Edited version of private advice

Authorisation Number: 1052034877268

Date of advice: 29 September 2022

Ruling

Subject: Division 7A and family law obligation

Question 1:

Will the deemed dividend under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) arising out of payments by Company A to you because of Order 1 of the Family Court Order dated XX XX 20XX be a frankable dividend under section 109RC of the ITAA 1936?

Answer:

Yes

Question 2:

Will the deemed dividend under Division 7A of ITAA 1936 arising out of payments by Company A to you because of Order 2 of the Family Court Order dated XX XX 20XX be a frankable dividend under section 109RC of the ITAA 1936?

Answer:

No

This ruling applies for the following period:

1 July 20XX - 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse are directors of Company A.

The sole shareholder of Company A is Family Trust.

You are a beneficiary of Family Trust.

The trustee of Family Trust is a corporate trustee (Trustee) and you are the director.

You and your spouse were separated on XX XX 20XX.

Subsequent to the separation the Trustee amended the Trust Deed of Family Trust to include your spouse as a beneficiary.

On XX XX 20XX the Federal Circuit Court of Australia made orders under section 79 of the Family Law Act 1975 in respect of the matrimonial property proceedings between you and your spouse (Family Court Order).

Order 1 of the Family Court Order requires you and your spouse as directors of Company A to cause Company A to make certain payments to you and your spouse.

Order 2 of the Family Court Order states that you as director of the Trustee of Family Trust, are entitled to utilise the trust funds to pay for certain expenses to you and your spouse.

Company A has made payments as required by both Order 1 and Order 2 from its own bank account.

All payments made by Company A have been treated as loans to you and your spouse in Company A's accounts.

There is no loan agreement between Company A and Family Trust relating to payments made by Company A under Order 2.

There is no loan agreement between you and Company A.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 109C(1)

Income Tax Assessment Act 1936 subsection 109C(2)

Income Tax Assessment Act 1936 subsection 109C(3)

Income Tax Assessment Act 1936 subsection 109RC(1)

Income Tax Assessment Act 1936 subsection 109RC(2)

Income Tax Assessment Act 1936 subsection 109RC(3)

Income Tax Assessment Act 1936 subsection 109C(4)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1936 unless otherwise stated

Question 1

In matrimonial property proceedings, under section 79 of the Family Law Act 1975 (FLA 1975), the Family Court can order:

•                     a private company, or

•                     a party to the matrimonial proceedings to cause the private company,to:

•                     pay money, or

•                     transfer property,

to a party to the matrimonial proceedings.

When a private company makes a payment of money or transfer of property to a shareholder of the company out of profits the payment is an assessable dividend under section 44. Section 44, however, only applies to the shareholders of a company and does not apply where the recipient of the payment of money or transfer of property is an associate of a shareholder. In such cases, Division 7A needs to be considered.

Paragraph 5 of Taxation Ruling TR 2014/5 Income tax: matrimonial property proceedings and payments of money or transfer of property by a private company to a shareholder (or their associate) (TR 2014/5) states that:

Where a section 79 order requires:

•                     a private company, or

•                     a party to the matrimonial proceedings to cause the private company,

to pay money or transfer property to an associate of a shareholder of property in compliance with the order, the payment of money or transfer of property is a payment for the purposes of subsection 109C(3) of the ITAA 1936.

Subsection 109C(3) defines the term 'payment ' for the purpose of Division 7A to mean:

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

(b) a credit of an amount to the extent that it is to the entity, or on behalf of the entity, or for the benefit of the entity, and

(c) a transfer of property to the entity.

Section 109RC allows dividends taken to be paid by a private company under section 109C because of family law obligations to be franked where certain conditions are met.

Section 109RC states that:

109RC(1) [Application] This section applies if a dividend is taken to be paid under this Division because of a family law obligation.

109RC(2) [Dividend not made frankable] Subparagraph 202-45(g)(i) of the Income Tax Assessment Act 1997 does not make the amount of the dividend unfrankable.

109RC(3) [Conditions for franking] The dividend can be franked in accordance with Part 3-6 of the Income Tax Assessment Act 1997 only if:

(a)          the dividend is franked at the company's benchmark franking percentage for the period in which the dividend is taken to be paid; or

(b)          if the private company does not have a benchmark franking percentage for the period - the dividend is franked at a franking percentage of 100%.

109RC(4) [Recipient] For the purpose of subsection (3), if the recipient of the dividend is not a member of the private company for the purpose of Part 3-6 of the Income Tax Assessment Act 1997, treat that recipent as such a member.

Application to your circumstances:

The Family Court Order dated XX XX 20XX are orders made under section 79 of the FLA 1975. The parties to the proceedings were you and your spouse.

Order 1 of the Family Court Order requires you and your spouse, as directors of Company A, to cause Company A to make payments of money to you and your spouse.

As the sole shareholder of Company A is the Trustee of Family Trust, you and your spouse are, therefore, associates of the Trustee by virtue of paragraph 318(3)(a) because you are beneficiaries of Family Trust.

Accordingly, the payments made by Company A to you and your spouse in compliance with Order 1 are payments under subsection 109C(3) and are frankable dividends as they were made because of a family law obligation.

Question 2

Under paragraph 109C(1)(a) when a private company makes a payment or transfer of property to an entity (a shareholder or associate of a shareholder) the company is taken to have paid a dividend to the entity. A payment for Division 7A purposes includes a payment to the entity or on behalf of the entity.

Application to your circumstances:

Order 2 of the Family Court Order is directed to you in your capacity as director of the Trustee of Family Trust and states that you shall be entitled to utilise the funds in Family Trust to make certain payments to you and your spouse from the trust funds. Even though Company A has made the payments from its own funds, Order 2 does not require Company A to pay, nor does it require you or your spouse as a party to the proceedings to cause Company A to pay. These payments, therefore, did not occur because of Order 2.

There is no loan agreement between the Trustee and Company A for Company A to make these payments.

The payments made by Company A to you for items listed under Order 2 are payments made by a private company to an associate of a shareholder.

As there is no loan agreement complying with section 109N between you and Company A the payments made by Company A to you for expenses listed under Order 2 are deemed dividends for the purpose of Division 7A and are unfranked dividends.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).