Dividend franking - current year profits and accumulated losses

Articles Written by John Keeves (Partner)

On 21 June, the Australian Tax Office (ATO) issued two draft 'fact sheets' relating to the taxation of the payment of dividends. This follows amendments to section 254T of the Corporations Act designed to allow companies to pay dividends based on balance sheet and solvency tests, rather than dividends needing to be paid out of profits.

In the draft 'fact sheets', the ATO has expressed the view that 'dividends' paid otherwise than out of profits might not be treated as frankable dividends for tax purposes. This is because such payments could, on the ATO's analysis, be regarded as being sourced out of share capital (based on the definition of 'dividend' in section 6 of the Income Tax Assessment Act 1936). This is despite a specific amendment to section 44(1A) to deem dividends paid other than out of profits as being dividends paid other than out of profits as being dividends out of points for tax purposes.

The ATO also expresses the view that where nets assets are less than paid up capital, dividends will necessarily be sourced from share capital.

Whether or not one accepts the ATO's logic, the issue is acute for companies that have accumulated losses - which can arise from corporate restructuring transactions, as well as from trading losses.

It appears that the ATO does not accept that a dividend out of current year profits can be franked where accumulated losses exist. In our view, such a position is not correct as a matter of corporate law because in Australia at least, the retained earnings account is not a running account, and losses do not have to be made up before current year profits can be made available for dividend. This is a well established principle of corporate law. If the ATO does not reconsider its position, it may be that the Government will need to move to amend the tax legislation to clarify the position.

However, regardless of the correctness of the ATO's view, it appears that the ATO will accept that a 'lost capital reduction' under section 258F of the Corporations Act - or if that is not available for any reason than a capital reduction under section 256B of the Corporations Act, whereby the capital of the company is reduced by the amount of accumulated losses, will solve the problem, and permit dividends from current year earnings to be franked.

Companies with accumulated losses should now be considering capital reductions to ensure dividends from current year profits can be ranked.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

Related insights Read more insight

Digital Bytes – cyber, privacy & data update

Welcome to Digital Bytes, our latest quarterly update on current developments in cyber, privacy and data governance.

JWS advises MM Capital Partners on acquisition of interests in Australian PPP projects

Leading independent law firm Johnson Winter Slattery (JWS) has advised MM Capital Partnerson the successful acquisition by its latest fund, MM Capital Infrastructure Fund II, L.P., of 50 per cent...

Victorian Commercial and Industrial Property Tax Reform Act is now law: here’s what you should know

The Victorian Commercial and Industrial Property Tax Reform Act 2024 (Vic) (CIPT Act) passed both houses of Parliament and received royal assent on 21 May 2024.