Under what authority are dividends included in assessable income?Dividends
Under what authority are dividends included in assessable income?
Some payments received from a company that are NOT dividends
Share Premium Reserves and the Curran Scheme
Under what authority are dividends included in assessable income?
If you think about it, dividends pass all the
tests that differentiate income receipts from non-income receipts. However, they are included in assessable income by a specific provision of the 1936 Income Tax Assessment Act - section 44.
Why?
Because not every payment received by a shareholder from a company will be included in assessable income. Section 44 is rather particular about what can be included in assessable income.
And before section 44 even gets to do its work, the receipt must come within the
definition of a dividend - more on that shortly.
Under section 44 (1) of the Act, the
assessable income of a resident shareholder shall include dividends paid to him by the company out of profits derived from any source.
The case of a
non-resident is more complicated - under section 128 the dividend income is excluded if, generally speaking, withholding tax applies.If withholding tax does not apply
, the non-resident is only assessable on dividends paid out of profits derived from sources in Australia....
So to simplify things we will concentrate on the case of a
resident taxpayerSection 44 includes a dividend paid to a shareholder in assessable income, but
when is a dividend 'paid' by to a shareholder?The
declaration of a dividend creates a debt owing to the shareholders, but that does not amount to a payment of the dividend.The posting of a dividend cheque or money discharges that debt. (So does crediting the amount or distributing it to or for the shareholder)
So we can so a
dividend is paid to the shareholder, and so for purposes ofsection 44, it is derived by the taxpayer, in the year in which the cheque is posted. ( refer CCH Master Tax Guide para 10-570)
In other words, a dividend is credited
so as to have been paid provided
a dividend has been declared
profits are appropriated to its payment and
the shareholder's account with the company is credited in such a way that it may be drawn upon as and when the shareholder desires
Dividends must be paid out of profits to be assessable under section 44
Does this mean that only revenue profits (as opposed to capital profits) are included in assessable income?
NO!
Any increase in the company's assets, including an increase resulting from a gift is a profit (Slater Holdings Ltd. (No. 2)) - refer CCH Master Tax Guide para 10-580.
Some of the different ways in which dividends can be paid....
Dividend is defined in section 6 of the Assessment Act as including...
(a) any distribution made by a company to its shareholders, whether in the form of money or property
(b) any amount credited to its shareholders because they are shareholders
(c) the paid up value of shares issued to shareholders to the extent those shares represent profits derived by the company which have been capitalised (treated as capital rather than income).
So if a shareholder gets anything from a company, with only a couple of exceptions, it will fall within the definition of a dividend.
(c) of the section 6 definition of dividend includes paid up value of shares issued to shareholders to the extent those shares represent capitalised profits
Payments excluded from the definition of dividends
The exceptions to the rule are found in (c),(d) & (f) of the definition.
. The definition in section 6 excludes 3 types of distribution.
These are...
(d) payments from share premium accounts (which are not part of tax avoidance arrangement)
(e) if a share is redeemed or cancelled, the money, etc, received by the shareholder that is equal to the paid up value of the share is not deemed to be a dividend.
If the share is not cancelled or redeemed, but has its paid up value reduced
after the payment to the taxpayer from the share premium account a different amount is excluded from the definition of dividend.|
Amount not deemed to be a dividend = |
Money, etc, received by the shareholder less |
amount by which the original paid up value exceeds the new paid up value |
If the shareholder receives more than the paid up value of the share, then that excess IS deemed to be a dividend.
(f) reversionary bonus on a life insurance policy
The exclusions (d) and (e) require a knowledge of how companies work, so you can skip the next few paragraphs if all you want to know is how to return a dividend...
Share Premium Reserves and the Curran Scheme....
Paragraph (d) of the definition of dividend (or more precisely, non-dividends) talks about
money or property which has been credited to shareholders, which has been debited against the company's SHARE PREMIUM ACCOUNT.
So what is a share premium account?
As you are probably aware, the shares of a company are often worth more than their 'par' value - the value at which they were issued.
For example, a company may have shares which were issued at $1 which are traded on the stock exchange for a lot more than $1.
If the company wishes to raise more funds, it can issue more $1 shares, but charge a premium, for each share.
So the purchaser may buy a $1 share but have to pay $1.50 for each such share.
The 50 cent premium must be credited to a share premium account. If a distribution is made from this account, (the account is debited), that distribution will NOT be considered to be a dividend under the section 6 definition.
Why?
Because it has not been made out of profits derived by the company.
There is an exception to this rule, and it is set out in subsections 4 and 5 of the definition in section 6. It deems an amount distributed to a shareholder from a share premium account to be a dividend, where the company issues a share at a premium then distributes money or property from a share premium account to shareholders,
'as part of an agreement or arrangement'. What kind of arrangement? Arrangements which, in the words of the Treasurer at the time these subsections were introduced, 'are arrangements for exploiting the exemption from tax of distributions out of share premium accounts'.
In other words, where share premium accounts are created as part of scheme for making tax free distribution of money or property to shareholders.
You may be aware that such distributions from share premium accounts were the method used in the Curran tax avoidance schemes, which were held to be a valid exercise of the provisions of the Income Tax Assessment Act, in Curran' case (CCH Master Tax Guide para 31-000). That decision was subsequently overturned by the High Court in John's case (see para 31-000).
The Curran scheme also relied for its efficacy on a now repealed section, (section 44(2)) which excluded from assessable income of a shareholder dividends
paid out of profits arising from the sale or revaluation of assets not acquired by the company for resale at profit or ...
from the issue of a convertible note
where the dividend was satisfied by the issue of non-redeemable shares.
refer (d) of the definition of dividend in section 6
Answer this question….
Par value of share = $1.
Shareholder receives $10 as part of reduction in capital of the company.
How much of the $10 is is included in income as a dividend?
(d) of the section 6 definition of dividend deems the excess over the par value to be a dividend - the par value is merely a return of capital
Many companies offer shareholders the opportunity to take their dividends in the form of new shares - they are commonly referred to as dividend reinvestment plans. The amount of dividend 'foregone' as the cost of the shares would still be included as dividends in the income of the taxpayer.
The Commissioner has issued a ruling (Ruling 2603) on 'scrip dividends', which is the name given to dividends declared by a company which are then applied to pay up the par value and a PREMIUM attaching to an allotment of shares, WITHOUT the consent being required from the shareholders.
Any amount of premium so charged does NOT amount to a dividend.
Payment of such premiums to a pre existing share premium account will result in that account ceasing to be a share premium account.
Refer CCH Master Tax Guide para 10-540.
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