Private ruling: Issue of dividend by an overseas company - Dividend or bonus shares?
Published: July 2011
Ruling period: Year ending 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Questions and answers | 1. Do the shares that you received in the overseas company represent an issue of bonus shares? | No. | 2. Is the value of the shares that you received in the overseas company included in your assessable income under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936) as a dividend received? | Yes.

Relevant facts and circumstances: You are an Australian resident. You are a shareholder of a family owned overseas company. The overseas company has provided you with documentation that reflects their retained earnings, profits, shares issued and the amount of shares that you held for 2009 and 2010. You have provided this documentation to us. Between 2009 and 2010 the overseas company's paid in capital increased. The overseas company paid out dividends during the year ended 30 June 2010. The first was a cash dividend. The second was satisfied by the issue of additional shares in the overseas company. You assert that this was an issue of bonus shares rather than a dividend. You assert that no consideration i.e. money, payment or distribution was physically paid to you. You received the shares from the overseas company for no consideration. The overseas company credited its capital account with the amount of the dividend. You were not given a choice of whether to be paid the dividend or issued with the shares. You did not receive any payments, allocations or distributions in substitution for the shares. No tax benefit was obtained as you could not access the attached imputation credits due to certain Imputation Rules. There have only been two instances of bonus issues in the last several years from the overseas company and you have no tax losses in the 2010 financial year. You are of the understanding that the shares were issued as part of an overseas corporate restructure as opposed to the company having an intention to pay dividends to their shareholders. The overseas accountants for the company categorised the transaction as a dividend based on their tax and corporate structuring rules as opposed to what, you believe, would likely be shown as a bonus share issue in Australian financial reports. You assert that the issue of the shares was a bonus issue and is not assessable income but instead reduces the cost base of your shares. You have provided the following documents: · dividend statements from the overseas company, · a copy of the overseas company's Annual Report for the relevant period and · a copy of the foreign exchange rates for the relevant period, which you sourced from the Australian Taxation Office's website. These documents are to be read in conjunction with, and form part of, this private ruling. The abovementioned overseas company's Annual Report for the relevant period indicates that the overseas company debited their retained earnings in order to affect the issue of the shares.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6, | Income Tax Assessment Act 1936 Section 44 and | Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision: Summary: A taxpayer who is an Australian resident must include in their assessable income, income derived directly or indirectly from all sources whether in or out of Australia. Where a company makes a distribution to their shareholders and the distribution is paid from the company's profits or retained earnings, the amount is a dividend. Where a company makes a distribution to their shareholders and the distribution is paid from the company's capital account, the amount will not be a dividend and may potentially be a return of capital or an issue of bonus shares. If the distribution is debited from the company's profits or retained earnings, and the distribution is in the form of an in specie dividend which is applied on the shareholders behalf to effect the issue of additional shares, the company must then credit their capital account. This is a basic accounting principle. Subsection 44(1) of the ITAA 1936 provides that a taxpayer who is a shareholder must include in their assessable income dividends paid to them by a company out of profits derived by the company. It is not relevant whether the company is a resident or a non-resident of Australia. Subsection 6(1) of the ITAA 1936 defines a 'dividend' as any distribution made by a company to any of its shareholders, whether in money or other property. Similarly to a dividend reinvestment plan, where a company issues a dividend to their shareholders and uses this dividend to acquire additional shares on behalf of their shareholders, the shareholder is taken to have received a cash payment and used this cash payment to purchase additional shares in the company. | Detailed Reasoning - Application to your circumstances: You have received additional shares in an overseas company. The overseas company's Annual Report for the relevant period indicates that the overseas company debited their retained earnings in order to affect the issue of the shares. Adding the profit for the 2010 year to the retained earnings for the relevant period in 2009 you get a total of a certain amount, subtracting the retained earnings for the relevant period in 2010, you get the amount retained earnings was debited by. This debit was used to fund the cash dividend and the in species dividend. The overseas country classified the distribution as a dividend because it was paid out of the company's profits. These same basic accounting principles also apply in Australia. Therefore if the distribution is a dividend in the overseas country it will also be a dividend in Australia. You received a dividend and the overseas company then applied this dividend, on your behalf, towards the acquisition of additional shares. Accordingly, the dividend is required to be included in your assessable income in the 2009-10 income year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.