Edited version of private advice

Authorisation Number: 1052330596666

Date of advice: 11 November 2024

Ruling

Subject: Deemed dividend component

Question 1

Is Co A required to include the Dividend Component ($X per share) of the B Co share distribution in its assessable income as an unfranked dividend under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

If A Co is not required to include the Dividend Component as an unfranked dividend then how should the Dividend Component be treated for tax purposes?

Answer

N/A

This ruling applies for the following period:

1 July 20XX to 30 June 20YY

The scheme commenced on:

Date 20XY

Relevant facts and circumstances

On date 20XY, C Co made an in-specie distribution of B Co shares by way of capital reduction to its shareholders on a pro-rata basis.

C Co provided B Co shares to C Co shareholders based on the number of C Co shares each shareholder held as at date 20XY.

On date 20XY the Deputy Commissioner of Taxation, Public Groups issued a Determination made pursuant to subsection 45B(3)(b) of the ITAA 1936 that:

•         section 45C of the ITAA 1936 applies to $X per B Co share provided by C Co on date 20XY to shareholders registered on the record date.

•         In accordance with section 45C of the ITAA 1936, the distribution of $X per B Co share is taken to be an unfranked dividend paid out of the profits of C Co to shareholders on date 20XY.

The remaining component of the distribution ($Y per share) represented a capital payment.

Also on date 20XY the Commissioner provided written advice to C Co shareholders that stated, inter alia:

•         The income tax consequences of the B Co Distribution are summarised below for Relevant Shareholders that held their shares on capital account.

•         That is, did not hold their C Co shares as revenue assets (as defined in section 977-50 of the Income Tax Assessment Act 1997 (ITAA 1997)) or as 'trading stock' (as defined in subsection 995-1(1) of the ITAA 1997).

A Co held C Co shares as trading stock at the time of the in-specie distribution of B Co shares on date 20XY. A Co has a history of holding shares as trading stock before and after the income year ending 30 June 20XY.

Relevant legislative provisions

S44 ITAA 1936

S45B ITAA 1936

S45C ITAA 1936

Reasons for decision

Question 1

Is Co A required to include the Dividend Component ($0.50878 per share) of the B Co share distribution in its assessable income as an unfranked dividend under section 44 of the ITAA 1936?

Summary

Yes. The Dividend Component of $X per share is an unfranked dividend for all C Co shareholders that received the distribution. Section 44 of the ITAA 1936 includes dividends paid to shareholders in assessable income.

Detailed reasoning

Pursuant to s45B(3) the Commissioner may make a determination that section 45C ITAA 1936 applies in relation to the whole, or a part, of a capital benefit.

S45C provides:

Effect of determinations under sections 45A and 45B for capital benefits

(1) If the Commissioner makes a determination under subsection 45A(2) or 45B(3), the amount of the capital benefit, or the part of the benefit, is taken, for the purposes of this Act, to be an unfranked dividend that is paid by the company to the shareholder or relevant taxpayer at the time that the shareholder or relevant taxpayer is provided with the capital benefit.

(2) The dividend is taken to have been paid out of profits of the company.

(3) If the Commissioner has made a determination under section 45B in respect of the whole or a part of a capital benefit and the Commissioner makes a further written determination that the capital benefit, or the part of the capital benefit, was paid under a scheme for which a purpose, other than an incidental purpose, was to avoid franking debits arising in relation to the distribution from the company:

(a) on the day on which notice of the determination is served in writing on the company, a franking debit of the company arises in respect of the capital benefit; and

(b) the amount of the franking debit is the amount that, if the company had:

(i) paid a dividend of an amount equal to the amount of the capital benefit, or the part of the capital benefit, at the time when it was provided; and

(ii) fully franked the dividend;

would have been the amount of the franking credit of the company that would have arisen as a result of the dividend.

(4) The amount of the capital benefit is:

(a) if the benefit is the provision of an ownership interest--the market value of the interest at the time that it is provided; or

(b) if the benefit is an increase in the market value of an ownership interest--the increase in the market value of the interest as a result of the change; or

(c) if the benefit is a distribution to the shareholder of share capital or share premium--the amount debited to the share capital account or share premium account of the company in connection with the provision of the benefit.

(4A) For the purposes of this section:

(a) a non - share distribution to an equity holder is taken to be the distribution to the equity holder of share capital to the extent to which it is a non - share capital return; and

(b) the debit to the company's non - share capital account, in respect of the non - share distribution, is taken to be a debit to the company's share capital account.

Pursuant to the Commissioner's determination, the B Co share distribution of $X per B Co share provided represented the following components:

•         an unfranked dividend of $X (Dividend Component), and

•         a capital payment of $Y (Capital Component).

Accordingly, the Dividend Component of the distribution is treated as an unfranked dividend for shareholders that held C Co shares on revenue account e.g. as trading stock.

Question 2

If A Co is not required to include the Dividend Component as an unfranked dividend then how should the Dividend Component be treated for tax purposes?

Summary

Not required to be considered as the Dividend Component is treated as an unfranked dividend.

Detailed reasoning

Not required to be considered.