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Ruling
Subject: Dividend streaming
Questions and Answers:
Does the shareholder of the ordinary A class shares need to include in their assessable income under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936) any dividends declared on the ordinary B class shares?
No.
Does the shareholder of the ordinary B class shares need to include in their assessable income under section 44 of the ITAA 1936 any dividends declared on the ordinary A class shares?
No.
This ruling applies for the following period
Year ending 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
You are a company limited by shares and currently have two classes of shares on issue, for which the rights attaching are identical. Both of your shareholders are Australian resident taxpayers.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 204-30
Income Tax Assessment Act 1997 Section 67-25
Reasons for decision
The former section 160APE of the Income Tax Assessment Act 1936 provided that shares in a company were of the same class if they had the same, or substantially the same, rights. Paragraph 8.107 of the Explanatory Memorandum for the Taxation Laws Amendment Act (No. 3) 1998 explained the former section 160APE was introduced as part of measures to "prevent inconsequential differences in share rights being used to classify shares into different classes" and to prevent companies "using artificial and inconsequential differences between share classes to facilitate dividend streaming".
The current dividend streaming provisions are contained in Subdivision 204-D of the Income Tax Assessment Act 1997. Here, section 204-30 was introduced as a specific anti-avoidance provision to apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most, in preference to other shareholders. Paragraph (c) of subsection 204-30(8) states:
A member of an entity derives a greater benefit from franking credits than another member of the entity if…the amount of income tax that, apart from this Division, would be payable by the other member because of the distribution is less than the tax offset to which the other member would be entitled…
Paragraph (c) examines whether a distribution is being directed towards one member in preference to another based upon the member's ability to derive a greater benefit from the associated tax offset. As an example, the Explanatory Memorandum for the New Business Tax System (Imputation) Bill 2002 cites a corporate tax entity that is not entitled to a refund of excess imputation credits.
While the introduction of the loss wastage measures reduces the circumstances in which excess franking credits are wasted, the focus of paragraph (c) is on instances where one member's tax profile limits the value of a tax offset to them. As Division 67 of the ITAA 1997 now allows the refund of excess imputation credits to resident individuals receiving franked dividends, resident shareholders are entitled to receive an equivalent benefit from franked dividends regardless of their basic tax liability.
In your case, both shareholders are entitled to refunds of excess imputation credits and consequently are able to utilize tax offsets associated with distributions to the same extent. To the extent that the amount of tax payable as a result of the distribution is less than the tax offset associated with the distribution under paragraph (c), they will both be entitled to a refund equal to the excess.
Accordingly, it cannot be said that the Company is able to direct distributions in such a manner as to confer greater benefits from franking upon a member that is able to derive a greater benefit from franking credits to the exclusion of a member that is unable to do so. Consequently, the Commissioner will not make a determination under paragraph 204-30(3)(c)of the ITAA 1997 that dividend streaming applies in your case.
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