ATO ID 2003/824: Special dividend paid prior to a corporate restructuring
Date of decision: 14 August 2003
Year of income: Year ending 30 June 2004
Business line: Public Groups and International

Issue
Is a Special Dividend, paid out of a combination of current year profits and retained earnings prior to a corporate restructuring, a 'dividend' for income tax purposes?

Decision
Yes. The Special Dividend constitutes a 'dividend' within the meaning of that term as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts
A resident company pays a special dividend to its ordinary shareholders prior to a corporate restructuring under which the shareholders are offered a combination of cash and scrip in exchange for their shares in the company. The special dividend is debited solely against current year profits and prior year retained earnings accounts.

Reasons for decision
Summary: Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines the term 'dividend' for income tax purposes. Under this section, 'dividend' has the meaning given by subsections 6(1) and (4) and 6BA(5) and section 94L of the ITAA 1936 The payment of the Special Dividend is a distribution of money by the company to its shareholders. This satisfies paragraph (a) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936. As the special dividend is sourced entirely from the company's current year and retained earnings, the distribution does not fall within any of the exclusions to the 'dividend' definition. The other provisions referred to in the subsection 995-1(1) of the ITAA 1997 definition are not relevant to the given facts. The Special Dividend is therefore a dividend for income tax purposes.

Legislative references: Income Tax Assessment Act 1936 subsection 6(1)
Subject references: Distributions Frankable dividends