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ATO Interpretative Decision

ATO ID 2004/461 (Withdrawn)

Income Tax
Div 7A: Court orders under the Family Law Act 1975

Attention This ATO ID is withdrawn as the issue is now covered by Taxation Ruling TR 2014/5, which issued on 30 July 2014.
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 11 April 2017.

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Issue

Is a private company taken under subsection 109C(1) of the Income Tax Assessment Act 1936 (ITAA 1936) to have paid a dividend to a shareholder's spouse in relation to a transfer of property made by the private company to the shareholder's spouse because of a court order under section 79 of Part VIII of the Family Law Act 1975 (FLA 1975)?

Decision

Yes. A private company is taken under subsection 109C(1) of the ITAA 1936 to have paid a dividend to a shareholder's spouse in relation to a transfer of property made by the private company to the shareholder's spouse because of a court order under section 79 of Part VIII of the FLA 1975 .

Facts

A private company holds an investment property.

E, an individual is the sole shareholder and employee of the private company.

E and their spouse (the taxpayer) are involved in proceedings in the Family Court.

The private company is not a party to the proceedings in the Family Court.

Pursuant to a court order under section 79 of Part VIII of the FLA 1975 made as a result of the proceedings in the Family Court the private company transfers the investment property to the taxpayer in the 2003-04 income year. At the time the transfer is made, E and the taxpayer are still legally married.

The amount that would have been paid for the transfer by parties dealing at arm's length is $500,000. No consideration is given by the taxpayer for the transfer.

None of the exclusions provided for in Subdivision D of Division 7A of Part III of the ITAA 1936 apply.

Reasons for Decision

Subsection 109C(1) of the ITAA 1936 provides that a private company is taken to pay a dividend to an entity if the private company pays an amount to the entity during the income year and:

·
 the entity is a shareholder or associate of a shareholder in the company at the time of the payment, or
·
 a reasonable person would conclude that the payment was made because the entity has been a shareholder or associate at some time.

By virtue of section 109ZD of the ITAA 1936 'associate' for the purposes of Division 7A of Part III of the ITAA 1936 has the meaning given by section 318 of the ITAA 1936. Under paragraph 318(1)(a) of the ITAA 1936 an associate of a natural person includes a relative of the natural person. Paragraph (b) of the definition of 'relative' found in subsection 6(1) of the ITAA 1936 includes the spouse of that person.

Under the definition of 'spouse' in subsection 6(1) of the ITAA 1936 a 'spouse' in relation to a person includes another person who, although not legally married to the person, lives with the person on a bona fide domestic basis as the husband or wife of the person.

Subsection 109C(2) of the ITAA 1936 provides that the amount of the dividend is the amount paid, subject to the private company's distributable surplus calculated under section 109Y of the ITAA 1936.

By virtue of paragraph 109C(3)(c) of the ITAA 1936 the definition of 'payment' in subsection 109C(3) of the ITAA 1936 includes a transfer of property to the entity.

Where the payment is by transfer of property, subsection 109C(4) of the ITAA 1936 provides that the amount of a payment is the amount that would have been paid for the transfer by parties dealing at arm's length less any consideration given by the transferee for the transfer.

In the circumstances here the taxpayer is the 'entity' for the purposes of subsection 109C(1) of the ITAA 1936. As E and the taxpayer are still legally married at the time of the transfer the taxpayer is the spouse of A. Therefore the taxpayer is an associate of E, who is a shareholder of the private company.

The transfer of the property is a payment for the purposes of section 109C of the ITAA 1936.

Therefore the private company's transfer of property to the taxpayer is a payment to an associate of a shareholder for the purposes of subsection 109C(1) of the ITAA 1936.

The amount of the payment by virtue of subsection 109C(4) of the ITAA 1936 is $500,000 as this is the amount that would have been paid for the transfer by parties dealing at arm's length.

Therefore subsection 109C(1) of the ITAA 1936 applies to treat the $500,000 payment as a dividend, subject to the private company's distributable surplus in the income year.

Note : If at the time of the private company's transfer of property, E and the taxpayer were no longer associates, subsection 109C(1) of the ITAA 36 would still apply where a reasonable person would conclude the payment was made because the entity (that is, the taxpayer) had been an associate at some time.

Date of decision: 14 May 2004

Year of income:Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   Division 7A
   Subdivision D
   subsection 6(1)
   section 109C
   subsection 109C(1)
   subsection 109C(2)
   subsection 109C(3)
   paragraph 109C(3)(c)
   subsection 109C(4)
   section 109Y
   section 109ZD
   paragraph 318(1)(a)

Family Law Act 1975
   section 79

Related ATO Interpretative Decisions
ATO ID 2003/256
ATO ID 2004/462

Keywords
Deemed dividends
Private companies
Shareholder payments

Siebel/TDMS Reference Number: 3941569

Business Line: Private Groups and High Wealth Individuals

Date of publication: 4 June 2004
Date reviewed: 16 May 2014

ISSN: 1445-2782

ATO ID 2004/461 (Withdrawn) history   Top  
   Date   Version 
   14 May 2004   Original statement   
 You are here ®  11 April 2017   Withdrawn   


 


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