Edited version of your written advice

Authorisation Number: 1012796816423

Ruling

Subject: Dividend streaming

Question

Would the Commissioner make a determination pursuant to section 204-30 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the intended payment of a franked dividend to another company?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

A taxpayer owned shares in the company.

The shares issued in the company are held by only a few shareholders. The shareholders are a taxpayer, and their relatives. Each of the shareholders holds an ordinary share. Of the remaining shares, a taxpayer holds a Class X share, while the other shareholders hold other classes of shares.

Ordinary shares carry rights to voting only.

The Class X share has the rights usually attached to ordinary shares. However, the Class X share is non-voting, while the shares only carry rights to dividends as recommended by the Directors.

Dividends to some classes of shareholders have been previously been paid in a few income year(s) but not in every year.

A taxpayer is also a director of the company. They transferred their shares in the company to another company. The consideration received by the taxpayer for the company shares was shares in another company. The taxpayer is the sole shareholder in another company.

The company may declare and pay fully franked dividends to one class of shareholder only in an income year; and it is proposed that the a series of fully franked dividends will be paid to another company as the only holder of Class X shares in coming years.

A dividend was paid to a Class Y shareholder.

A taxpayer, the company, the other current shareholders in the company and another company are all Australian residents for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 204-30.

Income Tax Assessment Act 1997 Subsection 204-30 (1).

Income Tax Assessment Act 1997 Subsection 204-30 (2).

Income Tax Assessment Act 1997 Subsection 204-30 (6).

Income Tax Assessment Act 1997 Subsection 204-30 (7).

Income Tax Assessment Act 1997 Subsection 204-30 (8).

Income Tax Assessment Act 1997 Subsection 204-30 (9)

Income Tax Assessment Act 1997 Subsection 204-30 (10)

Income Tax Assessment Act 1997 Subdivision 204-D.

Reasons for decision

Subdivision 204-D of the ITAA1997 was introduced as a specific anti-avoidance provision. It is intended to apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most from these credits, in preference to shareholders who would gain either no benefit, or a lesser benefit, from a franked dividend payment.

As stated in paragraph 3.2 of the Explanatory Memorandum (EM) to New Business Tax System (Imputation) Bill 2002, the anti-streaming provisions are intended to ensure that '…over time, the benefit of franking credits is spread more or less evenly across members in proportion to their ownership interest in the entity.' The general intent '…is that credits for tax paid on behalf of all members should flow to all members and not to only some of them.' By encouraging the distribution of franked dividends to shareholders who might not be able to take full advantage of imputation credits, it was expected that the 'intended wastage' envisaged at the time of introduction of the imputation credit regime would be achieved.

Section 204-30 of the ITAA 1997 is the key provision. Subsection 204-30(1) of the ITAA 1997 states that:

This section empowers the Commissioner to make determinations if an entity streams one or more distributions (or one or more distributions and the giving of other benefits), whether in a single franking period or in a number of franking periods, in such a way that:


(a) an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions; and

(b) the member would derive a greater benefit from franking credits than another member of the entity; and

(c) the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.

The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member.

Subsection 204-30(2) of the ITAA 1997 then states that:

These are examples of the giving of other benefits:

(a) issuing bonus shares;

(b) returning paid-up share capital;

(c) forgiving a debt;

(d) the entity or another entity making a payment of any kind, or giving any property, to a member or to another person on a member's behalf.

In part, subsection 204-30(6) of the ITAA 1997 states that:

A member of an entity receives an imputation benefit as a result of a distribution if:

the member is entitled to a tax offset under Division 207 as a result of the distribution; or

….

(c) a franking credit would arise in the franking account of the member as a result of the distribution…

As subsections 204-30(7) and 204-30(8) of the ITAA 1997 are headed: 'When does a favoured member derive greater benefit from franking credits?' these subsections are directly relevant to the application of paragraph 204-30(1)(b) of the ITAA 1997.

Subsection 204-30(7) of the ITAA 1997 states that:

The following subsection lists some of the cases in which a member of an entity derives a greater benefit from franking credits than another member of the entity. It is not an exhaustive list.

(b) the other member would not be entitled to any tax offset under Division 207 because of the distribution;

(c) the amount of income tax that, apart from this Division, would be payable by the other member because of the distribution is less than the tax offset to which the other member would be entitled;

(d) the other member is a corporate tax entity at the time the distribution is made, but no franking credit arises for the entity as a result of the distribution;

(e) the other member is a corporate tax entity at the time the distribution is made, but cannot use franking credits received on the distribution to frank distributions to its own members because:

(i) it is not a franking entity; or


(ii) it is unable to make frankable distributions;

Subsections 204-30(9) and 204-30(10) of the ITAA 1997 are also relevant to determining is dividend streaming has occurred, but are not relevant in the current case, as the distribution is not made by an exempting entity, and the distributions are not franked with an exempting credit or venture capital credit.

Application to the taxpayer's circumstances

The company will distribute franked dividends solely to one shareholder/member of the company in one or more income years. As stated above, section 204-30 of the ITAA 1997 can apply to a single distribution in a single franking period.

Dividends to some classes of shareholders have been paid in a few previous income year(s).

Thus, it could be argued that one or more dividend distributions to only one shareholder in an income year is contrary to the general policy intent of the dividend imputation provisions, being that that '…over time, the benefit of franking credits is spread more or less evenly across members in proportion to their ownership interest in the entity', and that '…tax paid on behalf of all members should flow to all members and not to only some of them'.

However, it is not a specific requirement of Subdivision 204-D of the ITAA 1997 that any distribution to one particular shareholder be 'matched' by an equivalent distribution to another. Rather, section 204-30 of the ITAA 1997 is concerned with whether the other shareholders/ members would have received a lesser benefit, or no benefit, from the franked dividend which was distributed.

Subsection 204-30(1) of the ITAA 1997

The three paragraphs of subsection 204-30(1) of the ITAA 1997 are key to the making of any determination in relation to dividend streaming.

Paragraph 204-30(1)(a) of the ITAA 1997

As it is intended that the dividend distribution to be made to another company in the income year will be franked, a 'member' of the company will be entitled to an 'imputation benefit' for the purposes of paragraph 204-30(1)(a), being the imputation credit and franking credit. Thus, the requirement of paragraph 204-30(1)(a) of the ITAA 1997 is met.

Paragraph 204-30(1)(b) of the ITAA 1997

However, the application of subsection 204-30(1) of the ITAA 1997 also requires that paragraph 204-30(1)(b) of the ITAA 1997 apply, being that '…the member would derive a greater benefit from franking credits than another member of the entity.' This in turn requires a consideration of the factors in subsection 204-30(8) of the ITAA 1997.

Paragraph 204-30(8)(a) of the ITAA 1997 will not apply, as the ruling application states that all of the current shareholders in the company are resident taxpayers.

Paragraphs 204-30(8)(b) of the ITAA 1997 will not apply, as all the other members would be entitled to a tax offset for the imputation credits (including a refund of excess imputation credits), being both resident taxpayers and natural persons.

Subsections 204-30(d) and (e) of the ITAA 1997 will not apply, as the other members are all natural persons rather than corporate entities or exempting entities.

Paragraph 204-30(8)(c) of the ITAA 1997 requires that it be considered whether:

…the amount of income tax that, apart from this Division, would be payable by the other member because of the distribution is less than the tax offset to which the other member would be entitled;

This paragraph effectively considers whether there would be wastage of the imputation credits in excess of the tax payable in the event that the dividend were paid to the other member.

However, given that all of the other members are Australian resident natural persons, they would be entitled to a refund of any imputation credits in excess of tax payable. Thus, the payment of the dividend to the other members would not result in any 'wastage' of the credit.

Thus, for the reasons stated above, it is considered that paragraph 204-30(1)(b) of the ITAA 1997 will not apply in this current case.

Paragraph 204-30(1)(c) of the ITAA 1997

This paragraph considers whether:

…the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.

In this current case, there is no indication that all the other members of the company may have received a similar imputation benefit to the current taxpayer in either the same or prior franking period (however, another shareholder did received a dividend in an income year). Thus, it is arguable that all other members of the company will or have received a lesser or no imputation benefit, and that 204-30(1)(c) of the ITAA 1997 could therefore apply.

However, section 204-30 of the ITAA 1997 will only apply where each of paragraphs (a), (b) and (c) of subsection 204-30(1) of the ITAA 1997 apply. As it is considered that paragraph 204-30(b) of the ITAA 1997 does not apply, the requirements of section 204-30(1) of the ITAA 1997 have not been met.

ATO Interpretative Decision 2005/31 (ATOID 2005/31)

This conclusion in regard to the application of subsection 204-30(1) of the ITAA 1997 is consistent with the ATO view contained in ATOID 2005/31. In this ATOID, it was determined that the payment of a dividend to one shareholder to the exclusion of another shareholder would not be sufficient in itself to establish dividend streaming in circumstances where the other shareholder:

• is a resident taxpayer and natural person

• would otherwise benefit from imputation credits to the same extent as the taxpayer who derived the dividend; and

• is not going to receive other benefits from the company in lieu of the franked distribution.

It is particularly noted in the ATOID that:

To the extent that the amount of tax payable as a result of the distribution less than the tax offset associated with the distribution, they will both be entitled to a refund equal to the excess.

As the other shareholders in the company who are not receiving the dividend are in the same position as the 'other shareholder' in ATOID 2005/31, this would suggest that the ATO view is that no declaration should be made under section 204-30 of the ITAA 1997 in regard to such a dividend payment.

Other factors

Rate of tax

The other company will pay tax on any franked dividend at a lesser rate that the other individual resident shareholders in the company. However, as noted in the ruling application, paragraph 3.42 of the Explanatory Memorandum (EM) to the New Business Tax System (Imputation) Bill 2002 states that:

A difference in marginal tax rates of members of a corporate tax entity does not, by itself, indicate that some members derive a greater benefit from imputation credits than others.

Thus, the fact that tax may be paid at differing rates by different members of the company will not by itself be sufficient grounds for a determination of dividend streaming to be made.

Family companies

The ruling application also cites paragraphs 3.36 to 3.38 of the EM to the New Business Tax System (Imputation) Bill 2002, which specifically consider discretionary dividend distributions made by closely-held companies or trusts. These paragraphs note that:

3.36 …some corporate tax entities have membership interests where the rights of the members holding those interests are effectively discretionary, since the entity can make distributions to some members to the exclusion of other members at its discretion. In these entities, which are usually family companies or trusts, the members do not have anything, in a sense relevant for streaming purposes, resembling a definite interest in the profits of the corporate tax entity; they have only a possibility of being considered as a possible recipient of distributions.

3.37 In these cases, the receipt of a franked distribution by one class of members does not imply that the other classes of members who have not received a franked distribution have deferred distribution of their share in the profits. More commonly it is reasonable to assume that they have simply missed out on any share in the profits. This is not streaming; all members with an actual share of the profits have appropriately received franked distributions.

3.38 In general, therefore, the distribution of franked and unfranked distributions by a closely-held family company or trust among family members is unlikely to be streaming.

In this current case, the shares currently issued in the company are held by a few shareholders. Each of the shareholders holds an ordinary share, which are stated to carry voting rights only. Of the remaining shares, a taxpayer holds a Class X share, while the other shareholders own other classes of shares.

Thus, as per the EM, shareholders in the company '…do not have anything, in a sense relevant for streaming purposes, resembling a definite interest in the profits of the corporate tax entity.' Based on the reasoning outlined in paragraphs 3.36 to 3.39 of the EM, it is 'unlikely' that the payment of a dividend to one taxpayer alone would be considered dividend streaming to which Subdivision 204-D of the ITAA 1997 can apply.

Conclusion

Based on the information available to the ATO, and having considered the application of Subdivision 204-D of the ITAA 1997, it is concluded that the Commissioner would not make a determination under section 204-30 of the ITAA 1997 where the company pays franked dividends to its class X shareholder to the exclusion of its other shareholders.

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