Edited version of private advice

Authorisation Number: 1012650848745

Ruling

Subject: Assessability of dividend income

Question

Is a non-cash dividend under a share scheme assessable for income tax in your tax circumstances?

Answer

Yes

This ruling applies for the following period

For year ended 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• The private ruling application.

You are currently a non-resident for Australian income tax purposes.

You have acquired, at market rates a portion of a non-listed private company in Australia.

You are paying off these shares by the dividends of the company until such time as the debt is extinguished. The debt is notionally incurring a market rate of interest. Under the agreement you receive no cash payments until such time as the cost has been paid off.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

If you are a foreign resident, your assessable income includes:

(a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having Australian sources.

Income that normally requires receipt before it can be said to be derived may sometimes be deemed to have been received.

Constructive receipt is when income is credited without restriction and made available to the taxpayer. Income reinvested, accumulated, capitalised, carried to any reserve or sinking fund, or otherwise dealt with on the taxpayer's behalf or as the taxpayer directs, is constructively received. Dividends credited to a shareholder and at the shareholder's direction, retained by the company as an advance are constructively received when credited.

Companies in Australia are currently subject to 30% tax on the taxable income for an income year. The company can choose to pay a dividend to shareholders out of the profits of the company. These dividends will be assessable income to the shareholder.

Because the company pays tax on the profits/taxable income, there is, what is called a franking credit system which prevents double taxation. If the company has enough credits from the tax it has paid, it can pay a fully franked dividend to the shareholder and the shareholder can claim a credit for the 30% tax paid by the company on the gross dividend amount they declare.

Companies can also pay unfranked or partially franked dividends, where they do not have enough franking credits to pay a fully franked dividend.

You have acquired a portion in a private company in Australia and are repaying the loan to purchase these shares by having your dividends credited against this debt. When the company pays a dividend to you as a shareholder it forms part of your assessable income, as there is a constructive receipt. You have redirected the payment to be offset against the debt you have from the purchase of shares in the company.

Foreign resident

Currently you are a foreign resident. The dividend will be part of your assessable income, as it is from a source in Australia. There are special rules with regards to the taxation of dividends for foreign residents where Australia has entered into tax treaties with the foreign countries.

The tax liability of the individual is normally limited to the application of the dividend withholding tax. The company paying the dividend should withhold this amount at the time of paying the dividend to the shareholder. This amount is currently 15%. If the dividends being paid are fully franked dividends there is no obligation to withhold an amount of tax.

Australian resident

The dividend will be part of your assessable income, as there is a constructive receipt. As an Australian resident when you declare the dividend as part of your assessable income, you will be entitled to claim any franking credits that are available to you from the dividends. For example, if you are paid a fully franked dividend, you will include the gross amount in your assessable income, offset any allowable deductions relating to that income and then calculate the tax liability on this amount. You can then claim the available franking credit to reduce the net amount of tax payable.