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Ruling

Subject: Division 7A - marriage breakdown

Question and answers

1. Does section 109J of the Income Tax Assessment Act 1936, apply to the cash payment made by the company to the taxpayer?

Yes.

2. Is the taxpayer taken to have received a deemed dividend pursuant to section 109C of the Income Tax Assessment Act 1936?

No.

3. Is the payment to the taxpayer a dividend as defined in section 6(1) of the Income Tax Assessment Act 1936?

No.

4. Is the payment to the taxpayer statutory income under section 44(1) of the Income Tax Assessment Act 1936?

No.

This ruling applies for the following periods

1 July 2011 to 30 June 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were a shareholder of a company.

You disposed of your shares in the company as a result of a marriage breakdown and court order.

The Orders are binding on all the parties to the proceedings; they were binding on you, your spouse and the company.

Under the court order the company was directed to make you a payment.

You received a dividend statement in relation to the court order payout.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1936 subsection 109C(1)

Income Tax Assessment Act 1936 Section 109J

Reasons for decision

Subsection 109C(1) and 109J of the Income Tax Assessment Act 1936

Subdivision B of Part III of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) deals with the circumstances under which certain private company payments will be treated as dividends.

A Family Court order directing the company to pay cash to the Rulee is a payment for the purposes of section 109C of the ITAA 1936 and would meet the requirements to be treated as a dividend for the purposes of subsection 109C(1) of the ITAA 1936.

However Subdivision D of Division 7A of Part III of the ITAA 1936 sets out rules about some payments which are not treated as dividends under subsection 109C(1) of the ITAA 1936. Section 109J of the ITAA 1936 in Subdivision D is specifically relevant to the circumstances here.

Section 109J of the ITAA 1936 provides that:

A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment:

a. discharges an obligation of the private company to pay money to the entity; and

b. is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length.

Subsection 6(1) of the Income Tax Assessment Act 1936

Subsection 6(1) of the ITAA 1936 defines 'dividend' to include: 

(a) any distribution made by a company to any of its shareholders, whether in money

or other property; and 

(b) any amount credited by a company to any of its shareholders as shareholders; 

(c) (Repealed by No 63 of 1998)

but does not include:  

(d) moneys paid or credited by a company to a shareholder or any other property

distributed by a company to shareholders (not being moneys or other property to

which this paragraph, by reason of subsection (4), does not apply or moneys paid

or credited, or property distributed for the redemption or cancellation of a

redeemable preference share), where the amount of the moneys paid or credited,

or the amount of the value of the property, is debited against an amount standing

to the credit of the share capital account of the company; or 

(e) moneys paid or credited, or property distributed, by a company for the redemption

or cancellation of a redeemable preference share if:  

(i) the company gives the holder of the share a notice when it redeems or

cancels the share; and  

(ii) the notice specifies the amount paid-up on the share immediately before

the cancellation or redemption; and

(iii) the amount is debited to the company's share capital account;

except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or  

(f) a reversionary bonus on a life assurance policy. 

Subsection 44(1) of the Income Tax Assessment Act 1936

Subsection 44(1) of the ITAA 1936 states that the assessable income of a resident shareholder includes dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source and all non-share dividends paid to the shareholder by the company.

Application to your circumstances

Effectively, section 109J of the ITAA 1936 provides that such a payment is not taken to be the payment of a dividend for the purposes of section 109C of the ITAA 1936 to the extent that it discharges an obligation of the private company to pay money to a shareholder or an associate of the shareholder, and does not exceed the arm's length amount required to discharge that obligation.

Consequently, based on the facts you have provided and provided the Family Court order binding the company, as a party to the proceedings, is an explicit order binding the company to specifically pay cash to you, and not some other alternative obligation, the payment would not be considered a dividend by virtue of section 109J of the ITAA 1936.

The payments would not come within the definition of the word 'dividend' in subsection 6(1) of the ITAA 1936. The payments to the shareholder are payments made pursuant to court proceedings and are not in the nature of being a distribution as required in the definition.

As the payments are not dividends section 44(1) has no application.

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