Private ruling: Application of section 23AJ of the ITAA 1936 to dividends received from a non resident subsidiary
Published: April 2013
Date scheme commenced: 1 July 2008

Ruling: Q1: Are dividends received by Company B from Company N non-portfolio dividends that constitute non-assessable non-exempt income of Company A pursuant to section 23AJ of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: Company A is the head company of an Australian income tax consolidated group. Company A holds 100% of the shares in Company B, an incorporated Australian resident company. Company B holds more than 10% of the shares in Company N, a non-resident company incorporated in a foreign country. The other major shareholder of Company N is Company F, also a non-resident company. Company B indirectly holds shares in Company N through Company F. Company B beneficially holds more than 10% of the voting power in Company N and there are no arrangements in force that would allow any person to affect those rights. At all times since 1 July 2008 one or more members of the Company A income tax consolidated group held at least 10% or more of the shares in Company N. At all times since 1 July 2008 there has been no change in the beneficial ownership interest of Company N by one or more members of the Company A income tax consolidated group. Company N is a controlled foreign company pursuant to section 340 of the ITAA 1936 under the 'defacto control test'. Company N's operations are within a services industry and it has major contracts outside of Australia. At all times since 1 July 2008, Company N did not carry on any business in Australia. Company N's central management and control is in a foreign country. Company N holds all board meetings in the foreign country, and all but one of Company N's directors reside in the foreign country. All dividend distributions made by Company N are made equally across the respective shares. Company B does not receive dividends from Company N in the capacity of a trustee. Since 1 July 2008, Company N did not have any income attributable to Australian tax under the Controlled Foreign Company (CFC) rules. Since 1 July 2008, Company N did not have an attribution surplus account immediately prior to payment of a dividend.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6 | Income Tax Assessment Act 1936 section 23AJ | Income Tax Assessment Act 1936 paragraph 23AJ(a) | Income Tax Assessment Act 1936 paragraph 23AJ(b) | Income Tax Assessment Act 1936 section 317 | Income Tax Assessment Act 1936 section 334A | Income Tax Assessment Act 1936 subsection 334A(1) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: All legislative references are to provisions of the Income Tax Assessment Act 1936 unless otherwise specified. Income tax consolidation As Company B is a member of the income tax consolidated group of which Company A is the head company, any dividends received by Company B will, for Australian Income tax purposes, be treated as dividends received by Company A. Where the dividends are subject to section 23AJ, the dividends are treated as non-assessable non-exempt income of Company A. | Detailed Reasoning - Section 23AJ: Section 23AJ provides that in specified circumstances, a non-portfolio dividend paid to an Australian resident company constitutes non-assessable non-exempt income of the Australian company. Specifically, section 23AJ states that: A non-portfolio dividend (as defined in section 317) paid to a company is not assessable income, and is not exempt income, of the company if: (a) the company is an Australian resident and does not receive the dividend in the capacity of a trustee; and (b) the company that paid the dividend is not a Part X Australian resident (as defined in that section). A 'non-portfolio dividend' is defined in section 317 to mean: a dividend (other than an eligible finance share dividend or a widely distributed finance share dividend) paid to a company where that company has a voting interest, within the meaning of section 334A, amounting to at least 10% of the voting power , within the meaning of that section, in the company paying the dividend. Non-Portfolio dividends Dividends have been paid by Company N to Company B during each income year since the year commencing 1 July 2008. In order for the dividends to be considered non-portfolio dividends, as defined in section 317, Company B must have voting interests in Company N within the meaning of section 334A(1) amounting to at least 10% of the voting power in Company N. Company B has held the requisite level of voting power at all times since 1 July 2008. Voting interest Subsection 334A(1) provides that: a company is taken to have a 'voting interest' in another company if: (a) the first-mentioned company is the beneficial owner of shares (other than eligible finance shares or widely distributed finance shares) in the other company that carry the right to exercise any of the voting power in the other company; and (b) there is no arrangement in force at the relevant time by virtue of which any person is in a position, or may become in a position, to affect that right; Beneficial ownership The phrase 'beneficial owner' is not defined for the purposes of section 334A. In Taxation Determination TD 2008/24, the Commissioner stated that the term 'beneficial owner' of shares for the purposes of subsection 334A(1) needs to be considered having regard to the context of former section 160AFB. Having regard to the context, TD 2008/24 states at paragraph 9 that a company will be the beneficial owner of shares for the purposes of subsection 334A(1) when it holds the bundle of rights associated with ownership of those shares for its own benefit, and not for the benefit of others. Company B beneficially holds more than 10% of the voting power in Company N and there are no arrangements in force which would allow any person to affect those rights. Further, Company B does not receive dividends from Company N in the capacity of a trustee. Company B directly owns more than 10% of the shares in Company N, and indirectly holds shares in Company N through Company F. As Company B holds more than 10% of the shares in Company N, which provides Company B with the same level of voting interest in Company N, and it does not receive the dividends as a trustee, Company B is the beneficial owner of the shares. Taxation Determination TD 2004/76 states that the voting interests that are held by a subsidiary member of a consolidated group in a non-resident company are treated as being voting interests held by the head company for the purposes of determining whether section 23AJ is satisfied. That is, although Company B is the legal owner of the voting interests, the voting interests are treated as being the voting interests of Company A as the head company. Both the receiving and paying entities must be companies. Section 23AJ, section 317 and section 334A together require that Company B and Company N are companies, pursuant to the definition contained in subsection 995-1(1) of the ITAA 1997, for Australian tax purposes. Subsection 995-1(1) of the ITAA 1997 defines the term 'company' as follows: company means: (a) a body corporate; or (b) any other unincorporated association or body of persons; but does not include a partnership or a *non-entity joint venture. Company B is an incorporated Australian resident company, and therefore meets the definition of a 'company' for Australian income tax purposes as defined in subsection 995-1(1) of the ITAA 1997. Company N is incorporated in a foreign country and registered as a 'stock corporation' with the relevant company registration body of that country. No material has been provided that indicates Company N is otherwise a partnership or a non-entity joint venture. Company N therefore meets the definition of 'a company' for Australian income tax purposes. The company that pays the dividend is not a 'Part X Australian resident' 'Part X Australian Resident' is defined in subsection 317(1) as: A resident within the meaning of section 6, but does not include an entity where: (a) there is a double tax agreement in force in respect of a foreign country; and (b) that agreement contains a provision that is expressed to apply, apart from the provision, the entity would, for the purposes of the agreement, be both a resident of Australia and a resident of the foreign country; and (c) that provision has the effect that the entity is, for the purposes of the agreement, a resident solely of the foreign country. Subsection 6(1) defines a resident or resident of Australia as: … ( (b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. Company N is incorporated in a foreign country and does not carry on a business in Australia. The central management of Company N is located in the foreign country with all but one of Company N's directors residing in the foreign country. All board meetings are held in the foreign country. Therefore, in accordance with the guidelines set out in Taxation Ruling TR 2004/15 for the residency of companies incorporated overseas, Company N is not a resident within the meaning of subsection 6(1) and therefore does not constitute a Part X Australian Resident company. | Detailed Reasoning - Conclusion: Company B and Company N are both companies, Company N pays dividends to Company B as a beneficial owner of the shares in Company N and Company B does not receive the dividends in the capacity of trustee. Company B has a voting interest of more than 10% in Company N. This meets the requirements for paragraph 23AJ(a). Company N is not a Part X Australian Resident and therefore the requirement of paragraph 23AJ(b) is met. Therefore a dividend Company N pays to Company B is a non-portfolio dividend that constitutes non-assessable non-exempt income of Company B pursuant to section 23AJ.