Edited version of private ruling

Authorisation Number: 1011768310848

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Ruling

Subject: Division 7A- Company payments

Question 1

Does subsection 109C (1) of the Income Tax Assessment Act 1936 (ITAA 1936) apply when the taxpayer's company makes a cash payment to the taxpayer pursuant to a Family Court Order under the Family Law Act 1975 (FLA 1975)?

No

Question 2

Does section 109J of the ITAA 1936 apply when the taxpayer's company makes a cash payment to the taxpayer pursuant to a Family Court order under the FLA 1975?

Yes

Question 3

Will the payment by the taxpayer's company to the taxpayer be a dividend within the meaning of subsection 6(1) of the ITAA 1936?

No

Question 4

Will the payment by the taxpayer's company to the taxpayer be a statutory income under subsection 44(1) of the ITAA 1936?

No

Question 5

Will Part IVA of the ITAA 1936 apply to the entire transaction?

No

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer and her partner were domestic partners for a number of years.

The taxpayer and her partner separated.

Their relationship was not registered under the Relationship Act of Victoria 2008 (RA 2008).

The taxpayer and her partner do not have a binding financial agreement.

The taxpayer and her partner are both directors of their company.

The taxpayer owns X amount of shares and her partner owns Y amount of shares in their company.

Their company owns X per cent interest in property A and Y per cent interest in property B.

Pursuant to item 86A of Part 2 of Schedule 1 of FLADFMA 2008, the taxpayer and her partner have chosen for Parts VIIIAB, VIIIB and subsection 114 (2A) of the FLA 1975 to apply to their de facto relationship.

The taxpayer and her partner have initiated Family Court proceedings with the Family Court.

At the time of this private ruling application, no orders as to property settlement have been made in the Family Court Proceeding.

A case attendance conference is scheduled for the Family Court.

Subject to the Family Court's approval, you and your partner will seek to have the following orders be made by the Family Court under the FLA 1975 as part of their settlement;

1) Their company be made a party to the Family court Proceedings;

2) The taxpayer will transfer your X amount of shares in their company to her partner for no consideration;

3) Their company will sell its X per cent interest in property A;

4) Their company will sell its Y per cent interest in property B;

5) Their company will pay the taxpayer the sale proceeds from property A;

6) Their company will pay the taxpayer the sale proceeds from property B.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 109J
Income Tax Assessment Act 1936 Subsection 109C (1)
Income Tax Assessment Act 1936 Subsection 6(1)
Income Tax Assessment Act 1936 Subsection 44(1)
Income Tax Assessment Act 1936 Part IVA

Reasons for decision

Subdivision B of Part III of Division 7A of the ITAA 1936 deals with the circumstances under which certain private company payments will be treated as dividends.

A Family Court order directing their company to pay cash to the taxpayer is a payment for the purposes of section 109C of the ITAA 1936 and would meet the requirements to be treated as a dividend for the purposes of subsection 109C(1) of the ITAA 1936.

However, Subdivision D of Division 7A of Part III of the ITAA 1936 sets out rules about some payments which are not treated as dividends under subsection 109(1) of the ITAA 1936. Section 109J of the ITAA 1936 in Subdivision D is specifically relevant to the circumstances here.

Section 109J of the ITAA 1936 provides that:

A private company is not taken under section 109C to pay a dividend because of an amount, to the extent that the payment:

(c) discharges an obligation of the private company to pay money to the entity; and

(d) is not more than would have been required to discharge the obligation had the
private company and the entity been dealing with each other at arm's length.

Effectively, section 109J of the ITAA 1936 provides that such a payment is not taken to be the payment of a dividend for the purposes of section 109C of the ITAA 1936 to the extent that it discharges an obligation of the private company to pay money to a shareholder or an associate of the shareholder, and does not exceed the arm's length amount required to discharge that obligation.

Consequently, provided the Family Court order binding their company, as a party to the proceedings, is an explicit order binding their company to specifically pay cash to the taxpayer, and not some other alternative obligation, the payment would not be considered a dividend by virtue of section 109J of the ITAA 1936.

Part IVA of the ITAA 1936 will only apply where a scheme has been entered into or carried out to obtain a tax benefit and it can be concluded that the dominant purpose of entering the scheme was to obtain a tax benefit. In such situations, the Commissioner can apply the provisions to deny the tax benefit obtained.

In this case, the purpose of the transaction is to carry out a Family Court order binding their company to pay cash to the taxpayer as part of a settlement. Therefore, it is considered that Part IVA of the ITAA 1936 does not apply to this arrangement.