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Edited version of your written advice
Authorisation Number: 1012780151246
Ruling
Subject: Pre-CGT liquidator's dividend Archer Brothers Principle
Questions and Answers
1. Can you apply the Archer Brothers principle to your winding up in relation to pre-CGT profits?
Yes.
2. Will the liquidators' distribution of your pre-CGT capital profits be tax-free to your shareholders?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
The scheme commences on:
1 June 2014
Relevant facts and circumstances
You are an investment company that was established prior to 20 September 1985, which mostly invested in Australian equities, for long term growth, as evidenced by the substantial portfolio of pre-CGT shares. All of your shareholders are also pre-CGT shareholders.
Disposals of post CGT assets have been accounted for as income and subject to tax.
Disposals of pre-CGT assets have been accounted for and recorded as a non-taxable capital profits reserve.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 47
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Section 118-20
Reasons for decision
Subsection 47(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides:
Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it.
Subsection 47(1A) of the ITAA 1936 explains the phrase 'income derived by the company' in subsection (1) as follows:
(a) an amount (except a net capital gain) included in the company's assessable income for a year of income; or
(b) a net capital gain that would be included in the company's assessable income for a year of income if the Income Tax Assessment Act 1997 (ITAA 1997) applied.
The effect of subsection 47(1A) is that a dividend paid to a shareholder that represents company profit will be taxed in the hands of the shareholder in the same manner in which that profit was taxed in the hands of the company. For example, the distribution of a non-taxable capital gain made by the company to a shareholder would be non-taxable to the shareholder (under subsection 47(1A)).
Note: Subsection 47(2B) of the ITAA 1936 states where the company does not cease to exist within a period of three years after the distribution or within such further period as the Commissioner allows, then those moneys or other property so distributed shall be deemed to be dividends paid by the company to the shareholders out of ordinary profits derived by it. For example, the distribution of a non-taxable capital gain made by the company to a shareholder would be taxable to the shareholder.
In addition to subsection 47(1) above, Taxation Determination TD 2001/27 explains the full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company (which is CGT event C2 in section 104-25 of the ITAA 1997). However, the anti-overlap provision in section 118-20 of the ITAA 1997 reduces any capital gain by amounts that are otherwise assessable as a result of the event. Where the relevant shares are pre-CGT assets, any capital gain made is disregarded.
Taxation Determination TD 95/10 explains the Commissioner's view on the Archer Brothers principle in the context of liquidation distributions. The Archer Brothers principle is if a liquidator appropriates a particular fund of profit or income in making a distribution, that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 and other provisions of the Act. TD 95/10 provides the Commissioner will accept that a liquidator may rely on the Archer Brothers principle if:
(i) a specific provision in the Act does not produce a different result;
(ii) the company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and
(iii) it is clear from either the accounts or statement of distribution that the liquidator has appropriated the specific profit or fund in making the distribution.
In your case, as your non-taxable capital profits reserve is clearly identifiable, you can rely on the Archer Brothers principle. As your shareholder shares are pre-CGT shares, the liquidator's distribution paid, from pre-CGT profits, will be tax-free in the hands of your shareholders (since the distribution is non-taxable under both section 47 of the ITAA 1936 and section 104-25 of the ITAA 1997).
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