Edited version of private advice

Authorisation Number: 1052134223760

Date of advice: 29 June 2023

Ruling

Subject: Payment from non-resident company

Question

Is the lump sum payment received by the taxpayer a dividend under subsection 6(1) of the Income Tax Assessment Act 1936?

Answer

Yes

Question 2

Is the lump sum payment received by the taxpayer a capital payment for shares to which CGT event G1 under subsection 104-135(1) Income Tax Assessment Act 1997 applies?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The taxpayer is and has been an Australian tax resident at all times since moving to Australia.

The taxpayer's late relative operated a factory in an overseas country through a company (Company) incorporated in that country before 19XX.

The taxpayer acquired shares in the Company in 200X, 200X and 200X.

Since 1 November 200X, the taxpayer has held XXX ordinary shares in the Company, being XX% of the total ordinary shares issued.

The taxpayer has never been appointed a director or involved in the operating activities of the Company.

All business operations were carried out by the taxpayer's late relative assisted by other family members in the overseas country.

Over the years, the taxpayer has received dividends from the Company. All such dividends have been included in the taxpayer's income tax returns for the relevant years and Australian tax paid accordingly.

In early 20XX, the taxpayer's late relative became seriously ill and decided to retire from the business. Because of that, the directors decided to sell the factory premises (the building).

The building was purchased before 20 September 1985.

The sale of the building resulted in a profit (capital gain).

The Company was not required to pay tax on the capital gain made on the sale of the building as it is exempt income for the Company in the overseas country.

The taxpayer's entitlement was XX% of the capital gain.

A Notice of Dividend was issued to the taxpayer notifying them that a dividend would be payable to them on a particular date in 20XX.

The taxpayer received a net amount and that amount has been included in their income tax return for the income year ended 30 June 20XX as 'XXX Dividend' under 'other foreign source income'.

In its financial statements, the Company accounted for the sale of the business premises and the profits as 'Other Revenue' which went directly to Accumulated Profits/Retained Earnings.

The distribution paid to the taxpayer was not debited against an amount standing to the credit of the share capital account of the Company.

The distribution paid to the taxpayer came straight from the Accumulated Profits account, which was different to the regular dividends that went through a Proposed Dividend account. This is shown in the Statement of Changes in Equity in the financial statements of the Company.

The Company was not wound up when the building was sold because there are still some assets, including land and equipment which have not been sold.

The shares held by the taxpayer were not cancelled on distribution of the profits from the sale of the building because there may be further distribution from the sale of remaining assets.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1997 Subsection 104-135(1)

Reasons for decision

Question 1

Summary

The lump sum payment that the taxpayerreceived is a dividend.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1936

Under subsection 44(1) an Australian resident shareholder is assessable on all dividends paid by a foreign resident company out of profits derived from any source.

Subsection 6(1) defines 'dividend' to include:

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

b)    any amount credited by a company to its shareholders as shareholders.

This is subject to a number of exclusions. In particular, an amount of money paid or credited by a company to a shareholder, or any other property distributed by a company to shareholders, which is debited against an amount standing to the credit of the share capital account of the company is excluded from being a dividend by paragraph (d) of the definition of dividend contained in subsection 6(1).

As stated in paragraph 4 of Taxation Ruling TR 2003/8 Income tax: distributions of property by companies to shareholders - amount to be included as an assessable dividend:

The amount of a dividend in respect of a distribution of property (including shares held by the company in another company) to a shareholder in their capacity as a shareholder will be the money value of the property at the time it is distributed, reduced by the amount debited to a share capital account of the distributing company in respect of the distribution.

In applying the definition of dividend in subsection 6(1), it is generally the form of the distribution from the company's perspective that is examined.

In the taxpayer's case, the Company accounted for the profits on the sale of the building as 'Other Revenue' and included it in Accumulated Profits/Retained Earnings.

No part of the distribution paid to the taxpayer was debited against an amount standing to the credit of the share capital account of the Company.

The distribution to the taxpayer was part of an ordinary dividend paid by the Company from the Accumulated Profits account.

A Notice of Dividend was issued to the taxpayer in respect of the payment.

It is concluded that the total lump sum payment that the taxpayer received meets the definition of a dividend in subsection 6(1) and is assessable to the taxpayer in accordance with subsection 44(1) as a dividend paid by a foreign resident company out of profits.

Question 2

Summary

The lump sum payment that the taxpayer received is not a capital payment for their shares in the Company to which CGT event G1 should apply.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Subsection 104-135(1) states that CGT event G1 happens if a company makes a payment to a taxpayer in respect of a share the taxpayer owns in the company and some or all of the payment is not a dividend, is not an amount that is taken to be a dividend under section 47 of the Income tax Assessment Act 1936 (regarding a distribution by liquidator) and is not included in the taxpayer's assessable income.

As concluded in Question 1, the total lump sum payment that the taxpayer received is a dividend. Accordingly, it is included in their assessable income.

Therefore, CGT event G1 does not happen.

The Company sold a capital asset and made a profit. However, when distributed as a dividend to the shareholders, the gain loses its character as capital in the hands of the shareholders.

Other comments

The capital gains tax (CGT) regime applies to Australian residents or foreign residents holding taxable Australian property. As the Company was not an Australian resident, and the building was not taxable Australian property, the CGT regime does not apply. The pre-CGT purchase of the premises is not a relevant consideration to the treatment of the distribution to the taxpayer.

Although the profit from the sale of the building was exempt from tax in the overseas country for the Company it does not make the lump sum payment received by the taxpayer a tax-exempt capital amount in Australia.

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