Edited version of private advice

Authorisation Number: 1052030350759

Date of advice: 19 September 2022

Ruling

Subject: Liquidator distribution - non-assessable non-exempt income

Question

Is a liquidator's distribution from a reserve the company derived from non-assessable non-exempt income treated as a capital payment as per section 47 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This private ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company was established in 20XX.

During the 20XX and 20XX financial years the Company received Cash Flow Boost.

During the 20XX financial year the Company received NSW Jobsaver Grant.

Both grants have been allocated to a separate equity reserve account in the Company's balance sheet so they are distinguishable from the retained profits in the business.

The Company is to be liquidated this year and the remaining equity to be paid out is Share Capital, Retained Profits and the Grant Reserves.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 47

Income Tax Assessment Act 1936 subsection 47(1)

Income Tax Assessment Act 1936 subsection 47(1A)

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 Division 59

Income Tax Assessment Act 1997 section 6-23

Income Tax Assessment Act 1997 subsection 118-20(1)

Income Tax Assessment Act 1997 subsection 118-20(1A)

Reasons for decision

At common law, a distribution to a shareholder by a liquidator is capital, not income, in the hands of the shareholder since it is a realisation of the shareholder's interest in the company: FC of T (NSW) v Stevenson (1937) 4 ATD 415; (1937) 59 CLR 80; FC of T v Blakely (1951) 9 ATD 239 at 245, 247; (1951) 82 CLR 388 at 402, 407; FC of T v Brewing Investments Ltd [2000] FCA 920; 2000 ATC 4431 per Hill J at 18 - 19.

Archer Bros Pty Ltd (In Vol Liq) v. FCT (1953) 90 CLR 140; 27 ALJ 353; 10 ATD 192 (Archers Case) discusses distributions. In a joint judgement, the Full High Court of Australia in Archers Case observed by way of obiter dicta:

By a proper system of bookkeeping the liquidator, in the same way as the accountant of a private company which is a going concern, could so keep his accounts that...distributions could be made wholly and exclusively out of...particular profits...or income...'

Taxation Determination TD 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions? discusses the significance of the "Archer Brothers principle" in the context of liquidation distributions:

The observations in Archers Case have given rise to what is known as the Archer Brothers principle. The principle is that 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 the Income Tax Assessment Act. Generally, a liquidator may rely on the Archer Brothers principle, except where a specific provision produces a different result.

Section 47 of the ITAA 1936 specifically deems certain amounts to be dividends paid to the shareholders out of the profits derived by the company. Specifically, subsection 47(1) of the ITAA 1936 provides that:

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.

The use of the term "income" in the context of subsection 47(1) of the ITAA 1936 has been interpreted in Gibb v FCT (1966) 118 CLR 628 as meaning income according to ordinary concepts rather than "assessable income".

Subsection 47(1) of the ITAA 1936 is extended by subsection 47(1A) of the ITAA 1936 to include any amounts that are included in a company's assessable income for a year.

In this case the distribution to the shareholders in questions is to be sourced from the proceeds of the Cash Flow Boost and NSW JobSaver Grant. In order to determine whether the distribution is a deemed dividend under subsection 47(1) of the ITAA 1936, the question arises as to whether the payments received by the Company were "income" according to ordinary concepts.

Ordinary Income

Subsection 6-5(1) of the ITAA 1997 defines ordinary income as 'income according to ordinary concepts'.

There is no definition for 'income according to ordinary concepts' in taxation legislation, but the courts have established guidelines to assist in determining the nature of a receipt. As Jordan CJ stated in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219:

The word 'income' is not a term of art, and what forms of receipts are comprehended within it and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind.

Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property, and income from carrying on a business.

Although the courts have not adopted a definitive definition of income, several characteristics have been identified by the courts as providing a basis for determining whether a receipt is ordinary income. The following relevant guidelines are listed below:

•         the nature of a payment is determined by examining the character of the payment in the hands of the recipient

•         regard must be given to all facts, as such a broad view must be taken of a taxpayer's situation and it is necessary to consider the total situation of the taxpayer

•         periodicity, regularity or recurrence may show a payment to be income, and

•         a payment provided for a particular revenue expense is a factor supporting a conclusion of income.

It is not essential for all characteristics to exist for a receipt to be considered income according to ordinary concepts.

Cash Flow Boost and NSW JobSaver Grant

The Cash Flow Boost is a measure that was introduced by the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 which received Royal Assent on 24 March 2020. It was part of a package of eight bills to respond to the economic impacts of the Coronavirus (COVID-19).

The measure provided temporary cash-flow support, during the economic downturn associated with COVID-19, to small and medium businesses and not-for-profit organisations that employed staff to support them to retain employees. This was done through two sets of tax-free cash flow boosts of between $20,000 and $100,000 to eligible businesses, delivered through credits in the activity statement system, when eligible businesses lodged their activity statements.

The Cash Flow Boost payments were periodical, regular or recurrent. Subject to meeting the eligibility criteria, the payments were received in circumstances where the businesses had an expectation of receiving the payments, and the businesses could rely on the payments for their regular expenditure.

Whilst not determinative, the motives of the payer are a relevant consideration. The Cash Flow Boost measure was intended to assist in supporting small and medium-sized businesses to manage cashflow challenges, help businesses retain their employees, and to improve business confidence. The Explanatory Memorandum to Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Bill 2020 notes this intention and states that '... it provides for payments to support employers and encourage the retention of employees through any downturn'.

Similarly, the NSW JobSaver Grant was introduced to provide cash flow support to businesses impacted by COVID-19 to help them maintain their NSW employee headcount.

Cash Flow Boost and the NSW JobSaver Grant payments are non-assessable non-exempt income per section 59-90 of the ITAA 1997.

Pursuant to section 6-23 of ITAA 1997, non-assessable non-exempt income is ordinary or statutory income that is expressly made not assessable income and not exempt income in the ITAA 1997, ITAA 1936 or in any other Commonwealth law.

As 'income' under subsection 47(1) of the ITAA 1936 bears its ordinary meaning, it will include amounts of ordinary income which are made non-assessable non-exempt income.

It is the Commissioner's view that Cash Flow Boost payments and NSW JobSaver Grant payments fall within the ordinary meaning of income for the purposes of subsection 47(1) of the ITAA 1936. The income having been derived from the Company's operations. Therefore, the distribution of amounts to shareholders that are demonstrably out of the proceeds of these amounts will be a deemed dividend under subsection 47(1) of the ITAA 1936, and assessable income under section 44 of the ITAA 1936.

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