Private ruling: Division 7A - Court ordered property transfer
Published: March 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the payment (being a transfer of property made by the private company to the shareholders) be a dividend for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: Is a private company taken under subsection 109C(1) of the ITAA 1936 to have paid a dividend to a shareholder in relation to a transfer of property made by the private company to the shareholder because of a court order under the Family Law Act 1975 (FLA)? | A2: Yes. | Q3: If the payments being a transfer of property made by the private company to the shareholders as a result of a court order are deemed dividends under section 109C of the ITAA 1936, can subsection 109D(4A) be applied to have the payments converted to a loan? | A3: No. | Q4: Are there any exceptions that apply to exclude the Court ordered property transfer from being treated as an assessable dividend paid to the shareholder under section 109C of the ITAA 1936? | A4: No. | Q5: Is the payment of a dividend from a private company to a shareholder assessable income to the shareholder under subsection 44(1) of the ITAA 1936? | A5: Yes. | Q6: Are the transfer of property as a result of a court order deemed to be an informal liquidators distribution under subsection 47(2A) of the ITAA 1936? | A6: No.


Relevant legislative provisions: Subsection 6(1) of the ITAA 1997 | Subsection 44(1) of the ITAA 1936 | Subsection 47(2A) of the ITAA 1936 | Section 109C of the ITAA 1936 | Section 109D of the ITAA 1936

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 6(1) defines 'dividend' to include: (a) any distribution made by a company to any of its shareholders, whether in money or other property; and (b) any amount credited by a company to any of its shareholders as shareholders; (c) (Repealed by No 63 of 1998) but does not include: (d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or (e) moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if: (i) the company gives the holder of the share a notice when it redeems or cancels the share; and (ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and (iii) the amount is debited to the company's share capital account; except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or (f) a reversionary bonus on a life assurance policy. Provided the payment is made by the company pursuant to court proceedings to which they are a party, the payment would not come within the definition of the word 'dividend' provided in section 6(1) of the ITAA 1936. The nature of the payment would not be in the form of a distribution, rather it would be made in accordance with a court order. Therefore, these payments are not dividends under section 6(1) of the ITAA 1936. | Detailed Reasoning - Question 2: Is a private company taken under subsection 109C(1) of the ITAA 1936 to have paid a dividend to a shareholder in relation to a transfer of property made by the private company to the shareholder because of a court order under the Family Law Act 1975 (FLA)? | Detailed Reasoning - Detailed reasoning: Subsection 109C(1) of the ITAA 1936 states that a private company is taken to pay a dividend to an entity if the private company makes a payment to the entity during the year and either: · the entity is a shareholder or an associate of a shareholder in the company at the time of payment, or · a reasonable person would conclude that the payment was made because the entity has been such a shareholder or associate at some time. Entity is defined in subsection 960-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and includes an individual. Subsection 109C(2) of the ITAA 1936 provides that the amount of the dividend is subject to the private company's distributable surplus calculated under section 109Y of the ITAA 1936. Paragraph 109C(3)(c) of the ITAA 1936 specifically includes a transfer of property as a payment. A court ordered transfer of property made by the private company to the respective individual shareholders, would satisfy both subsection 109C(1) of the ITAA 1936 and paragraph 109C(3)(c) of the ITAA 1936. Accordingly section 109C of the ITAA 1936 would apply to treat the court ordered property transfers made by the private company to the individuals as deemed dividends. Where the payment is by transfer of property, subsection 109C(4) of the ITAA 1936 provides that the amount of the payment is the amount that would have been paid for the transfer by parties dealing at arm's length less any consideration given by the transferee for the transfer. Consideration is not defined in Division 7A. Therefore, the term will take on its ordinary meaning. According to the Macquarie Dictionary , the ordinary meaning of consideration is 'a recompense for service rendered, etc.; a compensation'. The arrangement between the parties to the marriage in relation to the refinancing of the private company's outstanding mortgages over the properties is a private arrangement in satisfaction of the financial rights of the parties to the marriage, rather than consideration given to the private company for the transfer of the properties to the shareholders. Therefore, the value of the deemed dividends to each individual shareholder will be the arm's length value of the property transferred to the respective shareholders subject to the distributable surplus of the private company calculated under section 109Y of the ITAA 1936. Please note that as the deemed dividend by the private company is payable due to a family law obligation, the dividend received by the individual shareholders may be franked by the private company in accordance with section 109RC of the ITAA 1936. | Detailed Reasoning - Question 3: If the payments being a transfer of property made by the private company to the shareholders as a result of a court order are deemed dividends under section 109C of the ITAA 1936, can subsection 109D(4A) be applied to have the payments converted to a loan? | Detailed Reasoning - Detailed reasoning: Subsection 109D(4A) of the ITAA 1936 states that a payment may be converted to a loan before lodgment day if: · a private company makes a payment to an entity at a time in a year of income; and · the payment is converted to a loan before the end of the private company's lodgment day for the year of income · for the purposes of this division, treat the events mentioned above as the private company making a loan to the entity at the time mentioned in paragraph (a). · A loan under subsection 109D(3) of the ITAA 1936 includes: · an advance of money, and · a provision of credit or any other form of financial accommodation, and · a payment of an amount for, on account of, on behalf of, or request of, an entity, if there is an express or implied obligation to repay the amount, and · a transaction (whatever the terms or form) which in substance effects a loan of money. In your case, you ask whether a transfer of property being a payment under section 109C as a result of a court order be converted to a loan under section 109D(4A) of the ITAA 1936. We acknowledge that a transfer of property is a payment for Division 7A purposes under subsection 109C(3) of the ITAA 1936. It would appear that under subsection 109D(4A), that a transfer of property may be converted to a loan. However, in the definition of a loan, subsection 109D(3) of the ITAA 1936 uses phases such as: · advance of money · provision of credit · payment of an amount · a transaction which effects a loan of money · when describing what a loan is for Division 7A purposes. When reviewing the definition of a loan in subsection 109D(3) of the ITAA 1936, the language Division 7A uses implies that loans to which it applies are loans of money, not a loan of property as such. Further, subsection 109D(3) specifically includes the criteria, when defining a loan for the purposes of Division 7A, "if there is an express or implied obligation to repay the amount". In the circumstances outlined in this case, the payment is being made in full settlement of a family court dispute and there would therefore be no intention, by either party, to make a repayment of the amount paid. Accordingly, a loan of property other than money does not meet the definition of a loan under subsection 109D(3) of the ITAA 1936 for the purposes of Division 7A. Therefore a payment being a transfer of property made by the private company to the shareholders as a result of a court order cannot be converted to a loan as it does not meet the definition of a loan under subsection 109D(3) of the ITAA 1936. | Detailed Reasoning - Question 4: Are there any exceptions that apply to exclude the Court ordered property transfer from being treated as an assessable dividend paid to the shareholder under section 109C of the ITAA 1936? | Detailed Reasoning - Detailed reasoning: Subdivision D of Division 7A defines the types of payments that are excluded from being treated as dividends under section 109C of the ITAA 1936. These payments include: · payments of genuine debts (section 109J) · payments to other companies (section 109K) · payments that are otherwise assessable or that are specifically excluded from assessable income (section 109L). Only sections 109J and 109L of the ITAA 1936 could be applicable to the payments made by the private company. Section 109J of the ITAA 1936 provides that a deemed dividend will not arise under section 109C in respect of a payment by a private company to the extent that it discharges an obligation of the company to pay money to the entity and does not exceed the amount required to discharge the obligation had the parties been dealing at arm's length. The term obligation is not expressly defined for the purposes of section 109J of the ITAA 1936 and therefore adopts its ordinary meaning. The Macquarie Dictionary defines obligation as 'a binding requirement as to action; the binding power or force of a promise, law, duty, agreement, etc; a binding promise or the like.' A Court order made under the FLA 1975 may result in an entity who is not a party to the Court proceedings making a transfer of property under the terms of that court order however, the order only 'binds' a party to the proceedings who is subject to the order. In addition, the second element of section 109J of the ITAA 1936, requires an obligation to 'pay money'. The private company does not have a binding obligation as it is not a party to the Consent Order and the payment is a transfer of property rather than money. As such, neither element is satisfied and section 109J of the ITAA 1936 will not operate to prevent subsection 109C(1) of the ITAA 1936 to deem a dividend upon transfer of property. Section 109L of the ITAA 1936 provides that a private company is not taken to pay a dividend under section 109C to the extent that: · the payment would form part of the entity's assessable income because of some provision other than Division 7A as it operates in conjunction with section 44; subsection 109L(1); or · a provision of the Act other than Division 7A specifically excludes the payment from the entity's assessable income; subsection 109L(2). As the payment from the private company would not be assessable other than by virtue of Division 7A, subsection 109L(1) does not apply. Subsection 109L(2) also does not apply as there is no other provision of the ITAA 1936 that would specifically exclude the payment, being the transfer of property, from the individual shareholders' assessable income. | Detailed Reasoning - Question 5: Is the payment of a dividend from a private company to a shareholder assessable income to the shareholder under subsection 44(1) of the ITAA 1936? | Detailed Reasoning - Detailed reasoning: Section 109Z of the ITAA 1936 states that if a private company is taken under this Division to have paid a dividend to an entity, the dividend is taken for the purpose of this Act to be paid: · to the entity as shareholder in the private company, and · out of the private company's profits. That is the dividend is taken to be paid to the taxpayer as a shareholder in the private company and out of profits of the company. Therefore, the dividend will be assessable to the shareholder under subsection 44(1) of the ITAA 1936. | Detailed Reasoning - Question 6: Are the transfer of property as a result of a court order deemed to be an informal liquidators distribution under subsection 47(2A) of the ITAA 1936? | Detailed Reasoning - Detailed reasoning: Distributions of assets to the shareholders of a company where the company is not formally placed in to liquidation may apply under section 47 of the ITAA 1936. Subsection 47(2A) of the ITAA 1936 provides that for a company to be wound up informally, the company would have to meet all of the following requirements: · the business of a company has been or is in the course of being, discontinued otherwise than in the course of a winding up of the company under any law relating to that company, · in connection with the discontinuance, any monies of the company have been or other property of the company has been (on or after 19 October 1967) distributed otherwise than by the company to the shareholders, and · the monies or other property so distributed are not, for the purposes of this Act, dividends · the distributions shall be deemed to be a distribution to the shareholders by a liquidator in the course of winding up the company. The company must then be deregistered within 3 years of the distribution or the Commissioner can treat the distributions as dividends paid out of profits as per subsection 47(2B) of the ITAA 1936 . In order for the payments to maintain their character, all of the conditions in subsection 47(2A) of the ITAA 1936 are required to be satisfied. Paragraph 47(2A)(a) of the ITAA 1936 states that the business of a company has been or is in the course of being discontinued, otherwise than in the course of a winding up of the company under any law relating to the companies. You have stated that there has been no formal resolution to wind up the company and will not do so by the time the Family Court makes its orders. Based on this information, you would not satisfy the condition under paragraph 47(2A)(a) of the ITAA 1936 as you have not demonstrated that the business is or will be discontinued. Paragraph 47(2A)(b) of the ITAA 1936 states that in connexion with the discontinuance, any monies of the company have been or other property of the company has been, on or after 19 October 1967, distributed, otherwise than by the company, to shareholders of the company. In your case, the transfer of property is being made by the company to the shareholders as a result of the orders from the Family Court and not from the discontinuance of the company. Accordingly, this condition would not be satisfied under paragraph 47(2A)(b) of the ITAA 1936. Paragraph 47(2A)(c) of the ITAA 1936 states that the monies or other property so distributed are not dividends. In this ruling, we have advised at Question 2 that any transfer of property as a result of a court order would be deemed a dividend under section 109C of the ITAA 1936. Therefore, this condition would not be satisfied under paragraph 47(2A)(c). As you have not been able to satisfy all of the conditions in subsection 47(2A) of the ITAA 1936, this subsection does not apply to your circumstances. Therefore, the transfer of property as a result of a court order would not be an informal liquidators distributions under subsection 47(2A) of the ITAA 1936.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The relevant individuals are shareholders in a private company. | The relevant individuals are currently involved in a family law dispute and are seeking settlement orders. | It is proposed under the settlement that the private company will be ordered to transfer real property to the relevant individuals.