Edited version of private advice

Authorisation Number: 1012629532392

Ruling

Subject: Division 7A - dividends and marriage breakdown

Questions and answers

Does the proposed payment to you by the private company, under orders of the Family Court, result in an assessable dividend to you under section 44 of the Income Tax Assessment Act 1936?

Yes

This ruling applies for the following period

30 April 20XX to 30 June 20YY

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, your spouse and the private company, the company, are parties to the proceedings before the Family Court of Australia.

You are a director of the company and its sole shareholder.

The company is a party to the Family Court proceedings.

The company will pay you a sum in cash.

The Court order will be binding on all parties including the company.

The company has not made any payment to date.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 Section 109J

Income Tax Assessment Act 1936 Subsection 109L(1)

Reasons for decision

Section 44 of the Income Tax Assessment Act 1936 (ITAA 1936) includes dividends paid by a company to a shareholder in that shareholder's assessable income depending on whether they are, or are taken to be, paid out of profits derived by the company.

Section 44

The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes:

(a) if the shareholder is a resident:

(i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source;

The word 'dividend' is defined in subsection 6(1) of the ITAA 1936 to include:

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

The meaning of distribution:

The meaning of 'distribution' in context has been judicially considered and held:

• to at least involve a dealing out or bestowal;

• to encompass a very broad range of applications of company property and money to shareholders while the company is a going concern.;

• to undoubtedly be of wide import and concerned with the manner in which the shareholder receives the benefit of the dividend, emphasising that, in whatever manner the dividend reaches the shareholder it is to be regarded as assessable income.;

• that the legal form of the transaction and the capacity in which the benefit is conferred on the shareholder will be relevant factors;

• to not require the existence of the conditions necessary to declare a lawful dividend under the Corporations Act.

It is also to be observed the construction of paragraph 44(1)(a)(i) of the ITAA 1936 is silent on the cause of the private company in making the distribution.

Paid out of profits:

In terms of whether a distribution has been paid out of profits, paragraphs 15 and 16 of TR 2003/8 relevantly states:

15. In deciding whether, as a question of fact, a distribution has been made out of profits derived by the company in cases where the distribution is not formally acknowledged as such, a substantive approach should be adopted. There does not need to be a formal debiting of an account of profit of the company. So long as the market value of the company assets exceeds the total amount (as shown in its books of account) of its liabilities and share capital what remains is profits. If the distribution is not debited to share capital the distribution is one of profits.

16. Such an approach was adopted by the NSW Supreme Court in Masterman v. FCT 85 ATC 4015. In reaching its decision that the payment to shareholders in that case was a payment out of profits derived by the company, the court noted (at page 4030) that the company was solvent and that there was no evidence that the relevant payment was out of non-profit sources, and that 'commonsense would require that the company be kept solvent and that only surplus amounts not putting that requirement at risk be paid out'.

A dividend for tax purposes:

It follows for tax purposes that it does not matter whether a dividend is intended or predicated upon any particular process. All that is required is a factual enquiry as to whether there is a distribution and whether it is made out of profits.

Your circumstances

You are a shareholder of the company. Under the Family Court proceeding, you, your spouse and the company will become parties to the Court proceeding. Family Court orders will obligate the company to make a cash payment to you.

The Commissioner does not consider the authorities support a proposition that just because the distribution of profits is pursuant to a Court order that should alter characterisation as a dividend for tax purposes. The Court order is merely the impetus for the directors in resolving to make the distribution. Therefore, consistent with the approach in TR 2003/8, an assessable dividend arises under section 44 of the ITAA 1936.

In conclusion, the payment you will receive from the private company is assessable to you as a dividend under section 44 of the ITAA 1936.

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