Question:
Tax Office v. Treasury: dividends only out of profits
Answer:
Recent changes are outlined below:
July 1, 2022
- Loss carry back for eligible companies extended to cover 2023 income year.
- Professional firm profits diverted to the professional's spouse or other associates to be reviewed under new Tax Office guidance.
- Corporate collective investment vehicle legislative regime introduced.
- Temporary full expensing of depreciating assets extended to include 2023 income year.
- Depreciable assets of a company joining a tax consolidation group have tax costs setting rules modified for assets depreciated under temporary full expensing rules.
December 9, 2021
- Reduced Pandemic leave disaster payment of $750 per week made available through to 30 June 2022.
August 5, 2021
- COVID-19 Disaster Payments are non-assessable non-exempt income in 2021 income year and later. Payments phasing out as vaccination rates increase.
July 1, 2021
- New Investment Engagement Service launched for businesses planning significant new investments in Australia.
- Tax Office small business independent review service made permanent for businesses with turnover < $10m, for income tax, GST, exercise, luxury car tax, wine equalisation tax and fuel tax credits. Requested before amended assessment issued.
- Small business income tax offset for individuals increased to provide a reduction of 16% for a tax payable up to $1,000.
- Self-managed superannuation funds can now have six members, increased from four members previously.
July 1, 2021
- Some COVID -19 state and territory business grants received by small and medium enterprises are non-assessable, non-exempt income for 2021 and 2022 income years.
- Certain state, territory and local government financial support for individuals and businesses suffering COVID-19 impacts made exempt where businesses have turnover less than $50 million and only in eligible programs.
March 31, 2021
- JobKeeper payments scheme ended.
October 5, 2020
- Boosting apprenticeship commencements subsidy (up to 50% of apprentice's wages) is assessable income.
June 4, 2020
- Homebuilder grant for new home or substantial renovation construction is not subject to income tax.
April 1, 2020
- COVID-19 cash flow boost payments are not subject to income tax
Dividends can only be paid from profits according to a new draft ruling released by the Tax Office. This contradicts recent changes by Treasury to the Corporations Act.
For many, many decades, the law about dividends required that they could only be paid from profits that were retained by the company. This was prescribed in the Corporations Act and also a key aspect of company law, as defined by the Courts.
Recently, Treasury and the Parliament amended the relevant section of the Corporations Act to require that dividends could not be paid unless:
+ The excess of the company’s assets over its liabilities was sufficient;
+ The payment was fair and reasonable to the company’s shareholders as a whole; and
+ The dividend does not prejudice creditors.
The rule now states that assets and liabilities must be measured in accordance with the accounting standards.
The new Tax Office ruling confuses matters and indicates that a dividend inherently involves a distribution of profits and the new statute has not eliminated that meaning. Rather it acts as a prohibition on a dividend out of profits if that dividend would cause net assets to be negative.
According to the draft ruling, it is not possible to pay a dividend debited to share capital and that section 44 (1A) of the 36 Tax Act which deems a dividend to be paid out of profits for tax purposes to be ineffective.
According to the draft ruling, Treasury has an “alternative view” on interpretation of the law!For dividends paid from current year profits, the new ruling indicates financial statements in accordance with the accounting standards must be prepared in relation to the dividend and if current year profits are offset against prior accumulated losses, it is not possible to pay the dividend from profits.
Net assets must equal or exceed share capital (after the dividend) for a dividend to be paid from revaluation reserves.
Where a distribution fails to be a dividend (due to these complex new rules), the draft ruling indicates it may be treated as one of the three following taxation events:
+ CGT event G1 which writes down the cost base of the shares;
+ CGT event H2 which generally creates an undesirable unfranked dividend; and
+ An assessable, unfranked dividend.
What an unnecessary mess!
Draft TR2011/D8, s 254T of Corps Act, s 44, 6(1) of 36 Tax Act
