Edited version of private advice

Authorisation Number: 1051973166830

Date of advice:

Ruling

Subject: Distribution by liquidator - cash flow boost - deemed dividend

Question

Is a distribution by a liquidator that is demonstrably paid out of the proceeds of the Cash Flow Boost, deemed to be a dividend, pursuant to subsection 47(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company was established for the purpose of contracting to the State Government, providing relief management (the Contract).

The Contract began in early 20XX and ceased in 20XX.

During this time, the Company directly employed up to XX staff as well as outsourced labour from contract arrangements and related party business operations.

In light of this level of employment and the timing of operations, the Company was in receipt of PAYGW Cash Flow Boost payments.

It is proposed that as the endeavours of the Company that constituted its substratum is now complete, that the Company be wound up by way of the appointment of a Voluntary Liquidation.

This will require the payment, by the Liquidator of the remaining assets of the company, which will be demonstrably sourced solely or partially from the proceeds of the Cash Flow Boost, to shareholders.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 47

Income Tax Assessment Act 1936 subsection 47(1)

Income Tax Assessment Act 1936 subsection 47(1A)

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 Division 59

Income Tax Assessment Act 1997 section 6-23

Income Tax Assessment Act 1997 subsection 118-20(1)

Income Tax Assessment Act 1997 subsection 118-20(1A)

Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020

Social Services Act 1947

Reasons for decision

Summary

The Cash Flow Boost payments received by the Company are considered to be ordinary income derived by the Company from its operations. Company liquidation distributions demonstrably paid out of the proceeds of the Cash Flow boost are therefore deemed dividends to shareholders under section 47(1) of the ITAA 1936.

Detailed reasoning

At common law, a distribution to a shareholder by a liquidator is capital, not income, in the hands of the shareholder since it is a realisation of the shareholder's interest in the company: FC of T (NSW) v Stevenson (1937) 4 ATD 415; (1937) 59 CLR 80; FC of T v Blakely (1951) 9 ATD 239 at 245, 247; (1951) 82 CLR 388 at 402, 407; FC of T v Brewing Investments Ltd [2000] FCA 920; 2000 ATC 4431 per Hill J at 18 - 19.

Archer Bros Pty Ltd (In Vol Liq) v. FCT (1953) 90 CLR 140; 27 ALJ 353; 10 ATD 192 (Archers Case) discusses distributions. In a joint judgement, the Full High Court of Australia in Archers Case observed by way of obiter dicta:

By a proper system of bookkeeping the liquidator, in the same way as the accountant of a private company which is a going concern, could so keep his accounts that...distributions could be made wholly and exclusively out of...particular profits...or income...'

Taxation Determination TD 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions? discusses the significance of the "Archer Brothers principle" in the context of liquidation distributions:

The observations in Archers Case have given rise to what is known as the Archer Brothers principle. The principle is that if a liquidator appropriates a particular fund of profit or income in making a distribution, that appropriation ordinarily determines the character of the distributed amount for the purposes of the Income Tax Assessment Act. Generally, a liquidator may rely on the Archer Brothers principle, except where a specific provision produces a different result.

Section 47 of the ITAA 1936 specifically deems certain amounts to be dividends paid to the shareholders out of the profits derived by the company. Specifically, subsection 47(1) of the ITAA 1936 provides that:

Distributions to shareholders of a company by a liquidator in the course of winding-up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it.

The use of the term "income" in the context of subsection 47(1) of the ITAA 1936 has been interpreted in Gibb v FCT (1966) 118 CLR 628 as meaning income according to ordinary concepts rather than "assessable income".

Subsection 47(1) of the ITAA 1936 is extended by subsection 47(1A) of the ITAA 1936 to include any amounts that are included in a company's assessable income for a year.

In this case the distribution to the shareholders in questions is to be demonstrably sourced from the proceeds of the Cash Flow Boost. In order to determine whether the distribution is a deemed dividend under subsection 47(1) of the ITAA 1936, the question arises as to whether the Cash Flow Boost payment received by the Company was an amount of "income" according to ordinary concepts.

Ordinary Income

Subsection 6-5(1) of the ITAA 1997 defines ordinary income as 'income according to ordinary concepts'.

There is no definition for 'income according to ordinary concepts' in taxation legislation, but the courts have established guidelines to assist in determining the nature of a receipt. As Jordan CJ stated in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219:

The word 'income' is not a term of art, and what forms of receipts are comprehended within it and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind..

Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property, and income from carrying on a business.

Although the courts have not adopted a definitive definition of income, several characteristics have been identified by the courts as providing a basis for determining whether a receipt is ordinary income. The following relevant guidelines are listed below:

•         the nature of a payment is determined by examining the character of the payment in the hands of the recipient

•         regard must be given to all facts, as such a broad view must be taken of a taxpayer's situation and it is necessary to consider the total situation of the taxpayer

•         periodicity, regularity or recurrence may show a payment to be income, and

•         a payment provided for a particular revenue expense is a factor supporting a conclusion of income.

It is not essential for all characteristics to exist for a receipt to be considered income according to ordinary concepts.

In Federal Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18, the court stated:

The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark or its character as income in accordance with the ordinary concepts and usages of mankind.

In Commissioner of Taxation (Cth) v Dixon [1952] HCA 65 (CT v Dixon), the court held a payment to be income because the amount was an 'expected periodical payment' and '... formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependents and was paid to him for that purpose...'. The court also held that where a payment '... is intended to be, and is in fact, a substitute for - the equivalent pro tanto of - the salary and wages which would have been earned and paid...', then the payment:

... must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments. It acquires the character of that for which it is substituted and that to which it is added.

The decision in CT v Dixon was followed in Keily v Federal Commissioner of Taxation 83 ATC 4248 where the aged person's pension was held to be income. The taxpayer had been receiving an aged person's pension under the Social Services Act 1947 since she reached 60 in 1978. The court held that the pension had all the accepted characteristics of income and formed part of the receipts upon which the pensioner depended for support. Further, she had a continuing expectation of receiving regular payments.

In Reckitt & Colman Pty Ltd v FC of T (1974) 74 ATC 4185, Mahoney J noted that:

In determining whether government payments... are of the nature of income, the court must examine the nature of the payment itself and the relationship to the activities, actual or potential, of the recipient.

In Scott v Federal Commissioner of Taxation [1966] HCA 48, Windeyer J noted that:

Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment of provision that the payer or provider was lawfully obliged to make. The ordinary illustrations of this are gratuities regularly received as an incident of particular employment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income. Whether or not a gratuitous payment is income in the hands of the recipient is thus a question of mixed law and fact. The motives of the donor do not determine the answer. They are, however, a relevant circumstance.

Cash Flow Boost

The Cash Flow Boost is a measure that was introduced by the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 which received Royal Assent on 24 March 2020. It was part of a package of eight bills to respond to the economic impacts of the Coronavirus (COVID-19).

The measure provided temporary cash-flow support, during the economic downturn associated with COVID-19, to small and medium businesses and not-for-profit organisations that employed staff to support them to retain employees. This was done through two sets of tax-free cash flow boosts of between $20,000 and $100,000 to eligible businesses, delivered through credits in the activity statement system, when eligible businesses lodged their activity statements.

The Cash Flow Boost payments were periodical, regular or recurrent. Subject to meeting the eligibility criteria, the payments were received in circumstances where the businesses had an expectation of receiving the payments, and the businesses could rely on the payments for their regular expenditure.

Whilst not determinative, the motives of the payer are a relevant consideration. The Cash Flow Boost measure was intended to assist in supporting small and medium-sized businesses to manage cashflow challenges, help businesses retain their employees, and to improve business confidence. The Explanatory Memorandum to Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Bill 2020 notes this intention and states that '... it provides for payments to support employers and encourage the retention of employees through any downturn'.

Cash Flow Boost payments are non-assessable non-exempt income per section 59-90 of the ITAA 1997.

Pursuant to section 6-23 of ITAA 1997, non-assessable non-exempt income is ordinary or statutory income that is expressly made not assessable income and not exempt income in the ITAA 1997, ITAA 1936 (the ITA Acts) or in any other Commonwealth law.

As 'income' under subsection 47(1) of the ITAA 1936 bears its ordinary meaning, it will include amounts of ordinary income which are made non-assessable non-exempt income.

It is the Commissioner's view that Cash Flow boost payments fall within the ordinary meaning of income for the purposes of subsection 47(1) of the ITAA 1936. The income having been derived from the Company's operations. Therefore, the distribution of amounts to shareholders that are demonstrably out of the proceeds of the Cash Flow Boost will be a deemed dividend under subsection 47(1) of the ITAA 1936, and assessable income under section 44 of the ITAA 1936.

It is noted that the amount will also form part of the capital proceeds from the ending of the shares (CGT Event C2). However, subsection 118-20(1) of the ITAA 1997, when read with subsection 118-20(1A) of the ITAA 1997, will operate to reduce the capital gain to the extent that the amount is assessable as a dividend.