Edited version of private advice

Authorisation Number: 1051762560180

Date of advice: 02 October 2020

Ruling

Subject: Income tax - assessable income - dividend income - deemed income

Question 1

Will the transfer of surplus assets from Organisation A to Organisation B constitute a dividend?

Answer

No

Question 2

Will the transfer of surplus assets from Organisation A to Organisation B constitute assessable income in the hands of Organisation B?

Answer

No

Question 3

If the Answer to (2) is yes; as the surplus assets received by Organisation B are from Organisation A who shares similar objects and purposes, will the principle of Mutuality apply to the transfer such that the transfer constitutes non-assessable non-exempt income resultant from the application of the principle of Mutuality.

Answer

Not applicable

This ruling applies for the following period:

Year ended 30 June 2021

Year ended 30 June 2022

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Organisation B represents businesses within a particular industry within Australia.

Organisation B is the sole member of Organisation A.

Organisation B is a corporation limited by guarantee established for specified objects.

Organisation A is a corporation limited by guarantee established for specified objects.

Organisation B is a member based organisation.

Recent discussions have occurred between the various Boards and the need for separate entities and consequential duplication of functions have been questioned.

It is proposed that the Organisation A will be wound up and, in accordance with the Organisation A dissolution clause, all surplus assets will be transferred to Organisation B, being an organisation with similar objects.

Organisation B is a taxable non-for-profit entity for the purposes of taxation legislation.

The amended constitution of Organisation A has a clause that prohibits distribution of any surplus assets to its members on winding-up.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 47

Reasons for decision

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines 'shareholder' to include 'member or stockholder'.

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that 'assessable income' includes income according to ordinary concepts. Whether a receipt is income depends upon its quality in the hands of the recipient: Scott v Federal Commissioner of Taxation (1966).^[1]

Section 15-15 of the ITAA 1997 includes in assessable income amounts arising from the carrying on or carrying out a profit-making undertaking or plan.

Section 44 of the ITAA 1936 includes in assessable income any dividends paid to a shareholder by a company out of profits and any non-share dividends paid to a shareholder by a company. 'Dividends' are defined in subsection 6(1) of the ITAA 1936 to include any distribution made by a company to any of its shareholders, whether in money or other property, or an amount credited by a company to any of its shareholders as shareholders, except to the extent that it represents an amount paid out of the company's share capital account.

Any distributions paid to a shareholder of a company by a liquidator in the course of winding up the company are deemed to be dividends paid out of profits of the company (section 47 of the ITAA 1936).

Organisation B is the ultimate holding company of Organisation A, therefore, for the purposes of the income tax legislation, Organisation B is the sole shareholder of Organisation A.

In Re United Medical Protection of Queensland [2004] NSWSC 14 Austin J. had to consider whether surplus funds could be transferred to its member on the winding up of United Medical Protection of Queensland Ltd (UMP Qld). UMP Qld was a company limited by guarantee and, as normally the case with non-profit companies, its constitution prohibited the distribution 'by way of dividend, bonus, or otherwise howsoever by way of profit' to its members (current or former). Austin J. concluded that the distribution proposed to be made by UMP Qld to its member, was not being made to the member in its character as a member of UMP Qld but rather the distribution of surplus assets was being made to an organisation that had similar objects, and subject to similar non-profit constraints of its constitution, stating:

... The purpose of the clause [the prohibition of making distributions to members], when read together with other constitutional provisions, is to mark the distinction between a company that exists for the purpose of earning profits or otherwise making gains to distribute to its member, and a company whose assets are accumulated for the collective benefit of members and are to be applied, in winding up, to bodies with similar objects which, likewise, do not exist for the purpose of making gains to distribute to members. ... (at 47)

Similar to UMP Qld, the Organisation A amended constitution specifically precludes the making of any payments or distributions to members, either during the life of the Organisation A or on winding up. Any amount transferred to the Organisation B on the winding up of the Organisation A will be paid to the Organisation B not in its capacity as a shareholder of Organisation A, but because Organisation B is an organisation with similar objects, including the relevant 'non-profit 'clauses in its constitution.

It follows, therefore, that the transfer of surplus assets to the Organisation B on winding up Organisation A, will not come within the definition of dividend in subsection 6(1) of the ITAA 1936 because it will be a payment to Organisation B as it is an organisation with similar objects to Organisation A, and not to Organisation B in its character as a shareholder of Organisation A. Accordingly, the payment will not be assessable to the Organisation B under either sections 44 or 47 of the ITAA 1936.

The transfer of assets to the Organisation B on winding up Organisation A is not ordinary income of Organisation B and is therefore not assessable under section 6-5 of the ITAA 1997.

Organisation B has been the sole shareholder of Organisation A since its establishment. In accordance with the amended Organisation A constitution, on winding-up, any surplus assets must be transferred to another organisation with similar objects to Organisation A and which has a prohibition on distributing profits to its members. Therefore, the transfer of assets to Organisation B on the winding up of Organisation A does not represent the receipt of profits from carrying on or carrying out a profit-making undertaking or plan but is rather a payment to Organisation B in accordance with the amended Organisation A constitution. Accordingly, the amount will not be assessable under section 15-15 of the ITAA 1997.

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