding this matter in RCI was that, in order to pay the $318m dividend, it was necessary for the assets of the foreign subsidiary to be revalued. This, the ATO submitted, indicated an objective purpose of diminishing the capital gain on sale of the foreign subsidiary.
However, the Full Federal Court dismissed this contention on two bases:
first, at the time of the dividend, the project that led to the share sale was “not even on the starting blocks”; and
secondly, in any case, the sale of the relevant shares (which occurred 7 months after the dividend) was not a matter for the board of the foreign subsidiary: see paragraph 161.
An important takeaway from RCI is that the prospects of Parent’s success are increased dramatically if it can be established either that a decision to sell had not been made at the time of the Dividend or that the Dividend would have been paid regardless of whether the Sale was pursued.
But a note of caution: where Parent controls Subsidiary’s dividend policy, there may be danger in relying on the Full Federal Court’s respect for the corporate veil alone.
Matter #2: form and substance of the scheme
The Full Federal Court in RCI applied a relatively narrow focus to determining the substance of the scheme.
They held that the form and substance were the same: a significant repatriation of capital.
The Full Federal Court chose not to address the point raised by Stone J at first instance that only
$20m of the $318m dividend was paid in cash.
The repatriated profits were unrealised capital profits – but that was entirely permissible and appeared to be of no significance for the Full Federal Court: see paragraph 165.
There is nothing in the bare bones fact pattern that inclines towards the requisite dominant purpose being present.
Moreover, given the approach taken by the Full Federal Court in RCI, it is difficult to readily think of additional facts that would produce a different result in relation to this matter.
Interestingly, this funding aspect of a pre-sale dividend was not explored in the examples considered in the NTLG Minutes.
Matter #3: timing
The closer together the Sale and the Dividend occur, the more this matter might potentially incline towards the requisite dominant purpose being present.
However, other factors may well impact the probative value of this matter. For example, an unsolicited offer after the Dividend and a quick completion would not indicate that the requisite dominant purpose is present.
Matter #4: tax result but for Part IVA
This matter draws attention to the $50 capital gain.
The Full Federal Court in RCI did not regard this matter as having any significant probative value.
Matters #5 and #6: changes in financial position from scheme
The Full Federal Court in RCI did not regard these matters as having much probative value.
However, at least where the Dividend is paid in cash (ie, no Unpaid Dividend Debt is involved), the Dividend will typically produce commensurate changes in financial position.
Again, the Full Federal Court chose not to address the point raised by Stone J at first instance that only $20m of the $318m dividend was paid in cash.
Matter #7: any other consequence for the taxpayer/connected entities
In RCI, the Full Federal Court noted that the $318m dividend generated significant assessable income which allowed the Australian part of the group to preserve the substantial accounting FITB. The Dividend also introduced debt into the US part of the group, reducing its US taxable income.
This matter inclines away from the requisite dominant purpose being present.
Matter #8: any connection between the parties
Even in RCI, where all the parties were members of the James Hardie group, the Full Federal Court did not regard this matter as having much probative value.
Weighing up the matters
In RCI, the Full Federal Court held that the only matter that inclined towards the requisite dominant purpose being present was the size of the dividend – which was out of step with another recent dividend.
However, the Full Federal Court held that this feature was commercially explicable by the other consequences referred to above in relation to matter #7.
On that basis, the Full Federal Court held that the requisite dominant purpose was not present.
Conclusion on the purpose requirement
Where the Dividend and the Sale do not occur close together in time or under a pre-ordained plan, it may be very difficult for the Commissioner to succeed in establishing that the purpose requirement is present in relation to a pre-sale dividend.
Nevertheless, the ATO has indicated in the NTLG Minutes that it may well continue to challenge pre-sale dividend fact patterns. There, the ATO indicated that it prefers the reasoning of Stone J at first instance to the reasoning of the Full Federal Court – and that:
“In the unlikely event that a case with facts that are materially indistinguishable from those of RCI were to arise, presumably the result would be the same. All other cases would need to be judged on their own merits.”