ATO ID 2002/1085: Foreign Dividend Account Declaration Percentage
Date of decision: 24 July 2002
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Whether preference shares that carry no fixed entitlement to dividends are to be regarded as ordinary shares for the purposes of sub-section 128TC(3) of the Income Tax Assessment Act 1936 ?

Decision
No. Preference shares that carry no fixed entitlement to dividends are not regarded as ordinary shares for the purposes of sub-section 128TC(3) of the Income Tax Assessment Act 1936.

Facts
1. The company is an Australian resident taxpayer. 2. The company has two classes of shares; ordinary shares and preference shares. 3. The preference shares have the following characteristics: 4. The preference shares and the ordinary shares on issue are held by resident and non-resident shareholders. 5. The company has a carry-forward Foreign Dividend Account (FDA) surplus. 6. The company wishes to pay dividends on both the ordinary shares and preferred limited voting ordinary shares. 7. Within each class of share, the dividend per share is proposed to be the same for both resident and non-resident shareholders. 8. The company wishes to be able to utilise its FDA surplus by making an FDA declaration percentage of up to 100% in relation to future dividend payments COMMENCEMENT OF ARRANGEMENT: 1 July 2001

Reasons for decision
Summary: The ordinary meaning of the expression "preference share" suggests that a preference share carries a preferred dividend or capital right. The issued preference shares in question have an entitlement to dividends in priority to other shares. The Explanatory Memorandum to Taxation Laws Amendment Act (No 3) 1994 states the following in relation to the "calculation value for dividend purposes": 'The "calculation value for dividend purposes" of a share is the amount that represents the shareholder's capital contribution against which a dividend would ordinarily be compared to calculate the rate of return. For ordinary shares, it is the nominal value of the shares. For preference shares, it could include an amount in addition to the paid-up value of the share. The additional amount could include a premium paid on subscription or the amount payable on redemption of the share.' There is no requirement that the rate of return of the dividends or the "calculation value for dividend purposes" be a fixed amount. Sub-section 128TC(3) merely requires the "calculation value for dividend purposes" to be the amount that is ordinarily used to calculate the rate of return on the shares. The use of the words "ordinarily be compared to calculate the rate of return" envisages that the "calculation value for dividend purposes" and rate of return may vary from time to time.

Legislative references: Income Tax Assessment Act 1936 subsection 128TC(3)
Subject references: Withholding tax exemptions Preference shares Precedent Foreign dividend withholding tax