Private ruling: Deduction for personal superannuation contribution
Date of advice: 20 December 2017
Published: May 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Whether in the Commissioner’s opinion the amount of a liquidator’s distribution and attached franking credits received by a superannuation fund is consistent with an arm’s length dealing within the meaning of subsection 295-550(2) of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: The Self-Managed Superannuation Fund (the Fund) was established less than 10 years ago. The members of the Fund are spouse 1 (Member 1) and spouse 2 (Member 2). The trustee of the Fund is an Entity (the Corporate Trustee). Member 1 and Member 2 are directors and shareholders of the Corporate Trustee. The Fund acquired shares in another Entity (the Company) from Member 1. Member 1 and Member 2 are directors of the Company. A short time later, an additional amount of ordinary shares in the Company were issued to the Fund for consideration of an amount. The Fund owns 100% of shares in the Company. You state that you acknowledge that the additional amount of ordinary shares were inadvertently issued for a rate other than the market rate, however given that the Fund is the sole shareholder of the Company no consequences have resulted from this oversight. Following the issue of shares to the Fund, the Company had investments and dividends were paid to the Fund in accordance with the Company’s dividend policy. You state that in ascertaining the appropriate level of dividend, the directors of the Company review the after tax profits of the Company each year. This is then compared to the available cash flow giving consideration for future capital expenditure commitments. This process ensures that sufficient liquidity was maintained in the Company to allow for the continued operations. The Company has not issued any shares to the Fund in satisfaction of a dividend. The Company sold a property (the Property) for an amount to an entity (the Entity). The Entity is an independent third party bearing no relationship to the members of the Fund. It is intended that the Company be liquidated during the financial year ending 30 June 2018. You explain that as the directors of the Company are approaching retirement they are looking to simplify their structures. It is intended that all future activities will be conducted by the Fund and now that the Company’s property has been sold the Company is superfluous. You state that the Fund will be doing no more than recouping its original investment in the Company.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 295-545 | Income Tax Assessment Act 1997 section 295-550

Reasons for decision: Summary: After considering the facts in this case, the Commissioner is of the opinion that the amount of the liquidator’s distribution and attached franking credits received by the Fund will not be considered non-arm’s length income of the Fund as defined by section 295-550 of the ITAA 1997. | Detailed Reasoning - Income of a complying superannuation fund: In accordance with section 295-545 of the ITAA 1997, the taxable income of a complying superannuation fund is split into a ‘non-arm’s length component’ and a ‘low tax component’. Any income falling within the non-arm’s length component is reduced by any deductions to the extent that the deductions are attributable to that income and is then taxed at the highest marginal rate (currently 45%). The remaining part of the entity’s taxable income for the income year is the low tax component, which is taxed at a concessional rate (currently 15%). The non-arm’s length component, as defined in section 295-550 of the ITAA 1997, includes dividends paid to a complying superannuation fund by a private company, or ordinary income or statutory income that is reasonably attributable to such a dividend, unless the amount is consistent with an arm’s length dealing. The Commissioner has issued Taxation Ruling TR 2006/7 (TR 2006/7), which is concerned with special income derived by a complying superannuation fund under the now repealed section 273 of the Income Tax Assessment Act 1936 (ITAA 1936). As the wording of section 273 of the ITAA 1936 is similar to section 295-550 of the ITAA 1997, TR 2006/7 provides useful guidance on the factors to be considered in the interpretation of the current provision. Paragraph 19 of TR 2006/7 states: Dividends are only derived on an arm's length basis when the shares are acquired, the investment is maintained, and the dividends are paid on an arm's length basis. If the shares are acquired at market value, the private company is not involved in non-arm's length dealings and the rate of dividend is the same as the rate of dividend paid on other shares in the company or is reasonable having regard to investment risk, and there are no other matters that the Commissioner will consider relevant, the Commissioner will form the opinion that it would be reasonable not to treat the dividend as special income. In applying subsection 295-550(3) of the ITAA 1997 to the facts of this case, the Commissioner will have regard to paragraphs 295-550(3)(a) to (f) of the ITAA 1997 in order to decide whether or not dividends are derived on an arm’s length basis. The facts of the case and all the matters contained in paragraphs 295-550(3)(a) to (f) of the ITAA 1997 cannot be considered in isolation to each other but must be considered as a whole. Subsection 295-550(3) states: In deciding whether an amount is consistent with an arm’s length dealing under subsection (2), have regard to: (a) the value of shares in the company that are assets of the entity; and (b) the cost to the entity of the shares on which the dividend was paid; and (c) the rate of that dividend; and (d) whether the company has paid a dividend on other shares in the company and, if so, the rate of that dividend; and (e) whether the company has issued any shares to the entity in satisfaction of a dividend paid by the company (or part of it) and, if so, the circumstances of the issue; and (f) any other relevant matters. It is proposed to deal with each of these matters in turn. | Detailed Reasoning - The value and cost of the shares acquired: For the purposes of subsections 295-550(2) and (3) of the ITAA 1997, the Fund, which is a complying self-managed superannuation fund as per your advice, is the entity, and the Company is the private company. In deciding whether any dividend payable to the Fund by the Company is consistent with an arm’s length dealing, paragraphs 295-550(3)(a) and (b) of the ITAA 1997 requires regard to be given to: ● the value of shares in the Company that are assets of the Fund and ● the cost to the Fund of the shares on which any dividend was paid. It was previously determined in a Private Ruling that the Fund has paid market value for all ordinary shares in the Company. Therefore, the transaction will be consistent with an arm’s length dealing. This is a favourable factor in the Commissioner’s consideration of paragraphs 295-550(3)(a) and (b) of the ITAA 1997. | Detailed Reasoning - Rate of dividend: In deciding whether any dividend payable to the Fund by the Company is consistent with an arm’s length dealing, paragraph 295-550(3)(c) of the ITAA 1997 requires regard to be given to the rate of dividend paid on the Fund’s shares: Dividends have been paid by the Company since its acquisition by the Fund At this stage, no dividend has yet to be paid to the Fund and the rate of dividend provided is anticipative only, which will be subject to the ongoing profitability of the Company. In the circumstances, the Commissioner is unable to provide a definitive view on whether the anticipative rate of dividend at which the dividend will be paid in the future is consistent with an arm’s length dealing. The Commissioner has taken it as a neutral factor in his overall consideration of whether the acquisition being contemplated will produce an arm’s length outcome. | Detailed Reasoning - Dividend on other shares and issue of shares in satisfaction of dividend: Paragraphs 295-550(3)(d) and (e) of the ITAA 1997 require regard to be given respectively to: ● whether the Company has paid a dividend on other shares in the Company and, if so, the rate of that dividend; and ● whether the Company has issued any shares to the Fund in satisfaction of a dividend (or part thereof) paid by the Company and, if so, the circumstances of the issue With regard to dot point 1 above, there is only on class of the Company shares and as the Fund is the sole shareholder of the Company. With regard to dot point 2 above, no shares have yet been issued by the Company to the Fund in satisfaction of any dividend otherwise payable to the Fund. | Detailed Reasoning - Other relevant factors: In deciding whether any dividend payable to the Fund by the Company is consistent with an arm’s length dealing, paragraph 295-550(3)(f) requires regard to be given to any other relevant matters. Paragraph 54 of TR2006/7 states that: The matters that the Commissioner may consider relevant include: ● the extent to which members who are at arm’s length to the private company have an interest in the superannuation fund, ADF or PST; ● the relationship between the superannuation fund, ADF or PST and the private company; ● the relationship between the superannuation fund, ADF or PST and any party with which the private company has dealings; and ● who the superannuation fund, ADF or PST acquires the shares from and the circumstances of that acquisition In this case, the members of the Fund are the directors of the Company therefore the relationship between the parties is not at arm’s length. However, as pointed out by Davies J of the Federal Court in Hains, Re; Barnsdall v. Commissioner of Taxation (Cth) (1988) 88 ATC 4565; (1988) 81 ALR 173; (1988) 19 ATR 1352, a non-arm’s length relationship does not necessarily mean that the parties cannot deal at arm’s length in relation to a particular transaction. The Company sold property at market value to an independent third party bearing no relationship to the members of the Fund. Further, you have provided a copy of the Company’s financial statement for 30 June 2017. The balance sheet shows The Company’s net assets. From the information you provided, there is no indication of any particular transaction that may be inconsistent with an arm’s length dealing. | Detailed Reasoning - Conclusion: On the whole, having regard to the matters listed in paragraph 295-550(3)(a) to (f) of the ITAA 1997, it is considered that these factors are favourable in respect of the Commissioner considering the amount of a liquidator’s distribution and attached franking credits received by the Fund to be arm’s length income. Therefore, the amount of a liquidator’s distribution and attached franking credits received by the Fund will not be considered non-arm’s length income of the Fund as defined by section 295-550 of the ITAA 1997.