Edited version of private advice

Authorisation Number: 1052033594140

Date of advice: 19 September 2022

Ruling

Subject: Liquidator distribution

Question

Is a liquidator's distribution from a reserve the company derived from the Small Business and General Business Tax Break treated as a capital payment under section 47 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This private ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The company was established in 20XX.

During the 20XX-XX financial year the company purchased fixed assets totalling $X.

These assets were eligible for the Small Business and General Tax Break (SBGTB) totalling $X additional deductions for the company.

The SBGTB deductions have been recorded to a reserve account on the balance sheet of the company.

The company is to be liquidated this year and the remaining equity to be paid out is Share Capital, SBGTB Reserve and Retained Profits.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 47

Income Tax Assessment Act 1936 subsection 47(1)

Income Tax Assessment Act 1936 subsection 47(1A)

Reasons for decision

Section 47 of the ITAA 1936 specifically deems certain amounts to be dividends paid to the shareholders out of the profits derived by the company.

Specifically, subsection 47(1) of the ITAA 1936 states:

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.

The definition of income in subsection 47(1A) of the ITAA 1936 is inclusive; it states that 'income derived by a company' for the purposes of subsection 47(1) of the ITAA 1936 includes assessable income. It does not limit the meaning of the phrase 'income derived by the company' in subsection 47(1) of the ITAA 1936to ordinary income that is 'assessable income'.

A distribution (e.g. dividend) by a company of profits is ordinary income in the hands of its shareholders, as recognised by Hill J in FC of T v Brewing Investments Ltd [2000] FCA 920; 2000 ATC 4431 at 16 (and again at 42):

16. In terms of company law and the law of income tax the distribution by a company of profits, be they profits accumulated or current year profits, is seen as the "detachment", "release" or "liberation" of the profits. The share itself remains in existence and is held by the shareholder. So, as the Privy Council said in Hill v Permanent Trustee Co of New South Wales Ltd [1930] AC 720, a case concerned with the meaning of "income" for trust law purposes, it was said at 734 that:

"If payment to the shareholders is made out of profits it is income of the shares, and no statement of the company or its directors can change it from income into corpus."

Application to your circumstances

In this case, the company was eligible for the SBGTB in the 20XX-XX financial year. This meant the company was eligible to claim a deduction for $X in relation to the purchase of an asset. The company recorded this amount as a 'capital reserve'.

We consider that the deduction claimed under the SBGTB was an expense which was included in the calculations of the company's profit or loss in the relevant financial year. While the amount has been recorded in a capital reserve account it does not have the character of capital. Therefore the payment of this amount, by the liquidator to the shareholders, will be considered a dividend under subsection 47(1) of the ITAA 1936.