What tax is paid on dividends
This publication provides you with the following level of protection:
This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953.
A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes.
If you rely on this ruling, we must apply the law to you in the way set out in the ruling (unless we are satisfied that the ruling is incorrect and disadvantages you, in which case we may apply the law in a way that is more favourable for you - provided we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.
[ Note: This is a consolidated version of this document. Refer to the ATO Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.]
What this Ruling is about
1. This Ruling is about the taxation of dividends paid in compliance with section 254T of the Corporations Act 2001 (the Corporations Act) from 28 June 2010. This includes the definition of a dividend for taxation purposes under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), the assessment of dividends under section 44 of the ITAA 1936, the franking of dividends under Part 3-6 of the Income Tax Assessment Act 1997 (ITAA 1997), and the circumstances in which a dividend will be paid out of profits for taxation purposes. This Ruling is not about non-share dividends or returns paid on non-equity shares.
2. For the purposes of this Ruling the following key terms are used:
'Accounts' means the financial reports and statements of a company properly kept in accordance with the Corporations Act and prepared in accordance with Australian Accounting Standards from the company's financial records, 1 and includes interim and half yearly financial reports and statements prepared during a financial year that meet those requirements. For the purposes of this Ruling, accounts do not include general ledger accounts or journal entries.
'Company' means a company incorporated under the Corporations Act that is limited by shares.
'Dividend' means a dividend as defined in subsection 6(1) of the ITAA 1936, which includes any distribution made by a company to any of its shareholders, whether in money or other property, and any amount credited by a company to its shareholders as shareholders; but does not include 2 moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company. The taxation law definition is wider than the usual or company law meaning of dividend, and can include illegal distributions and distributions of money or property that do not satisfy section 254T of the Corporations Act.
'Frankable distribution' means a distribution under section 202-40 of the ITAA 1997 that is not an unfrankable distribution under section 202-45 of the ITAA 1997, among other things, and, in particular, a distribution that is not sourced, directly or indirectly, from a company's share capital account under paragraph 202-45(e) of the ITAA 1997.
'Net assets' means the amount by which a company's assets exceed its liabilities, calculated in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year or company concerned). 3
'Profits' means profits recognised in a company's accounts which are available for distribution by way of dividend. Profits include: (i) revenue profits 4 from ordinary business and trading activities, dividends received from other companies, and realised capital profits recognised in the statement of financial performance in a company's accounts; and (ii) unrealised capital profits of a permanent character 5 recognised in a company's accounts. Note that in this Ruling, dividends sourced from revenue profits are contrasted to dividends sourced from unrealised capital profits of a permanent character and are treated differently in terms of a company's ability to frank a dividend, having regard to the company's net asset position compared to its share capital. Profits do not include amounts of income or loss included in the other comprehensive income statement 6 irrespective of the fact that those amounts contribute to the retained earnings/accumulated loss account in the statement of financial position in a company's accounts. 7
'Share capital account' means share capital account as defined in section 975-300 of the ITAA 1997 which is an account the company keeps of its share capital, 8 or any other account (whether or not called a share capital account) that satisfies the following conditions: (i) the account was created on or after 1 July 1998, and (ii) the first amount credited to the account was an amount of share capital. Two or more
accounts together may constitute the share capital account. 9
3. Paragraph 202-45(e) of the ITAA 1997 does not prevent a company from franking a dividend paid to its shareholders that is paid out of profits recognised in the company's accounts and available for distribution, and is paid in accordance with the company's constitution and without breaching section 254T or Part 2J.1 of the Corporations Act, merely because the company has unrecouped accounting losses accumulated in prior years or has lost part of its share capital. 10 That dividend will be assessable income of its resident shareholders under paragraph 44(1)(a) of the ITAA 1936. 11
4. Paragraph 202-45(e) of the ITAA 1997 does not prevent a company from franking a dividend paid to its shareholders out of an unrealised capital profit of a permanent character recognised in its accounts and available for distribution, provided that the company's net assets exceed its share capital by at least the amount of the dividend, 12 and the dividend is paid in accordance with the company's constitution and without breaching section 254T or Part 2J.1 of the Corporations Act. That dividend will be assessable income of its resident shareholders under paragraph 44(1)(a) of the ITAA 1936. 13
5. Paragraph 202-45(e) of the ITAA 1997 prevents the franking of a distribution paid by a company to its shareholders where that distribution is a reduction or return of share capital, including an unauthorised reduction or return of share capital that does not comply with section 254T or Part 2J.1 of the Corporations Act, even if it is labelled as a dividend. That distribution will be taxed as a capital gains tax (CGT) event under the CGT provisions in Part 3-1 of the ITAA 1997, or will be taxed as an assessable unfranked dividend, depending on the particular facts and circumstances of the payment.
6. Whether profits are available for distribution as a dividend by a company or not, and have been distributed as a dividend in compliance with the law, or not, depends on the operation of the provisions of the Corporations Act, on the constitution of the distributing company, and on the acts or omissions of its directors and members, and not on the terms of the ITAA 1936 or the ITAA 1997. No ruling is made in respect of these matters. However, some practical observations appear in the Explanation at paragraphs 20 to 26 and 44 to 54 of this Ruling, and in the Examples at paragraphs 8 to 16 and Further Examples at paragraphs 73 to 86 of this Ruling.
Date of effect
7. This Ruling applies from 28 June 2010. However, the Ruling will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10).
Commissioner of Taxation
27 June 2012
Appendix 1 - Explanation
This Appendix is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.
Examples of dividends paid out of profits
8. The following examples (and those set out in the Further Examples at paragraphs 73 to 86 of this Ruling) are intended to illustrate the taxation principles set out in the Ruling section at paragraphs 3 to 6 of this Ruling and the issues discussed in the Explanation at paragraphs 8 to 72 of this Ruling. They do not appear in the Ruling section because they reflect the operation of the Corporations Act. For the purposes of the examples it is assumed that the requirements of the Corporations Act, 14 the Australian Accounting Standards and the company's constitution have been complied with. It is also assumed that the company is a going concern and the company's accounts have entries preceding those represented here.
Example 1: interim dividend 15 determined and final year dividend declared, 16 and both paid out of profits netted off against accumulated losses
9. The accounts of Youyang Ltd disclose an accumulated loss position of ($100) as at 30 June 2011. Youyang Ltd's half year reporting date is 31 December. 17 For the six months ending 31 December 2011, Youyang Ltd makes $25 of profits (current period profits). On 29 February 2012, Youyang Ltd prepares and lodges an interim financial report with the Australian Stock Exchange (ASX) pursuant to Appendix 4D of the ASX Listing rules 4.1 to 4.2C. That report is in the same form as the company's statutory half yearly accounts also lodged with the Australian Securities and Investments Commission (ASIC). 18
10. On 29 February 2012, Youyang Ltd makes a market announcement that it will distribute a dividend from the $25 profit.
11. The interim financial report/half yearly statutory accounts of Youyang Ltd 19 show $65 of net accumulated losses [as it has offset the $100 accumulated loss with the $25 of profit for the six month period ending 31 December 2011 and it also has $10 of other comprehensive income (disclosed in 'Other Reserves' in the Balance Sheet), which for the purposes of this Ruling does not constitute 'profit']. Youyang Ltd's interim accounts are as follows:
30 June 2011 - full year accountsSource: law.ato.gov.au