Edited version of your written advice

Authorisation Number: 1012773088116

Ruling

Subject: Wind-up distribution and franking

Questions and Answers

1. If you declare a dividend in the course of an informal winding up, is the dividend taxable to your shareholder in the same manner (i.e., as a discount capital gain) as the capital gain in your Capital Profits Reserve was originally taxable to you (the company)?

Yes.

2. Can you (partially) frank the above dividend?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You were registered after 20 September 1985. You have only had one shareholder.

In the year ended 30 June 200X, you declared a discount capital gain in your tax return.

You have not traded for several years and your director wishes to wind you up.

Your only assets are debit loans, you have no liabilities, you have a Capital Profits Reserve from the above mentioned capital gain and your franking balance is relatively small.

If the debit loans are repaid, you can declare a dividend from the Capital Profits Reserve.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 47

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 118-20

Reasons for decision

Subsection 47(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides:

Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it.

Subsection 47(1A) of the ITAA 1936 explains the phrase 'income derived by the company' in subsection (1) as fiollows:

(a) an amount (except a net capital gain) included in the company's assessable income for a year of income; or

(b) a net capital gain that would be included in the company's assessable income for a year of income if the Income Tax Assessment Act 1997 (ITAA 1997) applied.

The effect of subsection 47(1A) is that a dividend paid to a shareholder that represents company profit will be taxed in the hands of the shareholder in the same manner in which that profit was taxed in the hands of the company. For example, the distribution of a non-taxable capital gain made by a company (for example, from the sale of a pre-CGT asset) to a shareholder will also be non-taxable to the shareholder if that distribution is made in the course of wind up the company.

(Note: Subsection 47(2B) of the ITAA 1936 states where the company does not cease to exist within a period of three years after the distribution or within such further period as the Commissioner allows, then those moneys or other property so distributed shall be deemed to be dividends paid by the company to the shareholders out of ordinary profits derived by it. For example, the distribution of a non-taxable capital gain made by the company to a shareholder would be taxable to the shareholder.)

Taxation Determination TD 2001/27 explains the full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company (which is CGT event C2 in section 104-25 of the ITAA 1997). However, the anti-overlap provision in section 118-20 of the ITAA 1997 reduces any capital gain by amounts that are otherwise assessable as a result of the event (such as under section 47 of the ITAA 1936).

Section 115-25 of the ITAA 1997 provides (in general) a discount capital gain will result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. The discount percentage is 50%.

Section 202-45 of the ITAA 1997 lists the types of distributions that are unfrankable, which does not include distributions to shareholders of a company by a liquidator in the course of winding up the company.

In your case, if you are wound up within three years of making the distribution, under both section 47 of the ITAA 1936 and sections 104-25 and 115-25 of ITAA 1997, a distribution you make to your shareholder, in the course of a wind up, will be a discount capital gain.

In addition, section 202-45 of the ITAA 1997 does not prohibit you from (partially) franking the dividend.