Edited version of your written advice

Authorisation Number: 1051459432686

Date of advice: 14 December 2018

Ruling

Subject: Winding up -distributions -dividends

Question 1

Does the agreement by the two shareholders to close down the company and distribute the surplus assets to the shareholders constitute an informal winding up of the company?

Answer:

Yes

Question 2

Is the distribution paid to you as a shareholder of the company treated as a distribution pursuant to section 47 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

In XXXX, you and a family member established a business and operated this business through a partnership.

In XXXX, you and a family member acquired another business operated by another company.

A number of shares were issued in relation to the company and the shares were held in the following proportions:

● XX shares held by the family member.

● XX shares held by you.

The family member was the director and secretary of the company.

The partnership operated by you and a family member was rolled over into the company.

In XXXX, the company acquired another business and an asset.

A few years later the company acquired a property to operate its business from.

You worked part time for the company.

You and a family member became estranged.

The family member passed away.

Under the Will of the deceased family member person A was appointed the Executor of the family member’s Estate.

Person A as the Executor was also appointed the sole director and secretary of the company under the family member’s Will.

In XXXX the asset held by the company was sold to a third party.

A few months later the property which the company operate its business from was sold to a third party.

The company lodged a company tax return and did record a CGT event for the disposal of the asset.

The company lodged a company tax return and recorded a CGT event for the disposal of the property and applied the Small Business 50% Active Reduction to reduce the gain on the sale of the property.

You did not receive the proceeds from the disposal of the company’s asset within two years from the company’s CGT event.

You did not receive the proceeds from the disposal of the company’s business premises during the 20XX-XX to 20XX-XX income years.

In XXXX, the Executor and you entered into an agreement to close down the company.

You received a distribution of $XXX,XXX from the retained profits of the company.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 47

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subsection 118-20 (1)

Income Tax Assessment Act 1997 subsection 118-20(1A)

Income Tax Assessment Act 1997 section 152-125

Detailed reasoning

Distributions made in the course of winding up a company

Section 47 of the ITAA 1936 provides that distributions made to shareholders by a liquidator in the course of winding up a company will be deemed to be dividends to the extent that they represent income derived by the company.

Subsection 47(2A) of the ITAA 1936 applies where moneys or other property of the company are distributed to the shareholders otherwise than by the company, in connection with the discontinuance of the company's business in an informal winding up of the company. The subsection treats such distributions the same way as a distribution made by a liquidator providing that the company ceases to exist within three years of the distribution.

In this case, the company has made no formal resolution to wind up the company as Executor and you as shareholders of the company entered into an agreement and made a decision to wind up the company. The shareholders distributed the company's assets to themselves and consequently subsection 47(2A) of the ITAA 1936 applies to treat these distributions as if they were made by a liquidator in the course of winding up a company. Therefore, whether the distribution of $XXX,XXX will be included in your assessable income is considered below.

Capital gains tax

Under section 108-5 of the ITAA 1997 an asset for CGT purposes is any form of property or a legal or equitable right that is not property. An example of a CGT asset is a debt owed to you.

Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a CGT event.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset ends by the asset:

a) being redeemed or cancelled

b) being released, discharged or satisfied

c) expiring; or

d) being abandoned, surrendered or forfeited

The time of the event is when you enter into the contract, that results in the asset ending or if there is no contract, when the asset ends.

Taxation Determination TD 2001/27 considers how parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) treat a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the ITAA 1936) to be a dividend.

Paragraph 1 of the ruling states that:

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 for the purposes of capital gains or capital losses made on the happening of CGT event C2 (about cancellation, surrender and similar endings) in section 104-25 of the ITAA 1997. After the winding-up of a company, CGT event C2 happens to the shares when the company ceases to exist in accordance with the Corporations Act 2001 (see Taxation Determination TD 2000/7 paragraphs 3 and 4).

If all or part of a final distribution made by a liquidator of a company is deemed by subsection 47(1) of the ITAA 1936 to be a dividend paid out of profits, and to be assessable income of a shareholder under subsection 44(1) of the ITAA 1936, this does not alter the position stated in paragraph 1 of TD 2001/27.

Subsection 118-20(1) of the ITAA 1997 states that a capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of this part) includes an amount (for any income year) in:

a) you assessable income or exempt income; or

b) if you are a partner in a partnership, the assessable income or exempt income for the partnership.

Subsection 118-20(1A) of the ITAA 1997 applies to an amount that, under a provision of this Act (outside of this part), is included in:

a) your assessable income or exempt income; or

b) if you are a partner in a partnership, the assessable income or exempt income of the partnership;

In relation to a CGT asset as if it were so included because of the CGT event referred to in that subsection if the amount would also be taken into account in working out the amount of a capital gain you make.

Application to your circumstances

In your case, a final distribution was made to you as a shareholder in the company out of retained profits. As discussed in TD 2001/27, the full amount of this distribution constitutes capital proceeds from the ending of your shares which will trigger CGT event C2. However, subsections 118-20(1) and 118-20(1A) of the ITAA 1997 will operate to reduce any capital gain to the extent that the payment is assessable as a dividend.

In this case, you contend the amount of $XXX,XXX represent an exempt amount distributed by the company to a CGT concession stakeholder which was disregarded under the small business 15‑year exemption. Based on the information provided, the Commissioner does not consider that the amount of $XXX,XXX represents an exempt amount distributed by the company to a CGT concession stakeholder under section 152-125 of the ITAA 1997. This amount was not paid from the company to you in satisfaction of the 15 year exemption, the amount was paid in accordance with an agreement that you entered into with other shareholder to cease the company and distribute the cash reserves in proportion of each share holding. In addition to this, the amount was paid more than 2 years after the CGT event. Accordingly, the amount of $XX,XXX represents a deemed dividend under subsection 47(1) of the ITAA 1936 and is assessable as a dividend under subsection 44(1) of the ITAA 1936.

The Commissioner considers that $XX,XXX of the distribution was a result of the 50% active asset reduction. The exempt 50% component of the capital gain is not income derived by the company according to ordinary concepts for the purposes of subsection 47(1) of the ITAA 1936. The amount of $XX,XXX will not be treated as a dividend under subsection 44(1) of the ITAA 1936.