Edited version of private advice

Authorisation Number: 1012680878386

Ruling

Subject: Shareholder payment

Question 1

Is the shareholder distribution made to you and originally derived from the sale of land by a related company assessable as a dividend?

Answer

Yes.

Question 2

If not, is the shareholder distribution made to you a capital gain to which a 50% discount will apply?

Answer

Not applicable.

This ruling applies for the following periods:

Year ended 30 June 2014.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

You purchased shares in A Company which is a related company to Another Company

Another company sold some land. Some of the proceeds of this land sale were distributed through A Company. You received A$XXX,XXX.

The proceeds of the land sale were not identified as capital. The documentation states the distribution was 'a dividend payment'. The total amount distributed was C,CCC,CCC and after this distribution A Company was still solvent.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 44

Reasons for decision

What is a dividend and is it assessable?

The definition of "dividend" in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides (as relevant) that a dividend includes any distribution made by a company to any of its shareholders, whether in money or other property. Any amount credited by a company to any of its shareholders as shareholders is also included.

Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder of a company (regardless of whether the company is a resident or a foreign resident) shall include dividends paid to him by the company out of profits derived by it from any source. Section 44 of the ITAA 1936 does not provide any discretion or mechanism to apply a discount to the assessable dividend.

Profits

The term "profits" has been found by the courts to include not only revenue profits but also capital profits and exempt profits (FC of T v Slater Holdings Ltd (No 2) 84 ATC 4883). So if a company pays a dividend to a shareholder out of the profits made on the sale of a capital asset, that dividend is paid out of the profits of the company even though part of the profit may be exempt from tax in the hands of the company. In the hands of the shareholder the dividend is assessable income under the provisions of subsection 44(1) of the ITAA 1936.

To determine if a distribution has been made out of profits (unless the company formally acknowledges it), it is necessary to determine if the market value of the company's assets still exceed (or are equal to) the total of liabilities and share capital after the distribution. If this is the case, then it can be said that the distribution has been made out of profits.

Your circumstances

In your case, you received a distribution of A$XXX,XXX. Although this income came from the sale of a capital asset in the hands of the entity that previously owned it, it was distributed to you as a dividend of A Company of their profits. This is evidenced by the fact that the company's assets were still greater than the total of their liabilities and share capital. As it is a dividend paid out of profits, the total amount is assessable to you as dividend income under section 44 of the ITAA 1936. A 50% reduction is not applicable in this case as the payment is a dividend, and section 44 of the ITAA 1936 does not provide a mechanism to apply a discount to income paid as dividends. As the payment is assessable as a dividend, it is not necessary to consider the capital gains tax provisions.