Edited version of private ruling

Authorisation Number: 1011903888285

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Ruling

Subject: Private company payments to shareholders

Issue 1

Question 1

Will the transfer to shareholder A & B of an amount of cash by a private company pursuant to a Family Court order be a deemed dividend under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will the transfer to shareholder A of a motor vehicle by a private company pursuant to a Family Court order be a deemed dividend under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 3

Does any other taxation provision apply to the transfer to either shareholder A or B of an amount of cash or other assets by a private company pursuant to a Family Court order?

Answer

No

Issue 2

Question 1

Will the private company have a Fringe Benefits Tax (FBT) liability on the transfer of property to a shareholder pursuant to a Family Court order?

Answer

No

This ruling applies for the following period:

Year of income ending 30 June 2012

The scheme commences on:

1 July 2011

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.

A private company has two shareholders, A & B.

Shareholders A & B were married a number of years ago, and have been separated for several years.

The company has a distributable surplus. The company's assets currently consist of cash at bank and a motor vehicle. The company currently has no liabilities.

Following their irreconcilable marriage breakup, shareholders A & B have negotiated a marriage settlement and are obtaining consent orders pursuant to section 81 of the Family Law Act 1975 (FLA).

Shareholders A & B and the company will all be parties to the consent orders.

Pursuant to the consent orders the company will be distributing a percentage of its cash on hand and the motor vehicle to shareholder A, and the remainder of the cash on hand to shareholder B.

Issue 1

Question 1 and 2

Summary

The receipt of an amount of cash from the company will not be a deemed dividend under Division 7A of the ITAA 1936.

The transfer of a motor vehicle to shareholder A will be a deemed dividend under Division 7A of the ITAA 1936. However, this dividend may be franked.

Detailed reasoning

Section 109C of the ITAA 1936

Subsection 109C(1) of the ITAA 1936 provides that a private company is taken to pay a dividend to an entity if the private company pays an amount to the entity during the income year and:

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

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

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.

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 to the entity.

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.

As A & B are both shareholders of the company and will be receiving a payment from the company, subsection 109C(1) of the ITAA 1936 will apply to treat the transfer of cash as a dividend, subject to the company's distributable surplus in the income year. Similarly, the transfer of the motor vehicle to shareholder A will be a payment under subsection 109C(3) and the amount of the deemed dividend in relation to that payment will be the amount that would have been paid for the motor vehicle if the transfer had been done at arm's length.

Section 109J of the ITAA 1936 exclusion to the operation of Division 7A

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 109C(1) of the ITAA 1936. Section 109J of the ITAA 1936 in Subdivision D may be relevant to the circumstances here.

Section 109J of the ITAA 1936 states:

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

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

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

The term 'obligation' is not expressly defined for the purposes of section 109J of the ITAA 1936 and therefore adopts its ordinary meaning. The Macquarie Dictionary 2003 rev. 3^rd edn, The Macquarie Library Pty Ltd, NSW defines 'obligation' as follows:

A binding requirement as to action; the binding power or force of a promise, law, duty, agreement, etc.; a binding promise or the like ....

There are two elements to paragraph 109J(a) of the ITAA 1936, both of which need to be met for section 109J of the ITAA 1936 to exclude a payment from the operation of section 109C of the ITAA 1936. These elements are:

· the payment must discharge an obligation of the private company, and

· that obligation must be to pay money to the entity.

In your circumstances, as the company will be a party to the consent orders issued under the FLA, there will be a 'binding requirement' on the company, which will create an obligation on the company to transfer a sum of money to shareholders A & B and to transfer the motor vehicle to shareholder A. Therefore the first element of paragraph 109J(a) of the ITAA 1936 is satisfied.

In relation to the cash payments to be made by the company to shareholders A & B, because the obligation of the company is one to pay money to shareholders A & B, the 2^nd element will be satisfied.

However, as the transfer of the motor vehicle to shareholder A is not an obligation to 'pay money', section 109J(a) of the ITAA 1936 cannot apply to exclude that payment from being a dividend under section 109C of the ITAA 1936.

Dividend may be franked

Pursuant to section 109RC of the ITAA 1936, if a dividend is taken to be paid under Division 7A because of a family law obligation, that dividend may be franked.

A family law obligation is defined in section 109ZD of the ITAA 1936, as an 'order, agreement or award mentioned in paragraph 126-5(1)(a), (b), (d)., (e) or (f) of the Income Tax Assessment Act 1997 (ITAA 1997). This includes a court order under the FLA (paragraph 126-5(1)(a) of the ITAA 1997)).

Under subsection 109RC(3) of the ITAA 1936, the dividend can be franked in accordance with the company's benchmark franking percentage for the year (paragraph 109RC(3)(a)), or to 100% if there is no benchmark franking percentage (paragraph 109RC (3)(b)).

Conclusion

The transfer of cash funds by the company to shareholders A & B pursuant to consent orders under the FLA will not be a deemed dividend.

The transfer of the motor vehicle to shareholder A will be a deemed dividend and the amount of the dividend will be the amount that would have been paid for the motor vehicle if the transfer had been done at arm's length. This dividend may be franked by the company.

Question 3

Summary

No other taxation provision will apply to the transfer of an amount of cash or motor vehicle to shareholder A or B by the company pursuant to a Family Court order.

Detailed reasoning

The receipt of an amount of cash or a motor vehicle pursuant to section 81 of the FLA is not income under ordinary concepts and therefore is not assessable income of either shareholder A or B under section 6-5 of the ITAA 1997.

Shareholder A's & B's, entitlement to receive an amount of cash or a motor vehicle from the company as part of their negotiated marriage settlement is a CGT asset under subsection 108-5(1) of the ITAA 1997 being a right that is acquired when the consent orders are issued pursuant to section 81 of the FLA.

CGT event C2 under section 104-25 of the ITAA 1997 happens when that entitlement is satisfied. The time of the CGT event under subsection 104-25(2) of the ITAA 1997 is when the payment is made, or the transfer of the motor vehicle is effected.

However, under section 118-75 of the ITAA 1997, any capital gain or loss you make as a result of CGT event C2 happening can be disregarded if at the time of CGT event C2 happening, the spouses were separated and there was no reasonable likelihood of cohabitation being resumed. (subsection 118-75(1) of the ITAA 1997).

As A and B are separated with no reasonable likelihood of cohabitation being resumed at the time of the transfer of the cash or motor vehicle (that is, at the time that CGT event C2 happens), any capital gain or loss made by A or B can be disregarded.

Therefore, following payment of the cash or transfer of the motor vehicle, no amount will be included in the assessable income of either A or B under any other taxation provision.

Issue 2

Detailed reasoning

The Fringe Benefits Tax Assessment Act 1986 (FBTA) applies to payments made by an employer to an employee.

As the company is not transferring the motor vehicle to shareholder A in her capacity as an employee (or associate of an employee) of the company, the FBTA has no application and the company will not have any fringe benefit tax liability as a result of the transfer.