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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012424255454

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Ruling

Subject: Division 7A - marriage breakdown

Question and answers

    1. Will subsection 109C(1) of the Income Tax Assessment Act 1936 apply to deem the payment, made by the company in accordance with the Family Court Order to the taxpayer, a dividend?

    No.

    2. Will section 109J of the Income Tax Assessment Act 1936 apply to exclude the payment from the application of subsection 109C(1) of the Income Tax Assessment Act 1936?

    Yes

    3. Is the payment made by a company to the taxpayer pursuant to a Family Court Order a dividend in accordance with subsection 44(1) of the Income Tax Assessment Act 1936?

    No.

This ruling applies for the following periods

1 July 2012 to 30 June 2013

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 are not divorced but have been separated for a lengthy period of time.

The company was incorporated; after you and your spouse had been separated for some time.

You are not an associate of the company.

Your spouse has an interest in the company.

Prior to the payment the company had a distributable surplus.

You have not, nor ever had any direct or indirect interest or directorships in the company.

You, your spouse and the company were parties to the court order.

Under the court order the company was required to make cash payments to you.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1936 subsection 109C(1)

Income Tax Assessment Act 1936 Section 109J

Reasons for decision

Subsection 109C(1) and 109J of the Income Tax Assessment Act 1936

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

Subsection 109C(1) of the ITAA 1936 provides that;

A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

    (a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or

    (b) a reasonable person would conclude (having regard to all the circumstances) that the payment is

    made because the entity has been such a shareholder or associate at some time.

Section 109J of the ITAA 1936 provides that:

    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.

Subsection 44(1) of the Income Tax Assessment Act 1936

Subsection 44(1) of the ITAA 1936 states that the assessable income of a resident shareholder includes dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source and all non-share dividends paid to the shareholder by the company.

Application to your circumstances

You are not a shareholder or an associate of a shareholder of the company because the company was incorporated after you and your spouse had separated.

Therefore; section 109C of the ITAA 1936 does not apply to the payment you received from the company under the court orders made by the Family Law Court.

The company was party to the court proceedings and the payments the company made to you were in satisfaction of its obligation set out by the Family Law Court in the court order.

Consequently, subsection 109J(b) has been satisfied.

As you are not a shareholder or and associate of a shareholder and the payments are not a dividend section 44(1) has no application.


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