Private ruling: treatment of special dividend
Date of advice: 30 November 2017
Published: April 2018
Ruling period: 1 July 2016 to 30 June 2017
Date scheme commenced: Financial year ended 30 June 2017

Ruling: Q1: Is the Special Dividend paid by the Company included in the Taxpayer’s assessable income under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: During the previous income year, the Company sold a stake in a subsidiary. Part of the proceeds from this sale were returned to shareholders through a Special Dividend. A share consolidation was implemented to maintain earnings per share and dividends per share on a comparable basis. There is no indication that any portion of the Special Dividend was debited against an amount standing to the credit of the Company’s share capital account.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1997 section 6-10(4) | Income Tax Assessment Act 1997 section 975-300

Reasons for decision: Summary: The Special Dividend received from the Company is a dividend, as defined in subsection 6(1) of the Income Tax Assessment Act 1936 ( ITAA 1936), and therefore is included in your assessable income under section 44 of the ITAA 1936 and subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision . The assessable income of an Australian resident taxpayer includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997). Section 10-5 of the ITAA 1997 lists the provisions about what constitutes assessable income. Included in this list is subsection 44(1) of the ITAA 1936 which deals with dividends. Paragraph 44(1)(a) of the ITAA 1936 provides that, subject to certain provisions, the assessable income of an Australian resident taxpayer, who is a shareholder of a company (whether the company is a resident or non-resident), includes dividends paid to the taxpayer by the company out of profits derived by it from any source. It is noted the term ‘profits’ from which the company can pay a dividend has a wide meaning and is not limited to the Corporations Law’s concept of the term ( MacFarlane v FCT 86 4477). In relation to the profits from which a dividend can be paid, in QBE Insurance Group Ltd & Ord v ASC & Anor, NRMA Insurance Ltd v ASC (1992) 38 FCR 270, Lockhard J stated: Plainly profits of a company available for dividend may be trading profits derived during the relevant financial year. Also, it is well established that capital profits, in the sense of profits earned on the realisation of capital assets, may be available for dividend provided there has been an accretion to the paid up capital. The definition of a ‘dividend’ contained in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders but excludes moneys debited against an amount standing to the credit of the share capital account. In the Taxpayer’s circumstances, the Special Dividend is a distribution of money by the Company to its shareholders. Based on the information provided there is no indication that this payment was debited to an amount standing to the credit of the Company’s share capital account. It therefore satisfies the definition of a dividend as defined in subsection 6(1) of the ITAA 1936. Under section 44 of the ITAA 1936 (and in turn subsection 6-10(4) of the 1997), the Special Dividend will therefore be included in the Taxpayer’s assessable income as it is considered to be a dividend paid by the Company out of ‘profits’ derived by it from any source (which as previously noted, in this case, is sufficiently broad enough to include amounts the Company has derived stemming from the sale of its stake in the subsidiary).