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Ruling

Subject: Income - assessability

Question and Answer

1. Are the cash payments made by company 1, under a court order, a dividend as defined in section 6(1) of the Income Tax Assessment Act 1936?

No.

2. Are the cash payments made by company 1, under a court order, statutory income under section 44(1) of the Income Tax Assessment Act 1936?

No.

This ruling applies for the following period

1 July 2012 to 30 June 2014

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.

Company 1, company 2, individual 1 and individual 2 are involved in a family law dispute and are seeking settlement orders.

All parties are joined to the proceedings.

Individual 1 is the sole Director and shareholder of company 2.

Individual 1 and individual 2 are equal Directors and shareholders in company 1.

Under the Family Law Act, company 1 will be ordered to make payments of cash to the individuals following the realisation of assets.

The proposed orders in respect of the payments to be made are as follows:

12. That individual 1 and individual 2 and each of company 1 and

Company 2 forthwith do all such things as are necessary to instruct

the Chartered Accountants to facilitate and make application to

the Australian Taxation Office for a private ruling to determine the income tax

status of orders that the companies pay to each of individual 1 and individual

2 specified cash payments, and as part of the process, each entity will:

12.1 Realise its assets; and

12.2 Complete its 2012 and 2013 financial statements and income tax returns;

And

12.3 Extinguish its liabilities including all statutory obligations, accounting fees

and professional fees in finalising the affairs of the companies.

13. That within 28 days of production of the private ruling referred to in Order 12

hereof, the parties shall provide a Minute of Order to be made pursuant to

Section 79 specifying the sums to be paid to each of the husband and the

wife.

15. That the Court note that individual 1 and individual 2 agree that the cash

Monies to be specified to be paid by the companies to individual 2 shall be equivalent to 53% of the funds and 47% of the funds estimated to individual 1.

Company 1 and company 2 have a distributable surplus.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 4(1)

Reasons for decision

Subsection 6(1) of the Income Tax Assessment Act 1936

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines 'dividend' to include: 

(a) any distribution made by a company to any of its shareholders, whether in money

or other property; and 

(b) any amount credited by a company to any of its shareholders as shareholders; 

(c) (Repealed by No 63 of 1998)

but does not include: 

(d) moneys paid or credited by a company to a shareholder or any other property

distributed by a company to shareholders (not being moneys or other property to

which this paragraph, by reason of subsection (4), does not apply or moneys paid

or credited, or property distributed for the redemption or cancellation of a

redeemable preference share), where the amount of the moneys paid or credited,

or the amount of the value of the property, is debited against an amount standing

to the credit of the share capital account of the company; or  

(e) moneys paid or credited, or property distributed, by a company for the redemption

or cancellation of a redeemable preference share if: 

(i) the company gives the holder of the share a notice when it redeems or

cancels the share; and  

(ii) the notice specifies the amount paid-up on the share immediately before

the cancellation or redemption; and

(iii) the amount is debited to the company's share capital account;

except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or  

(f) a reversionary bonus on a life assurance policy. 

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

The payments would not come within the definition of the word 'dividend' in subsection 6(1) of the ITAA 1936. The payments to the shareholder are payments made pursuant to court proceedings and are not in the nature of being a distribution as required in the definition.

As the payments are not dividends section 44(1) has no application.