• When should you deem a dividend to have been paid by a CFC?

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    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
      • shares in a company
      • rights or options to acquire shares
      • units in a unit trust, or
      • rights or options to acquire units
       
    • 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

    Time

    Amount

    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 consideration less than market value

    time the property or services were transferred

    difference between the market value of the property or services and 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.

    Dividends deemed paid by a CFC to a CFC

    If a non-portfolio dividend is deemed, under section 47A, to have been paid by an unlisted country CFC to another CFC, the dividend will be treated as notional exempt income of the second CFC

    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
    • 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
    • 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.

    Last modified: 05 Dec 2006QC 18000