Private ruling: Dividend income
Published: February 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the total amount of dividend income you received assessable in the 2011-12 financial year? | A1: No. | Q2: Is the dividend income assessable in the individual financial years in which the dividends were paid by the company and credited to you? | A2: Yes. | Q3: Is the finder's fee a deductible expense under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: No. | Q4: Is the finder's fee a deductible expense under section 8-1 of the ITAA 1997? | A4: No.

Relevant facts and circumstances: You purchased several parcels of shares in different entities with the assistance of a friend who was a financial planner. One of these entities was company A. The demutualisation of company A resulted in you being issued with X shares. Company A and company B merged. You were issued with X company B shares. Your address details on the share registry were incorrect due to an administrative error. You had no knowledge that you had ownership of these shares. For X years, dividends were unclaimed and accumulated on the share registry. A portion of dividends were held by the Public Trustee. You received these dividends from the Public Trustee in the 2011-12 financial year. An asset finding company contacted you to advise they had identified the shareholding and matched you to the shares. You were charged a finder's fee to facilitate and finalise the matching of your shares to the share registry. The fee was calculated as a percentage of the market value of the shares plus a percentage of the value of the accumulated dividends.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1), | Income Tax Assessment Act 1936 subsection 44(1), | Income Tax Assessment Act 1997 section 8-1 and | Income Tax Assessment Act 1997 section 25-5.

Reasons for decision: Detailed Reasoning - Question 1 and 2: Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines a dividend to include any distribution made by the company to any of its shareholders, whether in money or other property, and any amount credited by a company to any of its shareholders as shareholders. As per subsection 44(1) of the ITAA 1936, an Australian resident shareholder (the registered holder of shares) is assessable on all dividends paid (to the shareholder) by a company (whether the company is a resident or non-resident) out of profits derived from any source. The term 'paid' in relation to a dividend as defined in subsection 6(1) of the ITAA 1936 includes 'credited' or 'distributed. The declaration of a dividend creates a debt owing to the shareholders and the payment, crediting or distribution of the dividend discharges that debt. The posting of a dividend cheque or money represents a payment for these purposes. In Paget v FCT [2012] AATA 334 the AAT stated at paragraph 58: 58. Such an approach is consistent with the law relating to when a dividend is taken to have been "paid" for income tax purposes. That is, "paid" in relation to a dividend includes "credited" or "distributed": section 6(1) of the ITAA 1936. Broadly, a dividend is "credited", so as to have been "paid", if a dividend has been declared, profits are appropriated to its payment and, importantly, the shareholder's account with the company is credited in such a way that it may be drawn on as and when the shareholder desires. In Blankfield v FCT 72 ATC 4177 , the High Court held that an amount was paid even though it was not able to be accessed by the taxpayer. The Court said that subsection 44(1) of the ITAA 1936 is not concerned with the derivation of income but rather with the designation as assessable income of those receipts which take the form of dividends paid to a taxpayer. In your case, the conditions in subsection 44(1) of the ITAA 1936 are satisfied. You were a shareholder of the company and there had been a payment to you of the dividend for the purposes of subsection 44(1) of the ITAA 1936, even though dividend monies were not received by you for the last 12 years due to incorrect details held on the share registry. Accordingly, the dividends recovered from the Public Trustee and share registry are assessable to you in the income year the dividends were paid and credited by the company to you as a shareholder. This is the case even though you had not received the dividends in the individual income years in which they were credited to you. | Detailed Reasoning - Question 3: Section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that certain tax-related expenses are deductable. The section does not specify what constitutes managing tax affairs. However, it is considered that managing tax affairs would include activities required to prepare income tax returns (see ATO ID 2003/955). It is considered in this case that the finder's fee is not an expense associated with preparing your income tax return. Therefore, it is not deductible under section 25-5 of the ITAA 1997. | Detailed Reasoning - Question 4: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Taxation Determination TD 2004/1 explains the application of section 8-1 of the ITAA 1997 in the context of gaining or producing assessable dividends and interests from a portfolio of shares or bonds. While it may be arguable in this case that the expenditure has a connection to the finding of the dividends, it is considered not being incurred in gaining or producing the assessable dividends. In the circumstances, the relationship between the expenditure incurred and the gaining of the dividend income is too general. As the expenditure is related to your shareholding (an income earning investment), it is considered capital in nature. Accordingly, the finder's fee is not deductible under section 8-1 of the ITAA 1997.

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