ATO Interpretative Decision
ATO ID 2009/157
Income Tax
Non-portfolio dividends: returns on redeemable preference shares - debt interestsFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is a return on a redeemable preference share, which is a debt interest under Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997), non-assessable non-exempt income under section 23AJ of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes, a return on a redeemable preference share, which is a debt interest under Division 974 of the ITAA 1997, is non-assessable non-exempt income under section 23AJ of the ITAA 1936 because the return is a dividend and the other requirements of section 23AJ are satisfied.
Facts
Austco is an Australian resident company.
Austco holds redeemable preference shares (for its own benefit) in a company, Forco, which is a foreign resident and not a resident of Australia for the purposes of Australian tax.
The shares are not eligible finance shares or widely distributed finance shares for the purposes of the definition of non-portfolio dividend in subsection 317(1) of the ITAA 1936.
The shares are debt interests under Division 974 of the ITAA 1997.
Austco's voting interest in Forco for the purposes of section 334A of the ITAA 1936 is 48% of the voting power.
Forco pays a return on the shares, which is a distribution out of profit, to Austco.
Forco is a controlled foreign company and Austco is an attributable taxpayer in respect of Forco for the purposes of Part X of the ITAA 1936.
At the time of the payment of the return on the shares, Austco does not have an attribution surplus under section 370 of the ITAA 1936 in respect of Forco.
Reasons for Decision
Section 23AJ of the ITAA 1936 provides that a non-portfolio dividend (as defined in subsection 317(1) of the ITAA 1936) is non-assessable non-exempt income of a company if:
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- it is paid to the company
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- the company is an Australian resident
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- the company does not receive the dividend in the capacity of a trustee
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- the company that paid the dividend is not a Part X Australian resident (as defined in subsection 317(1)).
Subsection 317(1) of the ITAA 1936 defines a non-portfolio dividend as:
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- a dividend
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- other than an eligible finance share dividend or a widely distributed finance share dividend
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- paid to a company where that company has a voting interest, within the meaning of section 334A of the ITAA 1936, amounting to at least 10% of the voting power, within the meaning of that section, in the company paying the dividend.
Under subsection 6(1) of the ITAA 1936, 'dividend' includes any distribution made by a company to any of its shareholders (subject to exclusions that are not presently relevant). The meaning of 'dividend' in subsection 6(1) applies for the purposes of that Act, including Part X unless the contrary intention appears.
Accordingly, the meaning of 'dividend' in the definition of non-portfolio dividend is the ordinary meaning of the term as extended by subsection 6(1) of the ITAA 1936.
The return paid to Austco out of the profits of Forco is a distribution by a company to its shareholder and is, therefore, a dividend under subsection 6(1) of the ITAA 1936 and the definition of non-portfolio dividend in subsection 317(1) of the ITAA 1936.
Whether a payment is a dividend under subsection 6(1) of the ITAA 1936 is not affected by Division 974 of the ITAA 1997 as Division 974 does not modify the meaning of the term in subsection 6(1), nor the meaning of non-portfolio dividend in subsection 317(1) of the ITAA 1936. Paragraph 2.16 of the Explanatory Memorandum to the New Business Tax System (Debt and Equity) Bill 2001 confirms this as set out below:
Shares that satisfy the debt test (e.g. compulsorily redeemable preference shares) are still shares for the purposes of the income tax law and returns on them are still dividends.
As the shares are not eligible finance shares or widely distributed finance shares in the present case, the dividend is not an eligible finance share dividend or a widely distributed finance share dividend under subsection 317(1) of the ITAA 1936.
As Austco has a voting interest of 48% in Forco, it has a voting interest which amounts to at least 10% of the voting power in Forco.
Therefore, the distribution is a non-portfolio dividend as defined in subsection 317(1) of the ITAA 1936 for the purposes of section 23AJ of the ITAA 1936.
The remaining requirements of section 23AJ of the ITAA 1936 are satisfied because:
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- Austco is a company;
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- Austco is an Australian resident;
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- Austco does not receive the distribution in the capacity of a trustee; and
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- Forco is not a Part X Australian resident because it is not a resident of Australia.
Paragraph 1 of Taxation Determination TD 2006/51 states that section 23AJ of the ITAA 1936 does not apply to dividends to the extent that a dividend is non-assessable non-exempt income under section 23AI of the ITAA 1936. As Austco does not have an attribution surplus in respect of Forco, no attribution debit arises under section 372 of the ITAA 1936 when the dividend is paid by Forco to Austco. Therefore, section 23AI of the ITAA 1936 does not apply to make the dividend non-assessable non-exempt income under that section.
As all of the elements of section 23AJ of the ITAA 1936 are satisfied in the present case and the dividend is not non-assessable non-exempt income under section 23AI of the ITAA 1936, the return on the redeemable preference share which is a debt interest under Division 974 of the ITAA 1997 is non-assessable non-exempt income of Austco under section 23AJ of the ITAA 1936.
Date of decision: 2 December 2009Year of income: Year ended 30 June 2010
Legislative References:
Income Tax Assessment Act 1936
subsection 6(1)
section 23AI
section 23AJ
Part X
subsection 317(1)
section 334A
Division 974
Related Public Rulings (including Determinations)
Taxation Determination TD 2006/51
Other References:
Explanatory Memorandum to the New Business Tax System (Debt and Equity) Bill 2001
Keywords
Debt interest
Dividend income
Foreign income
Non portfolio foreign income
ISSN: 1445-2782