ATO Interpretative Decision

ATO ID 2003/460

Income Tax

Deemed Dividend: no dividend in future year where private company makes a payment and company has nil distributable surplus in year payment made
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Is a payment to a shareholder of a private company which is taken to be a dividend under section 109C of the Income Tax Assessment Act 1936 (ITAA 1936), and reduced to nil as the private company has nil distributable surplus in the year the payment is made, treated as a dividend in a future year if there is a distributable surplus in that future year?

Decision

No. If the amount taken to be a dividend is reduced to nil under section 109C of the ITAA 1936 because there is nil distributable surplus, the payment will not be treated as a dividend in a future year in which there is a distributable surplus because the payment was not made in that future year.

Facts

The private company made a payment to the taxpayer during the 2001-02 income year.

The taxpayer was a shareholder in the private company at the time the payment was made.

The payment was not a loan as there was no obligation to repay the amount.

The distributable surplus of the private company for the 2001-02 income year was nil.

The private company had a distributable surplus in the 2002-03 income year.

Reasons for Decision

Paragraph 109C(1)(a) of the ITAA 1936 provides that a private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and the payment is made when the entity is a shareholder or an associate of such a shareholder.

Entity is defined in section 109ZD of the ITAA 1936 and has the meaning given by section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997). An entity includes an individual.

Subdivision D of Division 7A of the ITAA 1936 sets out payments and loans that are not treated as dividends. The exclusions in Subdivision D do not apply to the taxpayer in this case.

Subsection 109C(2) of the ITAA 1936 provides that the amount of the dividend is taken to equal the amount paid, subject to section 109Y of the ITAA 1936.

Subsection 109Y(1) of the ITAA 1936 limits the dividends that a private company is taken to pay at the end of the year of income under Division 7A of the ITAA 1936 to the company's distributable surplus for that year.

The distributable surplus is worked out using the formula in subsection 109Y(2) of the ITAA 1936.

The payment from the private company to the taxpayer will be taken to be a dividend and reduced to nil in the 2001-02 income year, as the private company had nil distributable surplus.

As subsection 109C(1) of the ITAA 1936 states that the dividend arises at the end of the year in which the private company pays the amount to the shareholder, the payment will not be taken to be a dividend in a future year in which there is a distributable surplus.

Therefore, the payment from the private company will not be taken to be a dividend in the 2002-03 income year or any future year in which there is a distributable surplus.

Date of decision: 22 April 2003

Year of income: Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   Division 7A, Subdivision D
   section 109C
   section 109Y
   section 109ZD

Income Tax Assessment Act 1997
section 960-100

Keywords
Companies
Deemed dividends
Dividend income
Private companies
Private company distributions
Shareholder payments
Shareholders

Business Line: Business and Personal Tax Centre of Expertise

Date of publication: 20 June 2003

ISSN: 1445-2782

history

	Date:	Version:
You are here	22 April 2003	Original statement
	25 June 2010	Archived

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