On 27 June 2012, the Commissioner of Taxation (Commissioner) issued Taxation Ruling TR 2012/5 (Ruling) (previously issued as Draft Taxation Ruling TR 2011/D8), dealing with section 254T of the Corporations Act and the assessment and franking of dividends. The Ruling applies with effect from 28 June 2010, when changes to section 254T came into operation. The main points in the Ruling are discussed below.
Section 254T previously provided that a dividend may only be paid out of profits of the company.
New section 254T provides that the company must not pay a dividend unless:
The change raised doubts as to whether a dividend could now be paid out of an amount other than profits without undertaking the procedures for undertaking a reduction of capital under the Corporations Actand also as to the taxation implications.
The Commissioner was concerned in particular about the implications of the payment of a purported dividend under s 254T in the following circumstances:
The Commissioner obtained a joint opinion from Counsel on these issues (Joint Opinion). Based on the Joint Opinion, the Commissioner considers the better view is that new s 254T does not authorise a return or reduction of capital but merely specifies 3 additional prohibitions on the payment of a dividend, with the concept of profits as the source of a dividend remaining relevant under s 254T and for taxation purposes.
The Income Tax Assessment Act 1936 (ITAA 1936) and Income Tax Assessment Act1997 (ITAA 1997) (together, the Tax Act) contain various provisions in relation to dividends. In particular:
TR 2012/5 says that, assuming they are paid in accordance with the company's constitution and without breaching the Corporations Act, the following dividends are assessable and frankable:
In both cases above, the relevant profits must be:
These concepts are discussed further below.
The Ruling says that a distribution that is a reduction or return of capital (whether or not authorised under the Corporations Act) is not frankable and is either:
The Ruling gives the examples of an amount paid from unbooked or underived profits, internally generally goodwill, a negative reserve account or an amount of 'other comprehensive income' in the accounts (see further below).
The Ruling says that profits can be recognised in either the annual financial statements for the previous year or properly prepared half-yearly or interim accounts for the current year.
For this purpose, companies (including proprietary companies) will need to calculate their assets and liabilities in accordance with accounting standards, regardless of whether they are otherwise required to do so.
It is noted that Australian accounting standards have recently been revised, following the introduction of new international financial reportingstandards (IFRS) in 2005. In particular, AASB 101 ('Presentation of Financial Statement') was revised with effect for annual accounting periods commencing on or after 1 January 2009 (subject to early adoption), one of the main changes being the 'statement of comprehensive income'. 'Comprehensive income' is, essentially, the change in equity (or net assets) of the enterprise for the reporting period from transactions etc. other than with owners of the enterprise. It consists of amounts that would have been recognised in what was previously known as the 'income statement' or 'profit and loss' (P&L) account, as well as 'other comprehensive income', being amounts not recognised in the income statement/P&L (including certain unrealised gains and losses) and can be presented as a single statement or separate statements.
The Ruling says that profits cease to be available for distribution if they are applied against accumulated losses. This will prima facie be the case if the profit is offset or netted against accumulated losses in the accounts, but the presumption can be rebutted by an appropriately worded directors' resolution (as discussed below).
The Ruling says a company can ensure that a CY profit is available for distribution by either:
The Ruling says the sourceof profits from which a dividend is paid should be recorded in either the directors' minutes of the dividend resolution (or accompanying documentation) or notes to the accounts.
It is essential for companies to maintain proper records and evidence of directors' resolutions and accounts to establish that profits are available for distribution as a dividend and properly applied to the dividend.
The Ruling makes it clear that the company paying a dividend must itself have sufficient profits available for payment as a dividend at the relevant time. That is, the profits must be recognised in the company's own accounts and it is not sufficient that there are profits in the consolidated accounts. It may therefore be necessary for dividends to be paid up by subsidiaries to the parent company to ensure it has profits to distribute as a dividend to its shareholders.
This is also the case if the group that is consolidated for tax purposes, as the 'single entity rule' under tax consolidation does not apply for this purpose.
The Ruling gives a number of examples to illustrate the principles outlined in the Ruling.
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