Private ruling: Income tax treatment of dividend payment
Published: February 2014
Ruling period: This ruling applies for the period between 1 July 2013 and 30 June 2014.
Date scheme commenced: 17 February 2014

Ruling: Q1: Will the Proposed Dividend declared and paid by a head company and debited against the amounts standing to the credit of the '2012 Profit Reserve Account' not be unfrankable pursuant to paragraph 202-45(e) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, the Proposed Dividend declared and paid by a head company and debited against the amounts standing to the credit of the '2012 Profit Reserve Account' will not be unfrankable pursuant to paragraph 202-45(e) of the ITAA 1997.

Relevant facts and circumstances: 1. The taxpayer is the head company of an Australian consolidated group. 2. The Proposed Dividend will be declared and paid in the income year 2014. 3. The taxpayer will satisfy all the requirements of section 254T of the Corporations Act 2011 (Corporations Act) for the declaration and payment of the dividend. 4. During the 2012 year of income the directors of the head company resolved and appropriated profits which are identified as a 2012 Profit Reserve Account in the company's financial statements. 5. The Proposed Dividend will be sourced from the 2012 Profit Reserve Account. 6. The taxpayer has sufficient franking credits to frank the Proposed Dividend at 100%.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 202-C. | Income Tax Assessment Act 1997 section 202-40. | Income Tax Assessment Act 1997 section 202-45. | Income Tax Assessment Act 1997 subsection 975-300(1). | Income Tax Assessment Act 1997 section 995-1. | Income Tax Assessment Act 1997 paragraph 202-45(e). | Income Tax Assessment Act 1936 section 44. | Income Tax Assessment Act 1936 subsection 6(1). | Income Tax Assessment Act 1936 subsection 44(1A). | Corporations Act 2001 section 254T. | Corporations Amendment (Corporate Reporting Reform) Act 2010 Part 2J.1. | Corporations Amendment (Corporate Reporting Reform) Act 2010 section 254T.

Reasons for decision: Summary: The object of the imputation system and the provision for franking of corporate distributions is to ensure that it is only realised taxed profits of the corporate tax entity that can be franked. Paragraph 202-45(e) operates to prevent a company making a distribution that is sourced directly or indirectly from a company's share capital account from being a frankable distribution. From the facts of the scheme, we understand that the Proposed Dividend will be sourced from a profit reserve account that has retained its character, and is identified and separately recognised. Also, the declaration and payment of the Proposed Dividend will satisfy all the requirements of section 254T of the Corporations Act 2001 (Corporations Act) and that the taxpayer has sufficient franking credits to frank the Proposed Dividend at 100%. Therefore, the Proposed Dividend would not be a distribution that is sourced directly or indirectly from a company's share capital account and prevented by paragraph 202-45(e) from being a franked distribution.