Private ruling: Court ordered property transfer
Published: April 2012

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. 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)? Yes. | Q2: 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? | A2: Yes in specific circumstances. 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? No. | Q4: Are the transfer of property as a result of a court order deemed to be an informal liquidators distributions under subsection 47(2A) of the ITAA 1936? | A3: No. Year ended 30 June 2012 Year ended 30 June 2013 Year ended 30 June 2014 1 July 2011 The individual taxpayers are shareholders in a private company. The individual taxpayers 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 properties to the individual taxpayers. The private company has not made a formal resolution to wind up the company and will not do so by the time the Family Court makes it orders.


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 | Subsection109N(1) of the ITAA 1936 | Question 1 | 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)? 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money or other property; and | (b) any amount credited by a company to any of its shareholders as shareholders; | (c) (Repealed by No 63 of 1998) | but does not include: | (d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to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 private 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. | 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 | 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. | 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 | Subsection 109D(4A) of the ITAA 1936 states that a payment may be converted to a loan before lodgment day if: | (a) a private company makes a payment to an entity at a time in a year of income; and | (b) 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. | Consequently, we acknowledge that a transfer of property constitutes a payment under section 109C(3) and that such a payment may be converted to a loan before the end of the private company's lodgement day for the year of income under section 109D(4A) of the Act. However it must be emphasised that once the payment is converted to a loan, that loan must then satisfy the criteria established in section 109N of the ITAA 1936 so as not to be treated as a dividend. | 109N(1) Criteria. A private company that makes a loan to an entity in one of the private company's years of income is not taken under section 109D to pay a dividend at the end of the year of income because of the loan if, before the lodgement day for the year of income: | (a) the agreement that the loan was made under is in writing; and | (b) the rate of interest payable on the loan for years of income after the year in which the loan is made equals or exceeds the benchmark interest rate for the year; and | (c) the term of the loan does not exceed the term (the maximum term) for that kind of loan worked out under subsection (3). | The Explanatory Memorandum to Tax Laws Amendment (2007 Measures No 3) Bill 2007, which introduced the amendment enabling conversion of a payment to a loan , also included the following comparison of the current legislation (as at that date) and how the amended legislation was intended to be applied. The EM also included an example which is relevant to the facts outlined in this ruling application. The EM states: | New law Current law | A `payment' can be converted to a There is no provision in the current | loan that can be either fully repaid law for a `payment' to be treated as a | before the private company's tax loan unless it is of the type | return lodgment day for the year of contemplated by paragraph 109D(3)(c) | income or be placed on a commercial | footing on the terms of section 109N | of the ITAA 1936. | 1.15 Under the current law, a `payment' made by a company to a shareholder or an associate of a shareholder can not be treated as a loan unless it is of the kind contemplated by paragraph 109D(3)(c). Paragraph 109D(3)(c) contemplates payments made on account of, on behalf of or at the request of, a shareholder (or their associate) where there is an express or implied obligation to repay the amount to the private company. | 1.16 Where paragraph 109D(3)(c) applies the payment is treated as a loan and it must be repaid or put on a commercial footing before the private company's lodgment day in order to escape being treated as a dividend. In all other cases, once the payment is made there is a triggering of section 109C notwithstanding any subsequent desire to repay the amount. | 1.17 Under these amendments, a payment not already covered by paragraph 109D(3)(c) may be converted to a loan and the shareholder or associate will have until the lodgment date for the company's tax return to either repay the loan to the company in full, or enter into a written loan agreement with the company meeting the terms of section 109N. Either of these actions will prevent a deemed dividend arising. [Schedule 1, items 2 and 3, note under subsections 109C(3A) and 109D(4) of the ITAA 1936] | Example 1.1 | In 2007-08, XYZ Pty Ltd pays the petrol expenses of a vehicle owned by shareholder Sally, who is under no express or implied obligation to repay the amount. | Under the current law a deemed dividend will be taken to arise to Sally under section 109C. Taking into account these amendments, Sally and XYZ Pty Ltd will now have until the lodgment day of XYZ Pty Ltd's tax return (which will be in the 2008-09 income year) to convert the payment into a loan and repay it or enter into a written agreement that satisfies the criteria in section 109N of Division 7A. If the loan is put under a section 109N written agreement, Sally must then make the minimum yearly repayments on the loan in the 2008-09 and following income years by 30 June of each year. | The private company may need to undertake a journal entry in its accounting records to reflect the loan and reverse what may have been recorded as an expense in its financial statements for the 2007-08 income year. If these have been finalised, an adjustment to retained earnings may be required. | 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 | 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 shareholder's assessable income. | 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 | 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 taxpayers under subsection 44(1) of the ITAA 1936. | 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 | 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: | (a) 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, | (b) 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 | (c) 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. | The private company has not made a formal resolution to wind up the company and will not do so by the time the Family Court makes it 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.


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