Edited version of your written advice

Authorisation Number: 1051486863051

Date of advice: 25 February 2019

Ruling

Subject: Deemed Dividends

Question 1:

Does section 109C of the Income Tax Assessment Act 1936 (ITAA 1936) deem the payment to be a dividend?

Answer:

Yes

Question 2:

Does section 109T of the ITAA 1936 deem the payment to be a dividend?

Answer:

Not applicable

Question 3:

Does section 109XA of the ITAA 1936 deem the payment to be a dividend?

Answer:

Not applicable

Question 4:

Does section 109XF of the ITAA 1936 deem the payment to be a dividend?

Answer:

Not applicable

Question 5:

Does section 109XI of the ITAA 1936 deem the payment to be a dividend?

Answer:

Not applicable

This ruling applies for the following periods

Year ending 30 June 2019

The scheme commences on

1 July 2018

Relevant facts and circumstances

The Group consists of a number of discretionary trusts and private companies.

You are an object of a number of discretionary trusts.

You are also a minority shareholder in the trustee companies.

You are not a director of any of the trustee companies.

None of the trustee companies undertake any activities in their own right.

You will exit the Group (the Trusts and Companies) as a result of ongoing discussions between you and the controllers of the Group regarding the conduct of the Group’s business.

This business is located and operated in one State, and you have for some time resided in another - and you no longer has any desire to be involved in the business any further.

As such, you have agreed with the Group that you will relinquish any and all of your rights and potential beneficial interests in the group so that the legal structure is consistent with the commercial reality, namely, that you will have no future involvement in the group and have no expectation of receiving any benefits in respect of the group in the future.

You intend to relinquish all your rights and interests in the respect of the Group (the entities listed) being comprised of:

a. Your entitlements as an object or potential beneficiary pursuant to each trust; and

b. Your shareholding in the trustee companies.

As a result of an arm’s length negotiation, the Group has agreed to make a cash payment to you of $X.

Under the relevant transactional documents, one of the private companies has agreed to assume the liability for the Payment. This is on the basis that the company owns the major proportion of the Group’s overall net asset value.

The cash payment will be made by two of the trusts – Trust A (in the amount of $X) and Trust B (in the amount of $Y) (together, the trusts) on behalf of the company. Approximately $Z of the amount that will be paid by the Trust A will be financed by a loan from a third trust in the group.

No amount will be paid directly by the company to you.

You do not have an unpaid present entitlement in respect of any of the trusts in the group.

The company has a distributable surplus that exceeds the amount of the Payment.

Your shares in the trustee companies will be transferred by way of share transfer for nominal consideration. We note that the trustee companies do not hold any assets in their own right.

With respect to her potential entitlement as a beneficiary of the Trusts, you will relinquish any future potential beneficial interest you have by executing a Deed of Renunciation for each trust. These deeds have not yet been prepared but will be simple deeds under which you renounce your beneficial interest in each Trust.

Relevant legislative provisions

Section 109C of the Income Tax Assessment Act 1936

Section 109T of the Income Tax Assessment Act 1936

Section 109XA of the Income Tax Assessment Act 1936

Section 109XF of the Income Tax Assessment Act 1936

Section 109XI of the Income Tax Assessment Act 1936

Reasons for decision

A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A of the ITAA 1936.

In particular, subsection 109C(1) of the ITAA 1936 provides that a private company is taken to pay a dividend at the end of the year of income if:

● the payment was made when the entity was a shareholder or an associate of a shareholder, or

● a reasonable person would conclude that the payment is made because the recipient has been a shareholder or associate at some time.

Due to the extended meaning of "payment", a wider range of circumstances than would be covered by the ordinary meaning of that term potentially gives rise to a deemed dividend under section 109C of the ITAA 1936.

The term "payment to an entity" is defined in section 109C(3) of the ITAA 1936. The three types of payments under section 109C of the ITAA 1936 are:

a. a payment to the extent that it is to the entity, on behalf of an entity or for the benefit of the entity

b. a credit of an amount to the extent that it is to the entity, or on behalf of the entity, or for the benefit of the entity, and

c. a transfer of property to the entity.

An amount is treated as a payment if it falls within the ordinary meaning of "payment".

Payments made by the private company to a third party on behalf of (including at the direction of), or for the benefit of, a shareholder or an associate of the shareholder are brought within the scope of section 109C of the ITAA 1936.

Whether a payment is for the benefit of an entity will be a question of fact to be decided in each case. It is arguable that "for the benefit of the entity" requires a direct benefit for the shareholder or associate, and does not include the indirect benefit ensuing to a shareholder through increased profitability of the company.

A direction by a private company to a debtor to discharge the debt by payment to a shareholder of the private company, is a situation in which a private company pays an amount to an entity.

A credit of an amount to the extent that it is to an entity, on behalf of an entity or for the benefit of the entity is taken to be a payment for the purposes of Division 7A of the ITAA 1936. The expression "crediting an amount" is not defined but its meaning has been subject to extensive discussion in cases dealing with section 44 of the ITAA 1936 and former section 108 of the ITAA 1936.

In Lonsdale Sand and Metal Pty Ltd v FC of T 98 ATC 4175, the Federal Court took the view that there was nothing to suggest that the word "credited" in former section 108(1)(b) of the ITAA 1936 should be given any particular confined meaning. Its general meaning includes: "to enter upon the credit side of an account; give credit for or to; to give the benefit of such an entry to (a person, etc) (The Macquarie Concise Dictionary, 2nd ed at p 218).

However, "crediting" requires more than the mere book entry recording the debt owed by the company: it also requires something in the nature of an allocation or appropriation of the company's resources to an individual shareholder or to the shareholders each individually.

Transfers of property

In the case of a transfer of property to an entity, the amount of the payment is deemed to be the amount that would have been paid by arm's length parties, less any consideration actually given by the transferee. If such consideration equals or exceeds the arm's length amount, the amount of the payment is taken to be nil. A transfer of property is taken to be a payment and a dividend if the transfer of property is to the entity (i.e. to the shareholder or an associate of the shareholder): transfers to a third party do not give rise to a payment, unless the third party is an interposed entity and the transaction triggers the operation of Subdivision E.

While the transfer of property is not limited to the transfer of full ownership rights to the property, more than the mere loan or licence of property is required.

The agreement by the company to assume the liability for the Payment, is a “payment” for the purposes of section 109C of the ITAA 1936. As the ultimate beneficiary of the Payment is a shareholder or associate of a shareholder of the company, the payment is treated as a dividend for income tax purposes under Division 7A of the ITAA 1936.

As the Payment is a dividend under section 109C of the ITAA 1936, it is not necessary to consider whether the other provisions apply.