• 110. How is a distributable surplus worked out for income years prior to the 2009-10 income year?

    A private company's distributable surplus for its income year is the amount worked out using the formula contained in subsection 109Y(2). The formula is:

    Distributable surplus

    =

    Net assets

    -

    Non-commercial loans

    -

    Paid-up share value

    -

    Repayments of non-commercial loans

    Where:

    1. net assets means the amount at the end of an income year by which the private company's assets, according to its accounting records, exceeds the sum of its present legal obligations and amounts relating to the following provisions:
      • depreciation
      • annual leave and long service leave, and
      • amortisation of intellectual property and trademarks.
       
    2. non-commercial loans means the total of any amounts treated as dividends under sections 108, 109D or 109E in earlier income years and which are shown as assets in the company's accounting records at the end of the income year.
    3. paid-up share value means the paid-up share capital of the company at the end of its income year.
    4. repayments of non-commercial loans means the total of any repayments and set offs made against loans or amounts that have been treated as a dividend under sections 108, 109D or 109E in earlier income years, excluding any set-offs made as a result of later dividends being paid (to the extent that they are unfranked) and loans being forgiven.

    111. How is a private company's distributable surplus worked out for the 2009-10 and later income years?

    A private company's distributable surplus for an income year is worked out as follows:

    Distributable
    surplus

    =

    Net assets

    +

    Division 7A amounts

    -

    Non-commercial
    loans

    -

    Paid-up share value

    -

    Repayments of non-commercial loans

    Where:

    1. Division 7A amount is the total of any payments (under section 109C) or forgiven debts (under section 109F) that are treated as dividends in the income year.
    2. Non-commercial loan is the total of:
      • any loan amounts treated as dividends under sections 109D and 109E of Division 7A or section 108 of the Income Tax Assessment Act 1936 in prior income years that are shown as assets in the company's accounting records at the end of its income year, and
      • any trust amounts that are treated as dividends under section 109XB in prior income years reduced by the total of the unfranked part of any subsequent dividend set offs.
       

    Amounts that are treated as dividends under section 109XB relate to certain payments, loans and debt forgiveness by a trustee of a trust estate to a shareholder or associate of a shareholder where the private company is presently entitled to a share of the net income of the trust estate, and the trustee has not paid the amount of the present entitlement to the company.

    Refer to question 110 for the definitions for 'net assets', 'paid up share value' and 'repayments of non-commercial loans'.

    112. Can the retained earnings figure in the balance sheet be used as the distributable surplus?

    No. A company's retained earnings and its distributable surplus will not necessarily be the same.

    For example, the definition of 'net assets' in the formula for the calculation of a private company's distributable surplus provides that only present legal obligations and certain provisions are included in the calculation. In contrast, a company may choose to include additional provisions for accounting purposes. Also, a company may record an unrealised gain as an increase in its total assets but then transfer it to an asset revaluation reserve rather than to its profit and loss account.

    (See subsection 109Y(2).)

    113. What happens if the total amount of 'provisional dividends' exceeds the distributable surplus at the end of the income year?

    There is a proportionate reduction in the amount of each 'provisional dividend', such that the total amount of 'provisional dividends' for the income year does not exceed the private company's distributable surplus for that income year.

    The reduced amount of each dividend that the private company is taken to have paid is worked out using the following formula:

    Provisional dividend

    X

    Distributable surplus for the year of income
    Total of provisional dividends

    The term 'provisional dividend' means the amount of the dividend the private company is taken to have paid under Division 7A prior to any reduction due to the company's distributable surplus.

    (See subsection 109Y(3).)

    114. Given that a private company's distributable surplus may reduce the amount of a dividend, how will a shareholder or shareholder's associate that is taken to have received a dividend know the amount of that dividend?

    Where the private company is taken to have paid a dividend and the amount of the dividend is reduced (so that the sum of the dividends taken to have been paid does not exceed the company's distributable surplus), the private company is required to issue a written statement to the shareholder or shareholder's associate. This allows the shareholder or shareholder's associate to work out the amount that they should include in their assessable income as an unfranked dividend.

    The written statement to the shareholder or shareholder's associate must state:

    • the private company's distributable surplus for the income year, and
    • the total amount of dividends the company would have been taken to pay were that amount not reduced to the amount of the company's distributable surplus.

    (See subsections 109Y(4) and 109Y(5).)

    115. When calculating a private company's distributable surplus, can the Commissioner change amounts shown in the company's accounting records?

    Yes.

    For income years preceding the income year in which 1 July 2006 occurred (generally the 2005-06 and earlier income years):

    • If the Commissioner considers that the company's accounting records significantly undervalue its assets or overvalue its provisions, the Commissioner may substitute a different amount. This could have the effect of increasing the private company's distributable surplus.

    For the income year in which 1 July 2006 occurred and later income years (generally from the 2006-07 income year):

    • The Commissioner may substitute a different value if the assets are undervalued or overvalued or the provisions undervalued or undervalued.

    (See subsection 109Y(2).)

    116. Is internally generated goodwill included in the calculation of the amount of a private company's distributable surplus?

    When calculating the distributable surplus at the end of the income year, the value of internally generated goodwill would not normally be included in net assets as it should not be recognised in the company's accounting records under approved accounting standards.

    Where the private company does not include the internally generated goodwill in its accounting records the Commissioner would not adjust the book value of assets merely because the value of internally generated goodwill is omitted. In the absence of matters pointing to an attempt to circumvent Division 7A the Commissioner would respect book values shown in proper accounts. When, however, it is plain that the company, its shareholders and directors have acted in such a way that treats the real and higher value of assets as the true value, regardless of the books, and the mischief against which Division 7A is directed is present, the Commissioner will substitute those values.

    However, where the private company includes the internally generated goodwill in its accounting records, the amount will be taken into account in calculating the distributable surplus amount on the basis that the company is presenting a true and fair view of its financial position in the accounts.

    It is important to separate the value of internal goodwill from the things that are a source of goodwill, such as identifiable intangible assets. These assets may have value at the end of the year of income. For example: patents, copyrights, trademarks and brand names, franchise rights, distribution agreements, licences, quotas, leasehold interests, software or software development.

    (See Taxation Determination TD 2009/5.)

    117. Is a private company's income tax properly payable for an income year but unpaid at the end of that income year included in the calculation of distributable surplus as a present legal obligation?

    Yes. a private company's income tax properly payable for an income year but unpaid at the end of that income year is included in the calculation of distributable surplus as a present legal obligation.

    118. Where an amount is taken to be a dividend under Division 7A but is reduced to nil as the private company has a nil distributable surplus, can the amount be treated as a dividend in a future income year when there is a distributable surplus?

    No. An amount is taken to be a dividend under Division 7A at the end of the private company's income year. Therefore, if the amount taken to be a dividend is reduced to nil because there is a nil distributable surplus, the amount cannot be treated as a dividend in a future income year.

    (See subsections 109C(1), 109D(1), 109E(1), 109F(1) and 109Y(1).)

      Last modified: 14 Sep 2010QC 16852