House of Representatives

Taxation Laws Amendment Bill (No. 4) 1991

Taxation Laws Amendment Act 1992

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon Ralph Willis, M.P.)

Chapter 4 Dividend Rebates: Company Beneficiaries and Partners

Clauses: 10,11,12,13,25,31,32,33,49,63 and 66

Overview

Will amend the Income Tax Assessment Act 1936 to allow a rebate of tax on dividends paid on shares that are beneficially owned by a company but are registered in the name of a trustee or partnership.

Dividend Rebates: Company Beneficiaries and Partners

Summary of the proposed amendments

4.1 The Bill will amend the Income Tax Assessment Act 1936 (the Act) so that a rebate under sections 46 and 46A is allowed to a company that is the beneficial owner of shares that are registered in the name of a trustee.

4.2 The application of sections 46 and 46A will be extended to allow the rebate where:

the beneficial owner of the shares has an absolute entitlement to those shares as against the trustee;
in the case of a partnership, the companyis a partner in the registered shareholder;
a dividend on the shares is paid to the trustee or partnership; and
an amount attributable to the dividend is included in the company's assessable income (either under section 97 in the case of dividends paid to a trustee, or under section 92 where the dividends have been paid to a partnership).

4.3 If the beneficial owner had been the shareholder but would have been denied the intercorporate dividend rebate because section 46B, 46C, 46D, 46E or 46F applied, the particular section will continue to apply to deny the rebate to the beneficial owner of the shares.

4.4 The amendments will apply to dividends paid to trustees and partnerships from 17 August 1976 which is the day the High Court handed down its decision in the Patcorp case. This will ensure that no assessments or amended assessments may be issued after the introduction of this Bill to deny the rebate in respect of a dividend paid from that date. However, in any case where the rebate has been denied prior to the introduction of the Bill a company will not be entitled to an amended assessment to allow the rebate.

Background to the legislation

4.5 The issue of the entitlement of a company shareholder to a section 46 rebate on dividends paid on shares that are registered in the name of a trustee was considered by the High Court in Patcorp Investments Ltd & Ors v FC of T
76 ATC 4225 ; (1976)
140 CLR 247 . The High Court held that the beneficial owner of shares registered in the name of a trustee was not a "shareholder" and was therefore not entitled to the intercorporate dividend rebate under section 46.

4.6 The proposed amendments will, in contrast, extend the rebate allowable under section 46 or 46A to the beneficial owners of shares that are registered in the name of a trustee. They will also make it clear that where a partnership is the shareholder partners who are companies are entitled to the rebate.

Explanation of the proposed amendments

Present law

4.7 The present law provides a rebate to a shareholder that is an Australian resident company for dividends included in its taxable income for the year of income (section 46). If the dividends are paid as part of a dividend stripping operation a rebate is allowable for the net income from dividends (section 46A).

4.8 However, the intercompany dividend rebate is denied where the dividends are:

paid under a dividend stripping arrangement where the stripping dividend is paid to an entity other than the one that incurred the loss on the acquisition and the disposal of the stripped shares (section 46B);
regarded as debt dividends because of the manner and conditions in which they are paid (sections 46C and 46D);
asset revaluation dividends paid in a way that allow a company to obtain a capital tax benefit (which is a benefit arising because the arrangement is structured in such a way that the company is not taxed on the profit on the disposal of an asset, either as a capital gain (Part IIIA) or an ordinary taxable profit (section 46E);
unfranked and the shareholder is a private company that is not a member of the same wholly owned group of companies as the paying company (section 46F).

Trustee shareholders

4.9 If a company is the beneficial owner of shares that are registered in the name of a trustee, the company is not assessable (under section 44) on the dividends paid on those shares but the dividends form part of the net income of the trust (section 95). The company is then assessable on the dividends as its share of the net income of the trust (section 97).

4.10 Where a dividend is paid on shares that are registered in the name of a trustee and a company is absolutely entitled to those shares as against the trustee, the company will be entitled to the intercompany dividend rebate under section 46 or 46A on the amount of the trust income distributed to the company that is attributable to the dividend paid to the trustee. [New subsection 45Z(1)]

Partnership shareholders

4.11 Where shares are registered in the name of a partnership the dividends paid on those shares are included in the assessable income of the partnership as if the partnership was a taxpayer (section 90). Each partner is then assessed on their share of net income (section 92). Sections 46 to 46F are to be modified to ensure that they apply to the share of a company's net partnership income that is attributable to dividends received by the partnership in which it is a partner. [New subsection 45Z(2)]

Entitlement of beneficial owners and partners to rebate

4.12 The Bill proposes the insertion of a new provision into the Principal Act that will modify the application of sections 46 and 46A where the shares on which the dividend is paid are beneficially owned by a company but the registered holder of the shares is a trustee or partnership. [Clause 10 - new section 45Z]

4.13 As stated earlier the modification to sections 46 and 46A proposed by new section 45Z will apply to dividends paid after 17 August 1976. The rebate will not be denied in any assessment that issues on or after the day on which this Bill is introduced into Parliament. Also, a company will not be able to object against an assessment in which the rebate was denied, or obtain an amendment to that assessment, that issued before the day the Bill was introduced. [Clause 66]

4.14 The effect of new section 45Z will be that a rebate will be allowable under section 46 or 46A on a company's share of trust or partnership income that is attributable to a dividend paid to a trustee (against which the beneficial owner is absolutely entitled to the shares) or a partnership, as if:

the beneficial owner or partner was the registered shareholder in the company paying the dividend. Thus, for the purposes of sections 46 to 46F inclusive the beneficial owner or the partner is the shareholder; [New paragraphs 45Z(1)(d) and 45Z(2)(d)]
the dividend was paid directly to the beneficial owner or partner and not to the trustee or partnership; [New paragraphs 45Z(1)(e) and 45Z(2)(e)]
the amount of the dividend paid to the beneficial owner or partner was equal to the amount of their share of the net income of the trust or partnership that was attributable to the dividend actually paid to the trust or partnership. The relevant amount of the dividend received by a particular company partner will be the company's relevant proportion of the dividend received by the partnership. For example, if three companies are equal partners and the partnership receives a dividend of $20 and the net income of the partnership attributable to the dividend is $18, each partner will have a rebateable dividend of $6; [New paragraphs 45Z(1)(f) and 45Z(2)(f)]
the company's interest in the share was the share on which the dividend was paid. The effect of deeming this to be the case is that in determining when and whether the share was acquired or disposed of by the beneficial owner or partner for the purposes of sections 46 to 46F, the matter will be determined by reference to the company acquiring or disposing of its beneficial ownership of the share. The timing of the acquisition of shares by the trustee (otherwise than by way of issue) will not affect the application of sections 46 to 46F as modified by proposed section 45Z. For example, in determining whether shares have been acquired within the meaning of subsection 46A(2), or whether there has been a disposal of an asset for section 46E purposes, the relevant acquisitions and disposals will be those of the beneficial owner's interest in the share; [New paragraphs 45Z(1)(g) and 45Z(2)(g)]
the year of income in which the trust or partnership distribution is included in the assessable income of the company, was the year of income the dividend was (indirectly) "paid" to the beneficial owner or partner. The effect of these paragraphs is that a rebate will be allowable under subsection 46(2) or 46A(5) to the company in its assessment for the year of income in which the trust or partnership distribution containing the income attributable to the dividend is included in the company's assessable income; [New paragraphs 45Z(1)(h) and 45Z(2)(h)]
the date on which the dividend was paid to the beneficial owner was the date on which the dividend was paid to the trustee or partnership. Where the rebate depends on the dividend having been paid after a particular time, the relevant particular time will be the day the dividend was actually paid to the trustee or partnership; [New paragraphs 45Z(1)(i) and 45Z(2)(i)]
the share was issued to the company that is the beneficial owner at the time it was issued to the trustee or partnership. For example, in determining whether an issue of shares is one to which section 46C or 46D applies, the day the shares were issued is the day they were actually issued to the trustee or partnership; [New paragraphs 45Z(1)(j) and 45Z(2)(j)]
where entitlement to the rebate depends on shares having been issued to another person, as in subparagraph 46D(2)(b)(i), the relevant time the shares were actually issued to the other person; [New paragraphs 45Z(1)(k) and 45Z(2)(k)]
factors relating to the payment of a dividend that are taken into account in determining whether the dividend is a debt dividend (for the application of section 46C or 46D), were those that relate to the dividend that was actually paid to the trustee or partnership; [New paragraphs 45Z(1)(l) and 45Z(2)(l)]
in determining the extent to which a dividend is paid from particular profits, the dividend to be examined is the dividend actually paid to the trustee or partnership. Taking the earlier example, if $12 of the net partnership income attributable to dividends was an asset revaluation dividend for the application of section 46E, each of the three equal partners would have an asset revaluation dividend of $4; [New paragraphs 45Z(1)(m) and 45Z(2)(m)]
where it is necessary to determine whether the dividend is franked, the dividend was the actual dividend that was paid to the trustee or partnership. These provisions will apply where a private company receives an unfranked dividend from another private company that is not part of the same wholly owned group of companies; [New paragraphs 45Z(1)(n) and 45Z(2)(n)] and
where the date on which the dividend was declared is relevant for entitlement to the rebate, the relevant declaration was the date the dividend that was actually paid to the trustee or partnership was declared. [New paragraphs 45Z(1)(o) and 45Z(2)(o)]

Trustees

4.15 It has been implicit in the Principal Act that a company acting in the capacity of trustee is not entitled to the intercompany dividend rebate under section 46 or 46A. This implication can be drawn from the following factors:

trustees are taxed only in very limited circumstances. For example, trustees are taxed on income to which a beneficiary such as a minor is presently entitled but is under a legal disability (section 98) and on the income of a trust to which no person is presently entitled (section 99 or 99A);
where a trustee is liable for tax on trust income there is no difference in the way corporate and non-corporate trustees are taxed: it would be most peculiar if a trustee (particularly in the case of assessments raised under section 99 and 99A) that was a company was entitled to the rebate on dividends derived, but if the trustee was not a company the trustee was taxed on the dividends and not entitled to a rebate; and
rebates under section 46 or 46A are calculated on the basis of the tax assessed on the taxable income derived by the shareholder: tax is not assessed on the "taxable income" of trustees (any assessments to a trustee are raised on the net income or a share of the net income of the trust).

4.16 The amendments to sections 46 and 46A to make it clear that a company shareholder acting in a trustee capacity is not entitled to a rebate simply make explicit a status that has always been implied, ie. that a shareholder acting in a trustee capacity is not entitled to the intercompany dividend rebate. Accordingly, there is no change to the substance of the law. [Clause 11 - new 46(12)and (13) and Clause 12 - new subsection 46A(19) and (20)]

Unit trusts

4.17 The trustees of corporate unit trusts and public trading trusts that are treated as companies for tax purposes under Division 6B and 6C are the only trustees that are taxed as companies. This is the case whether the trustee is itself a company or not. In its capacity as the trustee of a corporate unit trust (Division 6B) or as the trustee of a public trading trust (Division 6C), the trustee stands in the place of the trust and is taxed as if it was a company. Entitlement to the section 46 and 46A rebates is conferred under subsection 102L(2) in the case of corporate unit trusts and subsection 102T(2) in the case of public trading trusts.

4.18 Where units in a unit trust that is taxed as a company under Division 6B or 6C are held in the name of a trustee and the beneficial owner of the units is a company that is absolutely entitled to those units as against the trustee, the company will be entitled to the rebate. Similarly, where the beneficial owner of units in a corporate unit trust or public trading trust, or shares in a company, is itself a corporate unit trust or public trading trust, the unit trust will be entitled to the rebate. [Clause 31 - new subsection 102L(2) and clause 32 - new subsection 102T(2)]

Private company dividends

4.19 Where the deductions allowable against against different classes of income are calculated under Subdivision B of Division 2A (Calculation of taxable income where disqualifying event occurs) the amount of private company dividends that are rebateable under section 46 or 46A is calculated under subsection 50N(23). Where these dividends are paid to a trustee or partnership, and the beneficial owner or partner is a company, the company will be entitled to the rebate, by virtue of the application of section 45Z as if it was the registered shareholder. [Clause 13 - new subsection 50N(24)]

Debt dividends

4.20 If a company is entitled to an allowable deduction (section 67AA) for a debt dividend paid to a registered shareholder, the company will also be entitled to a deduction if the actual recipient of the debt dividend was the trustee for a company that was the beneficial owner of the shares or a partnership of which the company was a partner. [Clause 25 - new subsection 67AA(3)]

Registered organisations

4.21 Registered organisations, even if they are companies, are not entitled to a rebate on dividends (section 116J). The rebate will not be allowable even if the dividend is actually paid to a trustee on shares that are beneficially owned by the organisation, or to a partnership in which the organisation is a partner. [Clause 33 - new subsection 116J(2)]

Frankable dividends

4.22 A dividend that is a debt dividend within the meaning of section 46D is not a frankable dividend (paragraph (f) of the definition). The dividend will retain its character as an unfrankable debt dividend where the actual recipient of the debt dividend is a trustee acting for a company that is absolutely entitled to the shares (as against the trustee). [Clause 49]

Commencement date

4.23 The amendment to allow the intercompany dividend rebate to the beneficial owners of shares registered in the name of a trustee or a partnership will apply in relation to dividends paid to the trustee or partnership after 17 August 1976.

Clauses involved in the proposed amendments

Clause 10: inserts new section 45Z which will modify the application of sections 46 and 46A where a company derives:

trust income attributable to a dividend paid to a trustee on a share to which the beneficial owner is absolutely entitled as against the trustee; and
partnership income attributable to a dividend paid to a partnership of which the company is a partner

Clause 11: amends section 46 to make it clear that a shareholder acting as a trustee is not entitled to the rebate, unless it is the trustee of a corporate unit trust or public trading trust that is taxed as a company

Clause 12: amends section 46A to make it clear that a shareholder acting as a trustee is not entitled to the rebate, unless it is the trustee of a corporate unit trust or public trading trust that is taxed as a company

Clause 13: amends section 50N to take account of proposed section 45Z

Clause 25: amends section 67AA to take account of proposed section 45Z

Clause 31: amends section 102L to extend the effect of new section 45Z to corporate unit trusts

Clause 32: amends section 102T to extend the effect of new section 45Z to public unit trusts

Clause 33: amends section 116J to take account of proposed section 45Z

Clause 49: amends the definition of "frankable dividend" in section 160APA to exclude the effect of new section 45Z

Subclause 63: is the application provision for new section 45Z

Clause 66: is a transitional provision denying companies the right to object against or obtain an amended assessment where the rebate was denied in an assessment that issued before the day the Bill was introduced into Parliament.


View full documentView full documentBack to top