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Edited version of your private ruling
Authorisation Number: 1012371649840
Ruling
Subject: Marriage breakdown - Division 7A
Question and Answer:
Will you be taken to have received a deemed dividend under section 109C of the Income Tax assessment Act 1936 (ITAA 1936) in respect of a payment by either Company A or Company B to the trust pursuant to a Family Court order?
No
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You and your spouse have separated.
Your spouse has instigated proceedings against you in the Family Court.
The following entities are associates of you and your spouse for the purposes of section 318 of the Income Tax assessment Act 1936 (ITAA 1936):
· Company A
· Company B
· A family trust (the Trust)
You and your spouse are the only two directors of Company A. You each own 50% of the shares.
You and your spouse are the only two directors of Company B. You own a percentage of the shares with the balance of the shares being held by another entity.
The trust is a discretionary trust of which you and your spouse are both beneficiaries.
Both Company A and Company B will become parties to the Family Court proceeding.
Company A and Company B will each make a cash payment to the Trust to discharge their obligations imposed upon them by the Family Court order.
Both Company A and Company B have a 'distributable surplus' for the purposes of section 109Y of the ITAA 1936.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 109C
Income Tax Assessment Act 1936 Section 109J
Income Tax Assessment Act 1997 Subsection 960-100(1)
Reasons for decision
Section 109C of the Income Tax Assessment Act 1936 (ITAA 1936) treats certain payments, loans and debt forgiveness made by a private company to shareholders, or associates of shareholders as dividends.
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 either:
a) the entity is a shareholder or associate of a shareholder in the company at the time of the payment; or
b) a reasonable person would conclude that the payment was made because the entity has been a shareholder or associate at some time.
Payment by virtue of subsection 109C(3) of the ITAA 1936 includes a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity.
Entity is defined in subsection 960-100(1) of the ITAA 1997 and includes an individual.
Subdivision D of Division 7A sets out certain payments that are excluded from the operation of section 109C.
In particular, section 109J provides:
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 and therefore adopts its ordinary meaning. The Macquarie Dictionary defines 'obligation' as:
'a binding requirement as to action; the binding power or force of a promise, law, duty, agreement, etc. ; a binding promise or the like'.
Hence, an obligation can only arise from a court order made under the Family Law Act where the entity is a party to the proceedings.
Application of sections 109C and 109J
You are a shareholder of Company A and Company B. Under the Family Court proceeding instigated by your spouse both Company A and Company B will become parties to the Court proceeding. Family Court orders will obligate Company A and Company B to each make a cash payment to the Trust. Company A and Company B will make the cash payments to the Trust to discharge their obligations imposed upon them by the Family Court order.
As you will not receive any payment, you will not receive a deemed dividend for the purposes of section 109C of the ITAA 1936.