Edited version of your private ruling

Authorisation Number: 1012462375913

You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you or to someone acting o your behalf.

The Register of private binding rulings is a public record of private rulings issued by the ATO. The register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies.

Ruling

Subject: Division 7A and Part IVA

Questions and answers

Is the taxpayer taken to have received a deemed dividend pursuant to section 109C of the Income Taxation Assessment Act 1936?

Yes.

Does section 109J of the Income Taxation Assessment Act 1936, in relation to the payment made by the company to the taxpayer?

Yes.

Is the payment to the taxpayer an excessive payment under section 109 of the Income Taxation Assessment Act 1936?

No.

Is the payment to the taxpayer a dividend as defined in section 6(1) of the Income Taxation Assessment Act 1936?

No.

Is the payment to the taxpayer statutory income under section 44(1) of the Income Taxation Assessment Act 1936?

No.

Will provision Part IVA of the Income Taxation Assessment Act 1936 be applied to the payment?

No.

This ruling applies for the following periods

1 July 2011 to 30 June 2012

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.

Individual 1, Individual 2 and the Company are all residents of Australia for taxation purposes.

Individual 1 and Individual 2 are married, but separated.

Individual 2 is the current sole director and shareholder of the Company.

Individual 1 is not a shareholder of the Company.

Individual 1 is an associate of the Company because of Individual 2 who is the director and shareholder of the Company.

No services have been rendered by Individual 1 to the Company.

There has been no office or employment held by Individual 1 in the Company.

The Orders are proposed as part of the property settlement between Individual 1 and Individual 2 arising out of their separation.

The Orders are, in essence, settled between the parties pending the outcome of this ruling request.

The Orders will be binding on all parties.

Pursuant to paragraph 21 of the Orders, the Company will pay to Individual 1 the payment. This will occur within a period of the publication of the Orders.

Cash payment to the spouse

21. Upon compliance with the previous orders and within 120 days of the publication of these orders, ("the settlement date") the company do pay to the spouse the sum ("the cash payment") calculated in the manner shown in schedule C to these orders.

The purpose of the Payment is to ensure that Individual 1 and Individual 2 each receive a part of the total available assets.

Individual 1 and Individual 2 have at all times dealt with each other at arm's length in relation to the property settlement.

Individual 1 and Individual 2 have always been represented by a separate set of lawyers and advisers.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 subsection 109C(1)

Income Tax Assessment Act 1936 Section 109J

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177A(3)

Income Tax Assessment Act 1936 subsection 177A(5)

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

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.

A Family Court order directing the company to pay cash to the Rulee is a payment for the purposes of section 109C of the ITAA 1936 and would meet the requirements to be treated as a dividend for the purposes of subsection 109C(1) of the ITAA 1936.

However 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 is specifically relevant to the circumstances here.

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:

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

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 109(1) of the Income Tax Assessment 1936

Subsection 109(1) of the Income Tax Assessment 1936 provides:

If a private company pays or credits to an associated person an amount (in this subsection called the excessive amount) that is, or purports to be:

(a)     a remuneration for services rendered by the associated person: or

(b)     an allowance, gratuity or compensation in consequence of the retirement of the associated person in the company, or upon the termination of any such office or employment;

so much (if any) of the excessive amount as exceeds an amount that, in the opinion of the Commissioner, is reasonable:

(c)     is not an allowable deduction; and

(d)     shall, for the purposes of this Act other than Division 11A of Part III, be deemed to be a dividend paid by the company:

i.to the associated person as a shareholder in the company;

ii.out of profits derived by the company; and

iii.on the last day of the year of income of the company in which the excessive payment or credit is made.

Application to your circumstances

Effectively, section 109J of the ITAA 1936 provides that such a payment is not taken to be the payment of a dividend for the purposes of section 109C of the ITAA 1936 to the extent that it discharges an obligation of the private company to pay money to a shareholder or an associate of the shareholder, and does not exceed the arm's length amount required to discharge that obligation.

Consequently, provided the Family Court order binding the Company, as a party to the proceedings, is an explicit order binding the company to specifically pay cash to you, and not some other alternative obligation, the payment would not be considered a dividend by virtue of section 109J of the ITAA 1936.

In relation to excessive payment; if the Commissioner believes that the payment - or part thereof - exceeds an amount that is considered reasonable, then that payment - or part thereof - will be deemed a dividend by Section 109 of the ITAA 1936.

Individual 1 has not provided services to the Company. There has been no office or employment held by Individual 1 in the Company. Therefore, the payment Individual 1 will receive from the Company under the court order is not considered a dividend under section 109 of the ITAA 1936.

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

Subsection 6(1) of the ITAA 1936 defines 'dividend' to include:

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

As the payment is not a dividend section 44(1) has no application.

Application of Part IVA

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

In broad terms, Part IVA will apply where the following requirements are satisfied:

· there is a scheme (see section 177A)

· a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme (see section 177C)

· the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b)).

The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case.

Application to your circumstances

What you are proposing is a 'scheme' capable of attracting the operation of Part IVA. However, when considered in conjunction with the factors in paragraph 177D(b) of the ITAA 1936, all these factors either point against the application of Part IVA or are neutral. Therefore, Part IVA will not apply to this arrangement.