Edited version of your written advice

Authorisation Number: 1013042333129

Date of advice: 5 July 2016

Ruling

Subject: Safety deposit box deposits

Question 1

Does withdrawing money from bank accounts and depositing in the bank's safety deposit box give rise to an ordinary dividend?

Answer

No

Question 2

Does withdrawing money from bank accounts and depositing in the bank's safety deposit box give rise to a Division 7A dividend?

Answer

No

This ruling applies for the following period:

Year end 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Client has a large sum of money in account deposits with an Australian bank and a safety deposit box with that bank.

The Client is to withdraw that sum of money and deposit it in the safety deposit box. The withdrawal and deposit will be recorded in The Client's financial accounts and balance sheet as cash-on-hand current asset. The Client will retain sole ownership and all rights in relation to the money in the safety deposit box. The Client's director only will have access to the money. Current or former shareholders or their associates will not have access to the money or rights to remove the money from the bank's premises.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Part III Division 7A

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 Subsection 109C(3)

Income Tax Assessment Act 1936 Section 109CA

Income Tax Assessment Act 1936 Section 109D

Income Tax Assessment Act 1936 Subsection 109D(3)

Income Tax Assessment Act 1936 Section 109F

Reasons for decision

Issue 1

Dividends on depositing in the bank's safety deposit box money withdrawn from bank accounts

Question 1

Summary

Depositing money in the bank's safety deposit box from account withdrawals will not give rise to an ordinary dividend as no enforceable rights to the money are gained by a shareholder.

Detailed reasoning

In the Income Tax Assessment Act 1936 (ITAA 1936) the positive limbs paragraph (a) and paragraph (b) of the definition of a 'dividend' in subsection 6(1) provide that a dividend includes:

• any distribution made by a company to any of its shareholders, whether in money or other property; and

• any amount credited by a company to any of its shareholders as shareholders;

The terms 'distribution' and 'credit' are not defined for the purposes of subsection 6(1) of the ITAA 1936. Accordingly, the terms should be interpreted by having regard to their ordinary meaning in the context in which it is used.

In C of T (Vic) v Nicholas (1938) 4 ATD 415, Evatt J, in referring to the word ''distributed'' in the NSW Income Tax (Management) Act 1928, said:

''The word 'distributed' is used in sec 11(b) and it is undoubtedly of wide import. But, like its neighbours, 'credited' and 'paid', it is concerned with the manner in which the shareholder receives the benefit of the dividend, emphasising that, in whatever manner the 'dividend' reaches the shareholder, portion of it is to be regarded as assessable income.''

Dixon J in Jolly v FC of T (1934) 2 ATD 362, at p 370 and in James v FC of T (1924) 34 CLR 404 expressed similar views that the words ''credited'' or ''distributed'' are concerned with the manner in which the shareholder receives the benefit of a dividend.

Notably, the general definition of a dividend in subsection 6(1) of the ITAA 1936 is an inclusive one, so the term 'dividend' first takes on its ordinary meaning. In an Australian context it has been stated: 'A dividend is a share of profits, whether at a fixed rate or otherwise, allocated to the holders of shares in a company', per Beach J in Churchill International Inc v. BTR Nylex Ltd (1991) 4 ACSR 693 at 696.

In Henry v. Great Northern Ry Co (1857) 27 LJ Ch 1 it was stated that a dividend is an appropriation of a share of a company's profits, being the right of a shareholder to receive his aliquot proportion of the profits of the enterprise.

The Client withdrawing money from bank account deposits and depositing the money in the bank's safety deposit box does not give rise to a dividend as defined in subsection 6(1) of the ITAA 1936 because a shareholder has not gained any enforceable rights to the money from The Client. All rights in relation to the money deposited in the safety deposit box remain with The Client.

Question 2

Summary

There is no Division 7A dividend in the absence of an entry of an amount upon the credit side of the private company's account for or a principal sum ultimately payable by a current or former shareholder or their associate.

Detailed reasoning

Division 7A of Part III of the ITAA 1936 (Division 7A) broadly may treat 3 kinds of amounts as dividends paid by a private company:

• amounts paid by the company to a current or former shareholder or their associate (section 109C);

• amounts lent by the company to a current or former shareholder or their associate (section 109D);

• amounts of debts owed by a current or former shareholder or their associate to the company that the company forgives (section 109F).

In the circumstances it is necessary to consider whether The Client has paid or lent an amount to a current or former shareholder or their associate.

For the purposes of Division 7A, a payment is defined in subsection 109C(3) of the ITAA 1936 to mean:

(a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and

(b) a credit of an amount to the extent that it is:

(a) to the entity; or

(b) on behalf of the entity; or

(c) for the benefit of the entity;

(c) and a transfer of property to the entity.

The Macquarie Concise Dictionary (2nd Edition) defines 'credit' to mean:

to enter upon the credit side of an account; give credit for or to; to give the benefit of such an entry to (a person, etc)

In addition, by virtue of section 109CA of the ITAA 1936, payment includes provision of an asset for use.

A loan, for the purposes of Division 7A, is defined in subsection 109D(3) of the ITAA 1936 to include:

(a) an advance of money; and

(b) a provision of credit or any other form of financial accommodation; and

(c) a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and

(d) a transaction (whatever its terms or form) which in substance effects a loan of money.

The term 'financial accommodation' is not defined in the ITAA 1936. The word 'other' in the phrase 'or other form of financial accommodation' suggests the provision of financial accommodation is not limited to situations where there is also the provision of credit.

The Australian Oxford Dictionary (1999, Oxford University Press, Melbourne) does not define the term 'financial accommodation'. However it does define the words individually as:

Financial 1. of finance

Finance 1. the management of (esp. public) money

2. monetary support for an enterprise

Accommodation 3. a convenient arrangement; a settlement or compromise

Similarly, the Macquarie Dictionary does not define the phrase 'financial accommodation' but defines the words individually as:

Financial 1. relating to monetary receipts and expenditures; relating to money matters; pecuniary

Accommodation 1. the act of accommodating

5. anything which supplies a want; a convenience

7. readiness to aid others; obligingness

8. a loan or pecuniary favour

Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements (paragraph 92 - 96) provides (in so far as relevant):

Combining these two definitions indicates that the phrase 'financial accommodation' could be, at its widest, a reference to any monetary supply or monetary arrangement or, more narrowly, a reference to a supply or grant of some form of pecuniary aid or favour.

Whilst the extended definition of 'loan' in subsection 109D(3) has not been judicially considered, former section 46D contained a definition of 'loan' which also included the 'provision of credit or any other form of financial accommodation'. This definition was considered by the Full Federal Court in Radilo where Sackville and Lehane JJ stated:

The provision of credit implies a consensual transaction, such as the delivery of goods on terms permitting deferred payment or the granting of overdraft facilities by a bank... Similarly, in its statutory context, the expression 'or any other form of financial accommodation' refers to a consensual arrangement between the person providing the accommodation and the recipient. Under a consensual arrangement for the provision of credit or financial accommodation a principal sum, or its substantial equivalent (by way of indemnity against a liability on maturing bills, for example, in the case of accommodation provided in the form of a bill acceptance facility), will ultimately be payable.

Given that, broadly speaking, the scheme of Division 7A targets benefits provided by a private company to shareholders and associates, a reference to financial accommodation that looks to the provision of 'assistance' or 'favour' to the shareholder or associate is more appropriate than one that looks at financial arrangements at large.

In the Commissioner's view, the statutory context in which the phrase appears limits what amounts to financial accommodation under this definition to:

• the supply or grant of some form of pecuniary aid or favour;

• under a consensual arrangement; and

• where a principal sum or equivalent is ultimately payable.

(italics added)

The Client makes no payment for the purposes of Division 7A because there is no entry of an amount upon the credit side of an account or credit given for or to a current or former shareholder or their associate. The Client has not created nor transferred any rights to a current or former shareholder or their associate by virtue of withdrawing the money and placing it in the safety deposit box.

The Client also does not provide financial accommodation or any other form of a loan for the purposes of Division 7A because there is no principal sum or equivalent ultimately payable by a current or former shareholder or their associate.

It is concluded The Client withdrawing and depositing the money in the safety deposit box at the bank will not give rise to a deemed dividend under Division 7A.

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