ATO Interpretative Decision
ATO ID 2004/90 (Withdrawn)
Income Tax
Income tax: Transfer from a share capital account - excluded transfer - sale of an assetFOI status: may be released
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This ATO ID is withdrawn from the database because it contains a view in respect of a provision of the Income Tax Assessment Act 1936 that doesn't apply after the 2006-2007 income year. Despite its withdrawal from the database, this ATO Interpretative Decision continues to be a precedential view in respect of decisions for income years up to, and including, the 2006-2007 income year.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
Status of this decision: Decision Withdrawn 14 January 2011
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Will a transfer from a company's share capital account to write-off the loss realised on the sale of an asset be an 'excluded transfer' for the purposes of subsection 46J(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. Where a company makes a transfer out of its share capital account to reflect the loss realised upon the sale of an asset, and there is no opportunity for recovery of that loss, the transfer will be an 'excluded transfer' for the purposes of subsection 46J(2) of the ITAA 1936.
Facts
A company sells an asset and realises a loss upon that sale. After the sale is settled, the company transfers an amount from its share capital account to its Retained Earnings/Accumulated Losses account to reflect the value that has ceased to be represented by assets, pursuant to section 258F of the Corporations Act 2001. The transfer does not facilitate the payment of a dividend. Neither does it replace funds used to pay a dividend.
Reasons for Decision
Section 46M of the ITAA 1936 operates to deny frankability to dividends to the extent that they are:
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- debited from a company's disqualifying account, or
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- debited from a company's non-disqualifying account to the extent that there is a debit to its notional disqualifying account.
The company's share capital account is a 'disqualifying account' (subsection 46H(1) of the ITAA 1936). A 'non-disqualifying account' is any account that is not a disqualifying account (subsection 46H(3) of the ITAA 1936). The company's 'notional disqualifying account' is credited if the company has transferred money from its share capital account into a non-disqualifying account (subsection 46I(3) of the ITAA 1936). As a result, it will have a surplus in its notional disqualifying account.
When the company pays a dividend from a non-disqualifying account and the notional disqualifying account was in surplus immediately before that payment, there will be a debit to its notional disqualifying account (subsection 46I(5) of the ITAA 1936). To the extent that the dividend is debited from the company's notional disqualifying account, it will not be frankable (subsections 46M(3) and 46M(4) of the ITAA 1936).
Section 46M of the ITAA 1936 will not operate with this effect, however, if the transfer from the share capital account is an 'excluded transfer' (subsection 46I(3) of the ITAA 1936). In this event, the notional disqualifying account will not be credited by the transfer. A transfer will be an excluded transfer where the disqualifying account is a share capital account and the transfer 'gives effect to a reduction in paid-up share capital that has been permanently lost or has permanently ceased to be represented by assets' (subsection 46J(2) of the ITAA 1936).
A 'permanent loss' is one where the loss has been realised and there is no presently foreseeable prospect of its recovery (Re Jupiter House Investments (Cambridge) Ltd [1985] 1 WLR 975 per Harman J at 979).
In this instance the company has realised a loss on the sale of the asset, and there is no reasonable prospect of recovering that loss. The loss is permanent.
The transfer from the share capital account did not facilitate the payment of a dividend by the company, nor did it replace funds used to pay a dividend. This means that the transfer did not take place as part of a 'dividend payment or replacement arrangement' and is not prevented from being an excluded transfer by subsection 46J(5) of the ITAA 1936. Accordingly, the transfer is an excluded transfer for the purposes of subsection 46J(2) of the ITAA 1936.
Date of decision: 23 December 2003Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1936
section 46H
section 46I
section 46J
section 46M(3)
section 258F
Case References:
Re Jupiter House Investments (Cambridge) Ltd
[1985] 1 WLR 975
ATO ID 2004/91
Keywords
Capital reductions
Share capital
ISSN: 1445-2782
| Date: | Version: | |
| 23 December 2003 | Original statement | |
| You are here → | 14 January 2011 | Archived |