ATO ID 2004/56: Distribution statements for non-share equity interests
Date of decision: 12 December 2003
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
Can the holder of a non-share equity interest, as determined by Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997), rely upon a distribution statement provided by an Australian issuer in accordance with Subdivision 202-E of the ITAA 1997?

Decision
Yes. The statutory obligation on an Australian issuer to provide a distribution statement generally entitles the holder to rely upon the statement to ascertain the extent, if any, of the frankable distribution. However, should the holder know that the distribution is other than a frankable distribution or that the distribution statement is fraudulent, then the holder's entitlement to rely upon the distribution statement is effectively displaced.

Facts
An Australian resident company issues a financing instrument on 1 July 2001 to a resident taxpayer. The instrument gives rise to a non-share equity interest under the debt and equity tests contained in Division 974 of the ITAA 1997. The company makes a frankable distribution for an income year ending on or after 30 June 2002 to the holder of the instrument and provides the holder with a distribution statement.

Reasons for decision
Summary: A non-share equity interest is an equity interest in a company that is not solely a share (subsection 995-1(1) of the ITAA 1997). Money or other property distributed or an amount credited to the holder of a non-share equity interest, as the holder of that interest, are a 'non-share distribution' (section 974 -115 of the ITAA 1997). The distribution is a 'non-share dividend' as defined under section 974-120 of the ITAA 1997 to the extent that the distribution is not debited against the company's share capital or non-share capital account. Generally, under subsection 202-40(2) of the ITAA 1997, a 'non-share dividend' is a 'frankable distribution' but only to the extent that it is not specifically listed as unfrankable in section 202-45 of the ITAA 1997. Where an Australian company makes a 'frankable distribution' it is obligated under Subdivision 202-E of the ITAA 1997, in particular section 202-75 of the ITAA 1997, to provide a 'distribution statement' to the recipient. Section 215-1 of the ITAA 1997 provides for the imputation system within Part 3-6 of the ITAA 1997 to apply to a non-share equity interest. The holder is entitled to rely upon the issuer's distribution statement stating the franked distribution amount and franking credit for the purpose of ascertaining a tax offset provided within Subdivision 207-A of the ITAA 1997. The statutory obligation on the issuer to provide a distribution statement generally entitles the holder to rely upon the statement to ascertain the extent, if any, of the frankable distribution. However, should the holder know that the distribution is other than a frankable distribution or that the distribution statement is fraudulent, then the holder's entitlement to rely upon the distribution statement is effectively displaced.

Legislative references: Income Tax Assessment Act 1997 subsection 202-40(2) section 202-45 section 202-75 Subdivision 207-A section 215-1 section 974-115 section 974-120 subsection 995-1(1)
Subject references: Debt equity borderline Equity test Financing arrangement Franked dividends Imputation system Non-share equity interest