Edited version of private ruling

Authorisation Number: 1011610627627

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Ruling

Subject: Franked dividend

Will the distribution of the capital profit active asset reserve to your shareholder be a dividend?

No.

This ruling applies for the following period<s>:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are a company.

You received a discretionary trust capital gain distribution in the previous income year.

The capital gain was grossed up as the trust had applied the small business 50% reduction and used the discount method to calculate the capital gain. The small business 50% active asset reduction was then applied by you to the capital gain, resulting in a net capital gain.

You were not eligible to use the discount method to calculate the capital gain.

You are to be wound up as your director is now deceased. The shareholder has been appointed your director.

The current date will be the date for wind up for the purposes of this private ruling.

As of the date of wind up, a dividend payable on your ordinary share capital will be declared by minutes of a meeting of directors.

Also as of the date of wind up, a liquidator's distribution of the capital profit active asset reserve to the shareholder will be declared for the balance of the reserve less the cost base of the shares.

The capital profit active asset reserve consists of the 'exempt' 50% component resulting from the application of the small business 50% active asset reduction.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 47(1)

Income Tax Assessment Act 1936 Subsection 47(1A)

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Subsection 115-215(6)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Subsection 47(1) of the ITAA 1936 provides that amounts distributed to shareholders by a liquidator in the course of winding up a company, to the extent that they represent income derived by the company, are deemed for tax purposes to be dividends paid to the shareholders by the company out of profits derived by it.

Under subsection 47(1A) of the ITAA 1936, the term 'income' covers amounts that are of an income nature, and includes any net capital gain that would be included in the company's assessable income for a year of income, calculated without regard to capital losses and indexation.

Applying the above to your circumstances

The liquidator's distribution of the 'exempt' 50% component of the capital gain distribution in the capital profit active asset reserve is not deemed to be a dividend under subsection 47(1) of the ITAA 1936.

The 'exempt' 50% component is not 'income derived by the company' according to ordinary concepts for the purposes of subsection 47(1) of the ITAA 1936. Nor is it 'income derived by the company' under the extended definition of that expression in subsection 47(1A) of the ITAA 1936.

For the capital gains provisions in the Income Tax Assessment Act 1997 (ITAA 1997), the liquidator's distribution of the 'exempt' 50% component represents capital proceeds for the cancellation of the shares (capital gains tax (CGT) event C2 under section 104-25 of the ITAA 1997) in the case of a final distribution or an interim distribution which is followed within 18 months by the dissolution of the company. It is an amount to which CGT event G1 (about capital payments for shares) in section 104-35 of the ITAA 1997 applies in the case of other interim liquidation distributions in respect of post-CGT shares.

Note

In addition to a reduction of your grossed up capital gain by applying the small business 50% reduction to calculate your net capital gain, you can also apply a further deduction under subsection 115-215(6) of the ITAA 1997 for the amount of the distributing trust's net capital gain.

This achieves the same result as if you had made the capital gain directly.

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