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Edited version of your private ruling
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Ruling
Subject: Dividends after cessation of company
Question
Are you able to treat a refund from the ATO which was received in relation to a deregistered company as a franked dividend?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You were the sole director and shareholder of a company.
The ATO issued a cheque for overpaid tax to the company.
As the cheque was not presented, it was declared stale and the amount of overpaid tax was deposited into your personal bank account.
Between the time the cheque was issued and when it was declared stale, the company was closed and deregistered.
Reasons for decision
Summary
The refund of overpaid company tax you received is assessable as an unfranked dividend. There is no provision within the tax legislation which allows you to treat this amount as a franked dividend.
Detailed reasoning
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that ordinary income is assessable.
Dividends received as a result of holding shares in a company are ordinary income.
Section 44 of the Income Tax Assessment Act 1936 (ITAA 1936) defines dividends assessable to resident shareholders to include:
a) dividends that paid to the shareholder by the company out of profits derived by it from any source, and
b) all non-share dividends paid to the shareholder by the company.
Subsection 47(1) of the ITAA 1936 deems distributions paid to shareholders of a company by a liquidator in the course of winding up a company to be dividends paid out of the profit derived by the company to the extent the distributions represent income derived by the company, whether before or during liquidation.
Subsection 47(2A) of the ITAA 1936 states that where
a) the business of a company has been discontinued
b) in connection with the discontinuance, any moneys of the company have been distributed to shareholders of the company, and
c) the moneys distributed are not dividends,
the distribution shall be deemed to be a distribution to the shareholders by a liquidator in the course of winding up the company.
In your case, you received a refund of overpaid company tax for a company, of which you were a shareholder, which had closed and been deregistered.
By the operation of subsection 47(2A) of the ITAA 1936, this money is deemed to be a dividend and is assessable under section 6-5 of the ITAA 1997 as ordinary income.
Can the dividend be treated as a franked dividend?
When a franking entity makes a distribution to its members, it has the option of passing, to those members, credit for income tax paid by the entity. This is done by franking the distribution.
Section 202-5 of the ITAA 1997 states an entity can frank a distribution only if the following conditions are met:
a) the entity is a franking entity that satisfies the residency requirements
b) the distribution is a frankable distribution, and
c) the entity allocates a franking credit to the distribution.
Distributions include dividends and amounts deemed to be dividends by provisions within the taxation legislation.
An entity is a franking entity at a particular time where it is a corporate tax entity at that time but excludes:
· a life insurance company that is a mutual insurance company at that time, and
· in a case where the entity is a company that is a trustee of a trust - it is not acting in its capacity as trustee of the trust at that time.
In your case, as you received the deemed dividend after the company had ceased operating and had been deregistered, it is not considered to be an entity for tax purposes at the time the deemed dividend was received. Therefore, the company was unable to frank the deemed dividend.
As the company was unable to frank the distribution, the dividend cannot be treated as a franked dividend.
Taxation legislation is applied on the basis of the facts: that is, what has occurred and not what could have happened. There is no provision within the legislation which would allow the payment to be treated as if it had been received by the company before the company ceased operations, was franked appropriately and then distributed to you.
Accordingly, the refund of overpaid company tax you received is assessable as an unfranked dividend in your tax return for the year ended 30 June 2013.
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