Edited version of your private ruling

Authorisation Number: 1012576401226

Ruling

Subject: Distribution of company assets

Questions and answers

1. If the amount of the dividend taken to be paid by the Company under subsection 109D(1A) of the Income Tax Assessment Act 1936 is nil, will a dividend be taken to be paid under section 109F of the Income Tax Assessment Act 1936?

No.

2. Will a dividend be taken to be paid under section 109F of the Income Tax Assessment Act 1936 in an earlier year of income?

No.

This ruling applies for the following period(s)

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

Relevant facts and circumstances

The company was incorporated.

The company owns farmland.

The farmland has been farmed by the family for a number of generations (all of the land was acquired prior to 20 September 1985).

The shares in the company came to be owned by;

As to xxx shares company 2 as trustee of the trust.
As so x share by company 3 as trustee for company 2 as trustee of the trust.

The trust is a discretionary trust, where the default beneficiaries of income and capital are family members.

There are retained earnings in the company, as it traded as a farming enterprise until it ceased.

Since then the farming activities have been conducted by a partnership of family trusts.

There is one trust for each of the family members.

The family members became participants in the partnership in their own right.

The company has no franking credits.

The capital value of the farmland is understood to be a considerably large sum.

It is intended that as a result of the transactions that the company will transfer the farmland to the family members.

The disposal of the farmland by the company will involve the sale of both depreciable assets and land.

The family members are associates of the shareholder, the trust, as they are capable of benefitting under the trust.

The family members, currently farming the property, want to transfer the land out of the company into their own names so that they can independently control and farm the land that they would then own in their own right.

It is proposed that the following transactions will be entered into;

The land owned by the company will be formally valued.

The value of each parcel of land to be purchased by each of the family members will be determined using the valuations obtained.

The company will be placed into liquidation.

Contracts for sale of land will be entered into between the company and the family members for the parcels of land they are to become owners of.

At settlement each of the family members will pay for the transfer of their land using promissory notes made out in the amount of the value of the land they will be acquiring.

On liquidation there will be small amounts of cash to be distributed to the shareholder in the company being the two trustees holding shares on behalf of the trust, and the promissory notes.

The promissory notes will be endorsed by the company's liquidator to its shareholders, trustee for company 2 as trustee for the trust.

The trust deed for the trust will be varied so that the trustee can make capital distributions.

Company 2 as trustee of the trust will then make capital distributions that it is empowered to make under the terms of the trust in favour of the family members, in an amount to each of them equal to the value of their promissory note. This will occur through the relevant trustees indorsing the promissory notes made by each of the family members to them.

At the end year of income in which the company is taken to pay a dividend the company may not have a 'distributable surplus'.

At the end of these transactions the family members would own the land currently owned by the company.

Under the arrangement, it is not intended that the family members be released by the company from their obligations under the promissory notes.

The company will rely on the family member's obligation under the promissory notes to make an in-specie distribution of the promissory notes to its shareholders.\

The company does own depreciable assets, and you stated, it is assumed for the purpose of this ruling that at the time that they are transferred along with the land, that they will be transferred for their adjustable value (written down value), which is, assumed to be equal to their market value. In providing the ruling you ask that this assumption be made.

You noted that if there is an amount included in the assessable income of the company as a result of a balancing adjustment event that such an amount will be taxable and will form part of a taxable liquidator's distribution on winding up.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 109D(1)

Income Tax Assessment Act 1936 subsection 109D(1AA)

Income Tax Assessment Act 1936 subsection 109F(2)

Income Tax Assessment Act 1936 subsection 109F(3)

Income Tax Assessment Act 1936 subsection 109F(6)

Income Tax Assessment Act 1936 subsection 109G(3)

Income Tax Assessment Act 1936 Section 109Y

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not considered the application of Part IVA to the arrangement you asked us to rule on.

Reasons for decision

Under subsection 109D(1) of the Income Tax Assessment Act 1936 (ITAA 1936) an amount lent by a private company to a shareholder during the current year is taken to be a dividend for the purposes of Division 7A if the loan is not fully repaid before the private company's lodgement day for that income year.

Under subsection 109D(1AA) of the ITAA 1936 the amount of the dividend taken to have been paid is the amount of the loan that has not been repaid before the private company's lodgement day for the current year, subject to section 109Y of the ITAA 1936.

Section 109Y of the ITAA 1936 limits the total amount of dividends taken to have been paid by the private company under Division 7A of the ITAA 1936 to the company's distributable surplus as at the end of its year of income.

Under subsection 109G(3) of the ITAA 1936 forgiveness of a loan debt does not give rise to a dividend if the loan gives rise to a dividend under section 109D.

Under subsection 109F(2) of the ITAA 1936 the amount of the dividend equals the amount of debt forgiven, subject to section 109Y of the ITAA 1936.

Under subsection 109F(6) of the ITAA 1936 an amount of debt an entity owes a private company is also forgiven for the purposes of this Division if a reasonable person would conclude (having regard to all the circumstances) that the private company will not insist on the entity paying the amount or rely on the entity's obligation to pay the amount.

Application to your circumstances

Question 1

The private company has made a loan to the family members (associates) which is taken to be a dividend under section 109D of the ITAA 1936, and the amount of the dividend can be reduced to nil if the company has a nil distributable surplus.

ATOID 2011/33 states;

…the private company is still taken to pay a dividend to the shareholder under subsection 109D(1) of the ITAA 1936. It is only the amount of the dividend under subsection 109D(1AA) of the ITAA 1936 which is affected by the private company's distributable surplus.

Therefore as the company is taken to pay a dividend under 109D of the ITAA 1936 then 109G(3) of the ITAA 1936 operates to exclude there being a dividend under 109F of the ITAA 1936.

Question 2

In the event of the endorsement of the promissory notes by the company's liquidator occurring in a subsequent year of income to that in which the promissory notes are issued to the company by the family members; a dividend may be taken to be paid under section 109F(6) of the ITAA 1936.

However, the company is relying on the family member's obligation under the promissory notes to make an in-specie distribution of the promissory notes to its shareholders.

Therefore, no amount is forgiven under section 109F(6) of the ITAA 1936 in the income year prior to the year in which the promissory notes are endorsed by the company to the trusts.

Further information

If promissory notes are issued prior to liquidation; 109D(1A) of the ITAA 1936 would not be applied, rather, 109D(1) of the ITAA 1936 would apply changing the timing of any dividend.

The application of 109D(1A) of ITAA 1997 effectively provides for a further 12 months for repayment if the loan is made by a liquidator in the course of winding up a company.

ATOID 2011/33 would also have application to these circumstances.