Private ruling: In-specie dividend
Published: August 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the taxation treatment of your in-specie distribution of XYZ shares received, as a shareholder of ABC, a return of capital rather than an unfranked dividend? | A1: No

Relevant facts and circumstances: At all relevant times, you were a shareholder of ABC and ABC was a listed company. You were not carrying on a business of share trading. ABC entered into an agreement with XYZ, to sell assets, for which ABC received XYZ shares, which it, in turn, distributed to ABC shareholders, as an in-specie distribution. In its history, ABC had never declared a profit and, as a result of the asset sale, it debited the sale proceeds amount to (increase) its accumulated losses (rather than debiting its share capital account). Advice given to ABC shareholders was the in-specie distribution would be classed as an unfranked dividend and therefore assessable income for tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6 | Income Tax Assessment Act 1936 Section 44 | Income Tax Assessment Act 1997 Section 104-135

Reasons for decision: Summary: When a company makes a payment to a resident shareholder, the payment is included in the assessable income of the shareholder under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936) if the payment is a dividend paid by the company out of profits or a non-share dividend. If the payment is not a dividend, under section 104-135 of the Income Tax Assessment Act 1997 (ITAA 1997), CGT event G1 may happen. It is therefore important to determine if the payment is a dividend when assessing the shareholding receiving the payment. Subsection 6(1) of the ITAA 1936 defines a 'dividend' broadly to include any distribution made or amount credited by a company to its shareholders as shareholders, but, relevantly, excludes an amount debited to amounts standing to the credit of the company's share capital account. Taxation Ruling TR 2012/5 is about section 254T of the Corporations Act 2001 and the assessment and franking of dividends paid from 28 June 2010. Paragraph 23 of TR 2012/5 explains the Commissioner's view that an application of the definition of dividend to a company distribution requires consideration of whether it has been debited to amounts standing to the credit of a company's share capital account, which in turn requires consideration of what the company has done with its share capital as a matter of accounting and for company law purposes. Paragraph 62 of TR 2012/5 explains, in applying the definition of dividend in subsection 6(1) of the ITAA 1936 to a shareholder, the source of the distribution from the company's perspective must be considered to determine the appropriate taxation treatment rather than the character of the receipt in the hands of the shareholder. Paragraph 63 of TR 2012/5 explains the changes to section 254T of the Corporations Act 2001 have not altered what is defined as a dividend for tax purposes or the process for determining what is a taxation law dividend and refers to paragraph 4 of Taxation Ruling TR 2003/8. Taxation Ruling TR 2003/8 is about distributions of property by companies to shareholders. Paragraph 4 of TR 2003/8 summarises the position which applies to in specie distributions: The amount of a dividend in respect of a distribution of property (including shares held by the company in another company) to a shareholder in their capacity as a shareholder will be the money value of the property at the time it is distributed, reduced by the amount debited to a share capital account of the distributing company in respect of the distribution. As explained in paragraph 64 of TR 2012/5, in applying the definition of dividend in subsection 6(1) of the ITAA 1936, it is generally the form of the distribution from the company's perspective that is examined. If a company makes a distribution to a shareholder it will prima facie fall within the definition of a dividend, unless it is subject to one of the exclusions in subsection 6(1) of the ITAA 1936. Subsection 44(1A) of the ITAA 1936 extends the operation of section 44 of the ITAA 1936 by providing that: 'For the purposes of this Act, a dividend paid out of an amount other than profits is taken to be a dividend paid out of profits'. It was inserted into the ITAA 1936 as a result of the substitution of the new section 254T of the Corporations Act 2001. In your case, ABC distributed XYZ shares to you in your capacity as an ABC shareholder. ABC treated the distribution as a dividend and the distribution of the XYZ shares was not debited against an amount standing to the credit of the share capital account of the company. Consequently, the form of the distribution from ABC's perspective is it is a dividend and the distribution is not subject to the relevant exclusion in subsection 6(1) of the ITAA 1936. As the form of the distribution of XYZ shares from ABC's perspective is a dividend, the distribution of the XYZ shares, to you, is a dividend. While ABC's method of debiting their accumulated losses account may bear resemblance to some of the examples in TR 2012/5 and raise the question of whether such a distribution is authorised by the Corporations Act 2001, it is not within the Commissioner's power to make a determination on such a question and TR 2012/5 is not a ruling on whether a distribution as a dividend is compliant with the Corporations Act 2001. As paragraph 6 of TR 2012/5 states: Whether profits are available for distribution as a dividend by a company or not, and have been distributed as a dividend in compliance with the law, or not, depends on the operation of the provisions of the Corporations Act, on the constitution of the distributing company, and on the acts or omissions of its directors and members, and not on the terms of the ITAA 1936 or the ITAA 1997. No ruling is made in respect of these matters.