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Edited version of private advice

Authorisation Number: 1012622238166

Ruling

Subject: Deceased estate - dividends

Questions and answers

This ruling applies for the following period(s)

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

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.

The deceased passed away. After a lengthy dispute over the estate it was established that the deceased's spouse is entitled to the income of the estate during their lifetime. Costs in relation to the proceedings were also awarded. To give effect to the consent orders of the court, payments were made by the company to the estate to allow the required amounts to be paid.

As a result of the dispute the Directors of the company did not issue a distribution statement within the required timeframe.

The Consent Order specifically required the Directors to treat the payments as fully franked dividends.

The trustee for the estate applied to the Commissioner for private binding rulings (PBR) in relation to the taxation treatment of amounts paid by the company to the estate, to cover both the income entitlements, and expenses incurred in relation to the deceased's spouse.

The Commissioner ruled that Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) was not applicable to the payments by the company to the estate. The reference to 'net income' in the wording of the Consent Orders specifically qualifies the net income as income "after the payment of expenses and tax". Therefore, it was not intended that the companies would make tax-fee distributions of profits to the estate or to the deceased's spouse.

The Commissioner treated the amounts as dividends for the purposes of section 6(1) of the ITAA 1936; further time was allowed to frank those dividends. The PBR was drafted on the basis that all of the payments from the company to the estate were made to satisfy the income entitlement of the deceased's spouse.

The Commissioner also considered that costs in relation to the deceased's spouse were deductible to the trustee of the estate, and that the payments received from the company were assessable recoupments under s 20-20 of the Income Tax Assessment Act 1997 (ITAA 1997). This PBR was drafted on the basis that all of the expenses related to enforcing an entitlement to receive income.

The Commissioner clarified that the ruling applied only to expenses in relation to the deceased's spouse and not to any other parties for whom the estate reimbursed legal expenses.

The draft accounts for the estate for the years ended 30 June xx and xx now reveal that the amounts received from the company in those years were used by the estate only to pay expenses. No amounts were used to satisfy the deceased's spouse's income entitlements.

The trustee wishes to treat all of the payments to the estate as dividends for the purposes of s 6(1) of the ITAA 1936 and not to treat any as assessable recoupments under section 20-20 of the ITAA 1997, as previously ruled by the Commissioner.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 Section 109L

Income Tax Assessment Act 1997 Section 202-75

Income Tax Assessment Act 1997 subsection 202-75(4)

Reasons for decision

A dividend is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) to include;

Dividends paid to Australian resident shareholders out of any profits of the company are assessable under section 44 of the ITAA 1936.

Under section 109L of the ITAA 1936, if a payment is assessable income by reason of some other provision under either the ITAA 1936 or Income Tax Assessment Act 1997 (ITAA1997), the deemed division provisions will not apply.

Application to your circumstances

Ordinary dividend

It is clear that the purpose and intention of the Consent Orders is that the relevant payments to satisfy the income entitlement of the widow would be paid by way of fully franked dividends, and as such, they would constitute dividends for the purposes of section (6(1) of the ITAA 1936.

Costs in relation to the proceedings were also awarded. All of the payments made by the company to the estate were used to pay the associated legal expenses. These expenses are considered to have been incurred in gaining or producing assessable income of the deceased's spouse.

To give effect to the terms of the Consent Order, the Commissioner will allow the payments to be treated as dividends under section 6(1) of the ITAA 1936.

Question 2

Franking of ordinary dividends is dealt with under Division 202 of the ITAA 1997. An entity that makes a frankable distribution must give the recipient a distribution statement under section 202-75 of the ITAA 1997.

The distribution statement provides documentary evidence of a number of factual issues concerning the making of the frankable distribution. The distribution statement cannot alter the amount of franking credits allocated by the company to the distribution

A private company must provide the statement within four months (or further time allowed by the Commissioner in writing) after the end of the income year in which the distribution is made.

Under subsection 202-75(4) of the ITAA 1997 an extension is not allowed for a franked distribution that would create or increase a liability to franking deficit tax.

Application to your circumstances

The company is a private company, the estate and the deceased's spouse have at all times been Australian residents for taxation purposes. Therefore, the taxation threshold requirements are fulfilled.

The deceased estate has been involved in a lengthy and complex legal dispute which has now been resolved. However, as a result of the dispute the Directors did not issue a distribution statement within the required timeframe.

The Consent Order specifically required the Directors to treat the payments as fully franked dividends and provides the evidence as to the decision that was made.

 

When the distribution statement is issued it will reflect the decision made under the direction of the Consent Order. Allowing further time to issue the distribution statement will not change the allocation of franking credits to the distribution.

Therefore; the Commissioner will exercise his discretion to allow the company further time to issue the distribution statement.

The Commissioner will allow the company up to 3 months to issue distribution statements to shareholder/s.

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