ATO Interpretative Decision

ATO ID 2003/256

Income Tax

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Issue

Is the transfer of property from a private company to a relative of a shareholder a payment which is taken to be a dividend under subsection 109C(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. The transfer of property from a private company to a relative of a shareholder is a payment which is taken to be a dividend under subsection 109C(1) of the ITAA 1936.

Facts

The taxpayer is a relative of the sole shareholder of a private company.

The private company owned the property (which is land), and transferred the legal title of the property to the taxpayer and others, as tenants in common.

The taxpayer paid no consideration for the transfer.

Reasons for Decision

Under subsection 109C(1) of the ITAA 1936 an amount paid by a private company to a shareholder in a private company, or an associate of such a shareholder, during a year of income is taken to be a dividend.

Section 109ZD of the ITAA 1936 states that 'associate' has the meaning given by section 318 of the ITAA 1936. An 'associate' of a natural person (other than in the capacity of trustee) includes a relative of the natural person (paragraph 318(1)(a)).

The taxpayer is a relative of the shareholder, and therefore is an associate of the shareholder.

Subsection 109C(3) of the ITAA 1936 defines a 'payment' to include a transfer of property to the shareholder of the private company, or an associate of such a shareholder.

Pursuant to subsection 109C(4) of the ITAA 1936, the amount of a payment consisting of a transfer of property is the amount that would have been paid for the transfer by the private company and the taxpayer if they had been dealing at arm's length, less any consideration given by the taxpayer for the transfer.

'Property' is not defined for the purposes of Division 7A of the ITAA 1936 (distributions to entities connected with a private company) but the term can be used to describe 'every type of right, (that is, a claim recognised by law), interest or thing which is legally capable of ownership and which has a value'; (Butterworths Australian Legal Dictionary, 1998, 2nd edn. Nygh, P and Butt, P). The taxpayer's legal title in the land constitutes property.

Subdivision D of Division 7A of the ITAA 1936 sets out rules about payments and loans that are not treated as dividends. However, the exclusions in Subdivision D do not prevent the private company from being taken to pay a dividend to the taxpayer in this case.

As the private company has transferred property to the taxpayer, who is an associate of the shareholder, the payment is taken to be a dividend under subsection 109C(1) of the ITAA 1936.

Under subsection 109C(2) of the ITAA 1936, the dividend is taken to equal the amount paid, subject to section 109Y of the ITAA 1936. Section 109Y limits the total amount of dividends taken to have been paid by the private company under Division 7A to the company's distributable surplus as at the end of the year of income.

The dividend is taken to be paid to the taxpayer as a shareholder in the private company and out of profits of the company (section 109Z of the ITAA 1936). Therefore, the dividend will be assessable to the taxpayer under subsection 44(1) of the ITAA 1936.

Year of income:  Year ended 30 June 2003 Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   Division 7A
   Subdivision D
   subsection 44(1)
   section 109C
   section 109Y
   section 109Z
   section 109ZD
   paragraph 318(1)(a)

Other References:
Butterworths Australian Legal Dictionary, 1998, 2nd edn. Nygh, P and Butt, P

Keywords
Associated persons
Deemed dividends
Dividend income
Shareholders

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  24 April 2003

ISSN: 1445-2782