It is possible that a resident taxpayer with an interest in an unlisted country CFC may try to minimise Australian tax by arranging for the CFC to distribute benefits in a form other than dividends to its shareholders or their associates.
There are rules to prevent this form of tax avoidance in section 47A. These rules deem certain transfers and payments made by an unlisted country CFC to be dividends. These dividends are then taxed in the normal way.
For section 47A to apply, a CFC must provide a benefit to:
- a resident who is a shareholder or an associate of a shareholder of the CFC, or
- another CFC or CFT, directly or through other entities, where the first entity that received the dividend is a shareholder or an associate of a shareholder of the CFC.
When should you deem a dividend to have been paid by a CFC?
Types of benefits that are covered under section 47A
The following seven types of benefits provided by a CFC could be treated as dividends:
- the waiver by the CFC of a debt owed by another entity
- the grant by the CFC of a non-arm's length loan to another entity
- the grant by the CFC of a loan - whether at arm's length or not - to another entity to facilitate, directly or indirectly, the payment by that entity of a dividend that would be non-assessable non-exempt income
- the transfer by the CFC to another entity of property or services for no consideration, or for inadequate consideration
- a payment made by the CFC for allotment of
- a payment made by the CFC in respect of calls on shares in another company
- the grant by the CFC of a loan - whether at arm's length or not - to another entity to facilitate a transaction of the type referred to in any of the above points.
Treat the fifth and sixth types of payments as dividends only if:
- a shareholder of the CFC - or shareholder's associate - holds any direct interest, or later acquires any direct interest, in any of the shares of the company in which the CFC acquired shares or in the unit trust in which the units were acquired, or
- the company - or unit trust - uses the proceeds of the issue to facilitate a transaction providing any of the above types of benefits.
Entities providing and receiving the benefit
For a benefit to be treated as a deemed dividend, the benefit must be provided by the CFC to a shareholder or an associate of a shareholder.
The benefit must be provided by either:
- an unlisted country CFC, or
- another entity under an arrangement with the CFC, where the CFC has transferred property or services in consideration for the benefit to
- the other entity, or
- any other entity.
These transfers of property or services are referred to as arrangement transfers.
The time the benefits are deemed to have been provided
The following table sets out some of the types of benefits provided by a CFC that are subject to section 47A, the time at which they are taken to be provided and the amount of the benefit.
Type of benefit
Waiver of a debt
time the debt was waived
amount of the debt
Non-arm's length loan
time the loan was made
amount of the loan
Transfer of property for no consideration
time the property was transferred
market value at time of transfer
Transfer of property or services for a consideration less than market value
time the property or services were transferred
difference between the market value of the property or services and the consideration paid
Payment or transfer of property for the allotment of shares or units
time the payment or transfer was made
amount paid or market value of the property transferred
Benefit provided by another entity under an arrangement with the CFC - if there is one 'arrangement transfer'
time the CFC made the arrangement transfer
amount of the arrangement transfer or market value of arrangement transfer
Benefit provided by another entity under an arrangement with the CFC - if there are several arrangement transfers
time the agreement to make the arrangement transfers was entered into
total amount of the arrangement transfers or the total market value of the arrangement transfers
Working out the amount of the deemed dividend
The amount of a benefit that can be treated as a dividend paid by a CFC cannot be more than the CFC's profits at the time the benefit was provided.
In this context, profits does not mean distributable profits. 'Profits' in this situation means 'commercial profits' of either an income or capital nature that the company has at the time the benefit is provided. Work out these profits at the time the company provided the benefit.
If the CFC provided a benefit by transferring property or services at less than their market value, work out the CFC's profits at the time the benefit was provided as if the property or services were transferred for their full market value.
Effect of deeming a benefit to be a dividend
A deemed dividend paid to a resident taxpayer is generally treated the same as other dividend payments. For example, a deemed dividend that is a non-portfolio dividend paid by an unlisted country CFC to an Australian company is treated as non-assessable non-exempt income.
Disclosure of deemed dividends
You will be denied access to certain credits and concessions in relation to a section 47A deemed dividend if you:
- do not disclose the deemed dividend in your tax return, and
- do not notify the Tax Office of the deemed dividend within one year of the end of the income year in which the dividend is deemed to have been paid.
The credits and concessions you lose are:
- any credit for foreign taxes you have paid on the dividend, and
- any possibility that a part of the deemed dividend may qualify as non-assessable non-exempt income under section 23AI.
The deemed dividend will also not give rise to an attribution credit.
Other deemed dividends - section 108
Under section 108 of the Act, the Tax Office may treat as a dividend:
- an amount paid by a private company to a shareholder - or a shareholder's associate - by way of an advance or loan, or
- an amount paid or credited on behalf of, or for the individual benefit of, a shareholder or a shareholder's associate.
To deem these payments to be dividends, the Tax Office must be of the opinion that the payments and credits represent a distribution of profits.
Section 108 will not apply to an amount paid or credited after 2 June 1990 by an unlisted country CFC if that amount is deemed, under section 47A, to be a dividend.