Private ruling: Treatment of accounting gains
Date of advice: 18 July 2016
Published: August 2016
Ruling period: 1 October 2015 to 30 September 2018

Ruling: Q1: Will the accounting gains be treated as assessable income for the Company A tax consolidated group in accordance with sections 6-5 or 6-10 of the ITAA 1997? | A1: No | Q2: Will the potential distributions made to Company A's shareholders out of retained earnings created following the dividend distribution from Company B be dividends paid out of profits derived by the company for the purposes of section 44 of the ITAA 1936? | A2: Yes | Q3: Will the potential distributions made to Company A's shareholders out of retained earnings created following the dividend distribution from Company B be frankable distributions for the purposes of subsection 202-40 (1) of the ITAA 1997? | A3: Yes | Q4: Will section 177EA if the ITAA 1936 apply to prevent the payment of franked distributions? | A4: No

Relevant facts and circumstances: Company A and its wholly owned subsidiary, Company B, are members of the Company A tax consolidated group with Company A as the head company. Company B is proposing to change its accounting policy in respect of certain investments. As a result of this accounting policy change, Company B is expected to record certain accounting gains. Company B is expected to pay dividends to Company A in the future. Company A is expected to pay distributions to its shareholders out of retained earnings created following the dividend distributions from Company B.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 section 177EA | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 202-40(1)

Reasons for decision: Summary: The accounting gains are not ordinary income or statutory income. Therefore, they will not be assessable income of the Company A tax consolidated group pursuant to sections 6-5 and 6-10 of the ITAA 1997. The potential distributions made to Company A's shareholders out of retained earnings created following the dividend distribution from Company B will be dividends paid out of profits derived by the company for the purposes of section 44 of the ITAA 1936. The potential distributions made to Company A's shareholders out of retained earnings created following the dividend distribution from Company B will not meet the requirements of section 202-45 of the ITAA 1997. Therefore, they will frankable distributions pursuant to subsection 202-40(1) of the ITAA 1997. The present case will not satisfy the requirements of section 177EA of the ITAA 1936. Therefore, section 177EA of the ITAA 1936 will not apply to prevent the payment of franked distributions.