ATO Interpretative Decision

ATO ID 2002/622 (Withdrawn)

Income Tax

• This ATO ID is withdrawn form the database because it contains a view in respect of provisions of the Income Tax Assessment Act 1936 that doesn't apply after the 2006- 2007 income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 ID 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.

Issue

Do the provisions of section 160AQCBA of the Income Tax Assessment Act 1936 ('ITAA 1936') apply where a private resident company pays a fully franked dividend to a resident individual shareholder in one income year and the same fully franked dividend to another resident individual shareholder in a later income year?

Decision

No. In the absence of a strategy to avoid the wastage of franking benefits section 160AQCBA of the ITAA 1936 does not apply.

Facts

Two resident individuals are equal shareholders in a resident private company. One shareholder holds all C class shares, while the other shareholder holds all D class shares. The resident private company is winding down business operations. Each shareholder will share equally in both the retained profits and the franking credits of the company. One shareholder will be paid a fully franked dividend in one income year, while the other shareholder will be paid the same fully franked dividend in a later income year. Both shareholders are 'qualified persons' under Division 1A, Part IIIA of the ITAA 1936 with respect to the dividends to be paid.

Reasons for Decision

Section 160AQCBA of the ITAA 1936 was introduced as a specific anti-avoidance provision to apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most, in preference to other shareholders.

Broadly speaking, any strategy directed to defeating the policy of the law by avoiding wastage of franking benefits through directing the flow of franked dividends to those shareholders who can most benefit from them, to the exclusion of disadvantaged shareholders, may amount to dividend streaming (Explanatory Memorandum to Taxation Laws Amendment Bill [No 3] 1998).

In the year that the first franked dividend is paid both shareholders are resident individuals and both would be 'qualified persons' (Division 1A, Part IIIA, of the ITAA 1936). Because Division 67 of the ITAA 1997 now allows the refund of excess imputation credits to resident individuals receiving franked dividends, both shareholders would be entitled to receive an equivalent benefit from franked dividends regardless of their basic tax liability.

In view of this, there can be no wastage of franking benefits. Therefore, no strategy to avoid wastage of franking benefits can be inferred by the deferral of the second dividend. In the absence of such a strategy, streaming will not have occurred and section 160AQCBA of the ITAA 1936 cannot apply.

Year of income:  Year ending 30 June 2002 Year ending 30 June 2003 Year ending 30 June 2004 Year ending 30 June 2005

Legislative References:
Income Tax Assessment Act 1936
   Division 1A, Part IIIA
   section 160AQCBA

Other References:
Explanatory Memorandum to Taxation Laws Amendment Bill (No 3) 1998

Keywords
Dividend streaming arrangements
Franked dividends
Franking credits
Refund of imputation credits

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  31 May 2002

ISSN: 1445-2782