Draft Taxation Determination

TD 94/D110

Income tax: capital gains: does the exclusion of capital losses in subparagraph 47(1A)(b)(ii) of the Income Tax Assessment Act 1936 (the Act) affect the application of the Archer Brothers principle*?

• Please note that the PDF version is the authorised version of this draft ruling.
  This document has been finalised by TD 95/11.

FOI status:

draft only - for comment

Preamble

1. No. If a liquidator makes a distribution in accordance with the Archer Brothers principle, subsections 47(1A) and 47(1) of the Act can only apply to a distribution appropriated by the liquidator from 'income' derived by the company.

2. We recognise, for example, that where a capital loss results in a loss of distributable funds, there may be insufficient funds to distribute a notional capital gain calculated under paragraph 47(1A)(b). In this case, the exclusion of capital losses in subparagraph 47(1A)(b)(ii) may have no practical effect because the subsection 47(1) deemed dividend cannot exceed the amount of distributable funds.

3. The wording of subsection 47(1) limits the deeming of dividends to amounts actually distributed by the liquidator. Thus, if the recalculated subsection 47(1A) amount exceeds the distributable funds, the excess cannot be deemed a dividend under subsection 47(1).

*

The Archer Brothers principle is discussed in TD94/D109.

Examples:

Three possible sets of company accounts for XYZ Ltd (in liquidation) are illustrated in column one of the following table. Assume in relation to each alternative set of accounts that Ms Jones, the appointed liquidator, makes distributions in accordance with the Archer Brothers principle. The subsection 47(1) implications of those distributions are shown in column two. If distributions are not made in accordance with the Archer Brothers principle, the subsection 47(1) implications are shown in column three.

In the table:

(i)

it is assumed that the liquidator distributes all the available funds as one final distribution; and

(ii)

the following abbreviations are used:

PUC	the paid-up capital of XYZ Ltd
CG/CL	a capital gain (loss) made by the company on the disposal of an asset acquired after 19 September 1985 (after allowing for tax where relevant but, in the case of gains, ignoring indexation)
Pre CG	a non-assessable capital gain on the disposal of an asset acquired before 20 September 1985
DF	distributable funds.

Items shown in the Company Accounts

Appropriations made from specific funds/profits - (applying the Archer Bros principle)

No specific appropriations made

If the liquidator appropriates $1,000 from PUC, this is not a deemed dividend under

subsection 47(1). Although the notional subsection 47(1A) amount is $100, there is only $25 DF remaining and the deemed s47(1) dividend is limited to this amount.

The notional subsection 47(1A) amount is $100. The deemed dividend under subsection 47(1) is $100, with the balance of $925 treated as a non-dividend return of PUC.

If the liquidator appropriates $1,000 from PUC and $100 from Pre CG, these amounts will not be deemed dividends under subsection 47(1). Again, because of a shortfall in DF, the deemed dividend is limited to $25.

Again, the notional subsection 47(1A) amount is $100. The deemed dividend under subsection 47(1) is $100. The balance of $1,025 must relate to the Pre CG and PUC and is not a deemed dividend.

If the liquidator appropriates the $1,000 from PUC, there is no deemed subsection 47(1) dividend in this case.

The notional subsection 47(1A) amount is $3,000. The deemed dividend under subsection 47(1) is $1,000.

Commissioner of Taxation
8 December 1994

References

ATO references:
NO NAT 94/8634-8

Related Rulings/Determinations:

TD 94/D109

Subject References:
capital gains
capital losses
distributions
dividends
liquidation
shares

Legislative References:
ITAA 47(1)
ITAA 47(1A)
ITAA 47(1A)(b)
ITAA 47(1A)(b)(ii)

Case References:
Archer Brothers Pty Ltd (in vol liq) v. FC of T
(1952-1953) 90 CLR 140
10 ATD 192