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Edited version of your private ruling
Authorisation Number: 1012501331004
Ruling
Subject: Dividends paid by non-resident companies
Question 1
Will an amount be included in the assessable income of Company D (as the head company of an income tax consolidated group) in respect of the first dividend payment?
Answer
No.
Question 2
Will an amount be included in the assessable income of Company D (as the head company of an income tax consolidated group) in respect of the second dividend payment?
Answer
No.
Relevant facts and circumstances
Company D is the head company of an income tax consolidated group.
Company E is a resident company which is a subsidiary member of the consolidated group.
Each of Company G, Company F and Company H is a non-resident company. Company E owns all of the shares in Company G. Company G owns all of the shares in Company F. Company F holds more than 10% of shares in Company H.
Company F will declare and pay a dividend to Company G (the first dividend payment). The amount of the dividend will reflect Company F's share of undistributed profits of Company H.
Company G will subsequently declare and pay a dividend to Company E of the same amount (the second dividend payment).
No other person carries or will carry rights to the voting power of Company F and Company G other than Company G and Company E respectively.
Neither Company G nor Company E will receive the dividend in capacity as trustee.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 23AJ
Income Tax Assessment Act 1936 Section 383
Income Tax Assessment Act 1936 Section 389
Reasons for decision
All legislative references are to provisions of the Income Tax Assessment Act 1936 unless otherwise stated.
Question 1
Summary
The first dividend payment will not be included in the assessable income of Company D as the payment constitutes a non-portfolio dividend that is excluded from the attributable income of Company D calculated in respect of Company G pursuant to sections 23AJ and 389.
Detailed reasoning
Section 23AJ states:
A non-portfolio dividend (as defined in section 317) paid to a company is not assessable income, and is not exempt income, of the company if:
(a) the company is an Australian resident and does not receive the dividend in the capacity of a trustee; and
(b) the company that paid the dividend is not a Part X Australian resident (as defined in that section).
The first dividend payment
The first dividend payment constitutes a dividend for Australian income tax purposes as it is a distribution by Company F to its shareholder, Company G, in its capacity as a shareholder on shares held by Company G that is not debited to the share capital account of Company F; subsection 6(1) of the ITAA 1936.
Non-portfolio dividends
Section 317 states that a non-portfolio dividend means:
… a dividend (other than an eligible finance share dividend or a widely distributed finance share dividend) paid to a company where that company has a voting interest, within the meaning of section 334A, amounting to at least 10% of the voting power, within the meaning of that section, in the company paying the dividend.
Subsection 334A(1) states that a company is taken to have a voting interest in another company if:
(a) the first-mentioned company is the beneficial owner of shares (other than eligible finance shares or widely distributed finance shares) in the other company that carry the right to exercise any of the voting power in the other company; and
(b) there is no arrangement in force at the relevant time by virtue of which any person is in a position, or may become in a position, to affect that right.
As Company G holds 100% of the shares in Company F, paragraph 334(1)(a) is satisfied. In addition, paragraph 334(1)(b) is also satisfied as no person is in a position or may become in a position to affect the right.
Paid to a company
The first dividend will be paid to Company G which is a registered company.
Although Company G is a non-resident, attribution is calculated out on the basis that Company G is a resident of Australia for the whole of the relevant year of income, section 383.
Not in capacity of trustee
Company G will not receive the first dividend payment in the capacity of trustee.
Payer is a company that is not a Part X resident
Company F is not a Part X Australian resident as defined in section 317. Although incorporated outside Australia, Company F does not carry on business in Australia and therefore is not a 'resident' as defined in subsection 6(1).
Accordingly, section 23AJ will apply to treat the first dividend payment as non-assessable non-exempt income in calculating the attributable income of Company D in respect of Company G.
Question 2
Summary
The second dividend payment will not be included in the assessable income of Company D as the amount constitutes a non-portfolio dividend which is excluded from the assessable income of Company D by reason of section 23AJ.
Detailed reasoning
Refer to Detailed reasoning for Question 1 for the text of section 23AJ, the definition of 'non-portfolio dividend' in section 317 and the text of subsection 334A(1).
The second dividend payment
The second dividend payment constitutes a dividend for Australian income tax purposes as it is a distribution by Company G to its shareholder, Company E in its capacity as a shareholder on shares held by the Company E that is not debited to the share capital account of Company G; subsection 6(1).
Non-portfolio dividends
As Company E holds 100% of the shares in Company G, paragraph 334(1)(a) is satisfied. In addition, paragraph 334(1)(b) is also satisfied as no person is in a position or may become in a position to affect the right.
Paid to a company
The second dividend will be paid to Company E which is a registered Australian company (and is taken to be paid to Company D as the head company of a consolidated group).
Not in capacity of trustee
Company E will not receive the second dividend payment in the capacity of trustee.
Payer is a company that is not a Part X resident
Company G is not a Part X Australian resident as defined in section 317. Although incorporated outside Australia, Company G does not carry on business in Australia and therefore is not a 'resident' as defined in subsection 6(1).
Accordingly, section 23AJ will apply to treat the second dividend payment as non-assessable non-exempt income and therefore the payment is not included in the assessable income of Company D.
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