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Ruling

Subject: CGT - shares and units - return of capital or dividend

Question:

Is the special dividend you received from Company A to be included in your assessable income as a dividend rather than a return of capital?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

You invested in Company A.

You received a payment from this investment which Company A has called a special dividend.

The payment was a result of the sale of an asset which was credited to Company A's retained earnings account.

Your Company A shares decreased in value due to the sale of an asset. You have since sold your shares at a loss.

In your opinion the correct treatment of these special dividends should be a return of capital.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 subsection 44(1)

Reasons for decision

The special dividend you received from Company A is to be included in your assessable income as a dividends received rather than a return of capital.

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines a dividend to include:

· any distribution made by a company to any of its shareholders, whether in money or other property; and

· any amount credited by a company to any of its shareholders as shareholders.

 The definition specifically excludes:

· money paid or credited; or property distributed by a company to a shareholder where the amount is debited to the share capital account of the company;

· moneys paid or credited; or property distributed by a company for the redemption or cancellation of a redeemable preference share;

· a reversionary bonus on a policy of life-assurance.

Special dividend payments to shareholders are dividends within the meaning of section 6(1) of the ITAA 1936 as they constitute distributions to shareholders. The amounts are paid out of retained earnings as calculated in accordance with generally accepted accounting principles (GAAP), and are dividends for legal and accounting purposes. None of the exclusions in the definition apply to the special dividend distributed by Company A during the 2011-12 income year.

This law has been tested in court in Condell v. Federal Commissioner of Taxation (2007) 2007 ATC 4404; (2007) 66 ATR 100; [2007] FCAFC 44 where on the 28 March 2007 the Full Federal Court determined that the source of the distribution (how the company accounted for the distribution) was the relevant factor in determining how the distribution was taxable.

Subsection 44(1) of the ITAA 1936 requires that dividends received by a resident of Australia issued by a company out of profits, are assessable income of a shareholder. Therefore, the Company A special dividend is assessable income as a dividend and not considered a return of capital.

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