Published: March 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 June 2012

Ruling: Q1: Will dividends paid from a private company to the superannuation fund be non-arm's length income under section 295-550 of the Income Tax Assessment Act 1997 ? Advice/Answers No.


Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 273(2). | Income Tax Assessment Act 1997 Section 295-545. | Income Tax Assessment Act 1997 Section 295-550. | Income Tax Assessment Act 1997 Subsection 295-550(1). | Income Tax Assessment Act 1997 Subsection 295-550(2). | Income Tax Assessment Act 1997 Subsection 295-550(3). | Income Tax Assessment Act 1997 Paragraph 295-550(3)(a). | Income Tax Assessment Act 1997 Paragraph 295-550(3)(b). | Income Tax Assessment Act 1997 Paragraph 295-550(3)(c). | Income Tax Assessment Act 1997 Paragraph 295-550(3)(d). | Income Tax Assessment Act 1997 Paragraph 295-550(3)(e). | Income Tax Assessment Act 1997 Paragraph 295-550(3)(f). | Income Tax Assessment Act 1997 Subsection 295-550(4). | Income Tax Assessment Act 1997 Subsection 295-550(5). | Income Tax Assessment Act 1997 Subsection 295-550(6). Reasons for decision | Summary of decision | The Commissioner is of the opinion that the transactions involving the payment of dividends by Company B to the Fund will produce an arm's length outcome. Therefore the dividends paid by Company B to the Fund will not be considered non-arm's length income of the Fund. | Detailed reasoning | In accordance with section 295-545 of the Income Tax Assessment Act 1997 (ITAA 1997) the income of a complying superannuation fund, complying approved deposit fund or pooled superannuation trust is split into a 'non-arm's length component' and a 'low tax component'. The non-arm's length component (formerly known as special income) comprises non-arm's length dividends received from private companies, non-fixed interest trust distributions, and any income derived from transactions where the parties are not dealing with each other at arm's length. This component is reduced by any deductions attributable to that income and is then taxed at the highest marginal rate. 'Derived' in this context is applicable to both ordinary and statutory income. | 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 per cent). | The Commissioner has issued Taxation Ruling TR 2006/7, titled ' Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income '. This ruling refers to the former section 273 of the Income Tax Assessment Act 1936 (ITAA 1936) which concerned 'special income' and still provides useful guidance on the factors to be considered in the interpretation of section 295-550 of the ITAA 1997. Subsection 295-550(2) of the ITAA 1997 states that dividends received by a complying superannuation fund will be non-arm's length income of the fund unless the amount is consistent with an arm's length dealing. In other words, is the dividend the same for the complying superannuation fund as it would be with any other shareholder? The factors listed in subsection 295-550(3) are to be considered in deciding whether there has been an arm's length result. | Consequently, the Commissioner will consider if dividends paid to the Fund by Company B produces an arm's length result. | As noted in the facts, the Members are the trustees of the Fund and only members of the Fund. The Fund is a complying self-managed superannuation fund. | The private company in this case is Company B, a private company. | Dividends | In applying subsection 295-550(3) of the ITAA 1997 to the facts of this case, the Commissioner will consider the factors described in paragraphs 295-550(3)(a) to (f) that indicate whether or not the dividends are consistent with an arm's length dealing. Further, the Commissioner will consider any other matter considered to be relevant under paragraph 295-550(3)(f). | 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) of the ITAA 1997 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. | Paragraphs 295-550(3)(a) and (b): | The entity in this case is the Fund. The private company is Company B and its shareholding is, as noted in the facts, owned by various entities comprising both individuals and corporate entities. | The Fund owns a very small percentage of the issued share capital in Company B. It is also noted that a further small percentage of the issued share capital is owned by one of the Members and that another small percentage is owned by Company A, in whom the Members are the sole shareholders. Consequently, the block of shares owned/controlled by the Members is significantly less than 50%. | It is further noted that there are other blocks of shares owned by individuals who are either related by birth or by marriage to the Members or by corporate entities that are owned/controlled by those individuals. Consequently, the blocks of shares owned/controlled by these related individuals and corporate entities collectively totals just over 50%. | The Fund paid slightly above market value for the shares it acquired in Company B. | The Fund's investment was based on the trustee of the Fund's knowledge of Company B's strong historical financial performance as a current investor for a number of years and the belief that the investment would continue to perform at levels that were better than the likely return that could be generated from investments held by the Fund either directly in equities or via managed funds. | The market value of the shares in Company B was determined by calculating and applying the Net Tangible Asset method. | It is considered that the shares have been objectively valued and that the market value is reasonable. Therefore it is considered that the value of the share acquired by the Fund was determined on an arm's length basis. | Overall, it is considered that these factors are favourable to the Commissioner considering that the income of the Fund is arm's length income. | Paragraphs 295-550(3)(c) and (d): | Company B's dividends are paid on an equal basis for all shares. | The Fund will receive an amount which is applicable to all other shareholders of Company B. | Overall, in view of the above, it is considered that these factors are favourable in respect of the Commissioner considering the income to be arm's length income. | Paragraph 295-550(3)(e): | Company B has not issued shares in satisfaction of a dividend. | This will be a neutral factor in determining if there is an arm's length outcome. | Paragraph 295-550(3)(f): | As noted earlier, some shareholders of Company B are individuals who are either related by birth or by marriage to the Members or are corporate entities that are owned/controlled by those individuals. However, the Members only hold a block representing less than a third (combined shareholding of the Fund, the Members and Company A) of the total shareholding of Company B. | There is nothing to indicate that the Members influence, or are in a position to significantly affect, the decisions of Company B including the timing and amount of the payment of dividends. | Therefore, the state of the relationship between the Members and Company B is a neutral factor. | The source of the funds used by the Fund to acquire the shares in Company B may have an influence on the decision made by the Commissioner. In this case, the source of funds used to acquire the shares in Company B came from the Members' non-concessional contributions. | It is also relevant to consider whether the profits of Company B are largely dependant on the efforts of key personnel (such as a director) who are also members of the Fund. In this case, neither of the Members has been a director of Company B or held a management role or a role of authority with Company B. | Conclusion: | On the whole, having regard to the matters listed paragraphs 295-550(3)(a) to (f) of the ITAA 1997, the Commissioner is of the opinion that the transactions involving the payment of dividends by Company B to the Fund will produce an arm's length outcome. | Therefore, the dividends paid by PIAT to the Fund will not be considered non-arm's length income of the Fund as defined by section 295-550 of the ITAA 1997. | Disclaimer | You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you or to someone acting on your behalf. | The Register of private binding rulings is a public record of private rulings issued by the ATO. 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Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The Fund was formed in the 2010-11 income year. | The Members are both employed by Company A and are shareholders of Company A. | The Fund holds cash and shares. | The Fund has made an investment in Company B a private company. | All shares in Company B carry equal voting rights. | One of the Members has a minority shareholding in Company B. These were previously held by that Member's parent and following their death, transferred to by the executor of the parent's estate to the Member. | The opportunity to invest in Company B arose due to an existing shareholder exiting their investment. The selling shareholder is not related by blood, marriage or otherwise to the Members. The intention to sell was circulated to all of the Company B's other shareholders. As a member of the Fund held shares in Company B in their own right they became aware of the opportunity to acquire the Company B shares. | The Fund's shares were acquired in the 2010-11 income year from a third party who was not related by blood, marriage or otherwise to either of the Members. | The Fund's investment was based on the trustee of the Fund's knowledge of Company B's strong historical financial performance as current investor for a number of years and the belief that the investment would continue to perform at levels that were better than the likely return that could be generated from investments held by the Fund either directly in equities or via managed funds. | The Members are related by blood and marriage to several other individual shareholders. In addition, there are several corporate shareholders in which the Members or the other related individuals have an interest. Individually, none of the various blocks of related shareholders have a majority interest. However, as a collective whole, they own more than 80% of Company B's shares. | There is nothing to indicate that the Members influence, or are in a position to significantly affect, the decisions of Company B. Neither of the Members has been a director of Company B or held a management role or a role of authority with Company B. | During the 2011-12 income year Company B paid a fully franked dividend.