Private ruling: Dividends
Date of advice: 3 December 2020
Published: January 2021
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will a dividend paid from the Reserve Accounts be considered 'paid from profits' in accordance with section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes . Paragraph two of Taxation Ruling TR 2012/5 : Income tax: section 254T of the Corporations Act 2001 and the assessment and franking of dividends paid from 28 June 2010 states that a dividend must be paid out of profits for it to satisfy the definition of dividend under subsection 6(1) of the ITAA 1936. Under paragraph two of TR 2012/5 'profits' means: ...profits recognised in a company's accounts which are available for distribution by way of dividend. Profits include: (i) revenue profits from ordinary business and trading activities, dividends received from other companies, and realised capital profits recognised in the statement of financial performance in a company's accounts; and (ii) unrealised capital profits of a permanent character recognised in a company's accounts... On the basis the proposed dividend payment is a 'dividend' paid by the company to its shareholders as defined in subsection 6(1) of the ITAA 1936 the dividend amount will be considered to have been 'paid from profits'. | Q2: Are the shareholders assessed under section 44(1) of the ITAA 1936 where a dividend is paid from the Reserve Accounts? | A2: Yes. Where a company distributes property to its shareholders and debits part of the value of that property to its share capital account and the remaining part to another account or reserve, where that account or reserve does not represent share capital, it would for the purposes of subsection 44(1) represent profits derived by the company so that the amount debited to it would be included in the shareholder's assessable income under that subsection. | Q3: Will a dividend paid from the Reserve Accounts be a frankable dividend in accordance with section 960-120 of the ITAA 1936 and section 202-45 of the ITAA 1997? | A3: Yes. Paragraph 202-45(e) of the ITAA 1997 does not prevent a company from franking a dividend paid to its shareholders where the amount is paid out of: • profits recognised in the company's accounts and available for distribution and is paid in accordance with the company's constitution without breaching section 254T or Part 2J.1 of the Corporations Act; • an unrealised capital profit of a permanent character recognised in its accounts and available for distribution, provided that the company's net assets exceed its share capital by at least the same amount of the dividend and is paid in accordance with the company's constitution without breaching section 254T or Part 2J.1 of the Corporations Act. Based on the facts provided, the proposed dividend payment by the Company to be debited against the Reserve Accounts is not prevented under section 202-45(e) from being a franked dividend. This is on the basis the relevant conditions are satisfied and the amount is not sourced directly or indirectly, from the Company's share capital account.

Relevant facts and circumstances: The company has an equity account. The revaluation account, active asset capital exemption account and the investment allowance reserve account are collectively referred to as the 'Reserve Accounts'. The Company anticipates that it will pay a dividend of approximately X in each financial year the dividend will be paid from the Reserve Accounts. The amounts do not relate to acquired or internally generated goodwill. The payment of the dividend does not result in net assets being less than share capital either before or after the dividend payment. Dividends will not breach section 254T(1) of the Corporations Act which provides that a company must not pay a dividend unless: (a) the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and (b) the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and (c) the payment of the dividend does not materially prejudice the company's ability to pay its creditors.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 202-45 | Income Tax Assessment Act 1997 subsection 960-120