ATO Interpretative Decision

ATO ID 2003/824

Income Tax

Special dividend paid prior to a corporate restructuring
FOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 Special Dividend, paid out of a combination of current year profits and retained earnings prior to a corporate restructuring, a 'dividend' for income tax purposes?

Decision

Yes. The Special Dividend constitutes a 'dividend' within the meaning of that term as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

A resident company pays a special dividend to its ordinary shareholders prior to a corporate restructuring under which the shareholders are offered a combination of cash and scrip in exchange for their shares in the company.

The special dividend is debited solely against current year profits and prior year retained earnings accounts.

Reasons for Decision

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines the term 'dividend' for income tax purposes. Under this section, 'dividend' has the meaning given by subsections 6(1) and (4) and 6BA(5) and section 94L of the ITAA 1936

The payment of the Special Dividend is a distribution of money by the company to its shareholders. This satisfies paragraph (a) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936. As the special dividend is sourced entirely from the company's current year and retained earnings, the distribution does not fall within any of the exclusions to the 'dividend' definition. The other provisions referred to in the subsection 995-1(1) of the ITAA 1997 definition are not relevant to the given facts. The Special Dividend is therefore a dividend for income tax purposes.

Date of decision:  14 August 2003

Year of income:  Year ending 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   subsection 6(1)

Income Tax Assessment Act 1997
   subsection 995-1(1)

Keywords
Distributions
Frankable dividends

Siebel/TDMS Reference Number:  3608378

Business Line:  Public Groups and International

Date of publication:  12 September 2003

ISSN: 1445-2782

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