Edited version of private ruling

Authorisation Number: 1011826048883

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Ruling

Subject: Deemed Dividends

Question 1

Are you an "associate" of a shareholder of the company for the purposes of Division 7A of Part III of the Income Tax Assessment Act (1936) and defined by section 318 of the ITAA 1936 at the time property was transferred to you from the company pursuant to a Court order?

Answer

No

Question 2

Does the transfer of the property to you pursuant to a Court order constitute a deemed dividend as a result of the application of section 109C of the ITAA 1936?

Answer

Yes

This ruling applies for the following period:
1 July 2009 to 30 June 2010.

The scheme commences on:
April 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.

You were the spouse of a shareholder of a private company (the Company).

Your former spouse owns and controls the Company.

You have never been a shareholder of the Company.

A Family Court order was made compelling the Company to transfer property to you as part of a property settlement.

You were no longer living with and were divorced from the shareholder of the Company when the Court order was made and the property transferred to you.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part III Division 7A.
Income Tax Assessment Act 1936 subsection 109C(1)(a).
Income Tax Assessment Act 1936 subsection 109C(1)(b).
Income Tax Assessment Act 1936 section 109C(2).
Income Tax Assessment Act 1936 section 109C(3).
Income Tax Assessment Act 1936 section 109C(4).
Income Tax Assessment Act 1936 section 109ZD.
Income Tax Assessment Act 1936 section 109J.

Income Tax Assessment Act 1936 section 109RB.
Income Tax Assessment Act 1936 section 109Y.
Income Tax Assessment Act 1936 section 318.
Income Tax Assessment Act 1997 subsection 995-1(1).
Tax Laws Amendment (2007 Measures No.3) Act 2007.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

By virtue of section 109ZD of the ITAA 1936 'associate' for the purposes of Division 7A of Part III of the ITAA 1936 has the meaning given by section 318 of the ITAA 1936. Under paragraph 318(1)(a) of the ITAA 1936 an 'associate' of a natural person includes a 'relative' of the natural person.

The definition of 'relative' for the purpose of section 318 of the ITAA 1936 is the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Paragraph (a) of the definition includes a 'spouse' as a relative of a natural person.

Under the definition of 'spouse' in subsection 995-1(1) of the ITAA 1997 a 'spouse' in relation to a individual includes another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis as a couple.

At the time of the transfer of the property you were no longer married to or living with the shareholder of the Company. Therefore, you are not an 'associate' as defined by section 318 of the ITAA 1936.

Question 2

Subsection 109C(1) of the ITAA 1936 states that a private company is taken to pay a dividend to an entity if the private company makes a payment to the entity during the year and either:

· the entity is a shareholder or an associate of a shareholder in the company at the time of payment, or

· a reasonable person would conclude that the payment was made because the entity has been such a shareholder or associate at some time.

Entity is defined in subsection 960-100(1) of the ITAA 1997 and includes an individual.

By virtue of paragraph 109C(3)(c) of the ITAA 1936 the definition of 'payment' in subsection 109C(3) of the ITAA 1936 includes a transfer of property.

Paragraph 109C(1)(a) of ITAA 1936 will not be satisfied at the time the property was transferred to you because as explained above you were no longer the spouse of and therefore, no longer an associate of a shareholder of the company.

Taxation Determination 2008/14 (TD 2008/14) provides the Commissioner's interpretation of the application of 109C(1)(b) of ITAA 1936 and it clearly sets out the view that it is not just a question of identifying the sole or dominant cause of the relevant event that causes the payment.

At paragraphs 26 and 27, TD 2008/14 states:

Given the breadth of paragraph 109C(1)(a), which as mentioned above requires no causal relationship between the making of the payment and the entity's status, the Commissioner considers it appropriate to take a broad view of the rule in paragraph 109C(1)(b) that is intended to support its operation. In particular, it would tend to make paragraph 109C(1)(b) ineffective if the existence of some other reason for a payment were enough to prevent the paragraph from applying. In other words, because paragraph 109C(1)(b) is there to stop people contriving ways to avoid paragraph 109C(1)(a), paragraph 109C(1)(b) in turn should be interpreted in a way that makes it relatively difficult to avoid, including by means of further contrivances.

The existence of multiple reasons for a transaction does not prevent a reasonable person from concluding that a payment, loan or debt forgiveness occurred because the entity has been a shareholder or associate at some time.

A reasonable person would conclude that the reason for the payment to you is that you were previously an associate of a shareholder of the Company.

Therefore subsection 109C(1) of ITAA 1936 applies to the payment to be made by the Company to you subject to any exclusions that may apply

This is consistent with the view contained in ATO Interpretative Decision ATO ID 2004/461 where a court ordered transfer of property from a private company to an associate of a shareholder is considered a dividend under subsection 109C(1) of the ITAA 1936. The note to ATO ID 2004/461 also confirms that subsection 109C(1) of the ITAA 1936 would still apply where a reasonable person would conclude that the taxpayer had been an associate of a shareholder at some time.

Subdivision D of Division 7A sets out certain types of payments that are not treated as dividends by section 109C of ITAA 1936. Under subdivision D, section 109J of ITAA 1936 requires that the payment must discharge an obligation of the private company to pay money to the entity and the payment does not exceed the amount required to discharge the obligation had the parties been dealing at arms length.

For an obligation to exist, the private company would need to be a party to the court proceedings and subsequently bound by the Court Order. Further, to satisfy section 109J of the ITAA 1936, the order itself would have to be an obligation to pay money, rather than an order to transfer property. This is the Commissioner's view as set out in ATO ID 2004/462.

The Court order directed the Company to a payment of property rather than money. As such, section109J of the ITAA 1936 has no application and you are deemed to have received a dividend in accordance with section 109C of the ITAA 1936.

Subsection 109C(2) of the ITAA 1936 provides that the amount of the dividend is the amount paid, subject to the private company's distributable surplus calculated under section 109Y of the ITAA 1936.

Where the payment is by transfer of property, subsection 109C(4) of the ITAA 1936 provides that the amount of a payment is the amount that would have been paid for the transfer by parties dealing at arm's length less any consideration given by the transferee for the transfer.

Section 109RC of the ITAA 1936 allows a dividend to be franked if it is taken to be paid because of a family law obligation. As the transfer of the property to you by the Company is made pursuant to a family law obligation, the dividend you receive from the Company may also be franked in accordance with section 109RC of the ITAA 1936.