All legislative references are to the Income Tax Assessment Act 1936 (ITAA 1936) unless specified otherwise.
For the purpose of this question, it is assumed that there is a payment to the shareholders from the asset revaluation reserve, as opposed to a loan by the company.
The payment from the company needs to be analysed to determine whether it is a dividend for taxation purposes.
Dividend
A dividend is defined in s 6 to include:
- any distribution made by the company to any of its shareholders, whether in money or other property; and
- any amount credited by the company to any of its shareholders as shareholders.
A dividend does not include:
- monies paid or credited by the company to a shareholder or any other property distributed by the company to shareholders, where the amount of the monies 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 (except where s 6(4) applies to disregard this provision, or the monies paid or credited or property distributed were for the redemption or cancellation of a redeemable preference share);
- certain monies paid or credited or property distributed by the company for the redemption or cancellation of a redeemable preference share, where the amount paid up and specified in the notice from the company is debited to the share capital account; or
- a reversionary bonus on a life assurance policy (ITAA 1936 s 6(1) definition of a dividend).
Where monies are drawn from an asset revaluation reserve, they will be treated as a dividend for taxation purposes. This is because the amount drawn will be a distribution made by the company to its shareholders. None of the exclusions from being a dividend will apply in the circumstances. Note that an amount debited to the asset revaluation reserve does not constitute a debit to the share capital of the company. Consequently, it will not be excluded from being a dividend under the outlined definition.
Based on the information provided, the payment is likely to be treated as a dividend for taxation purposes.
Assessability
The assessable income of a resident shareholder in a company (regardless of whether the company is a resident or a non-resident) includes:
- dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and
- all non-share dividends paid to the shareholder by the company (s 44(1)).
Whether or not a company has profits depends on commercially accepted accounting principles.
In QBE Insurance Group Ltd & Ors v Australian Securities Commission & Anor (1992) 10 ACLC 1,490, Lockhart J stated:
“The meaning of the word profits is for the courts to determine. But the identification of what in relation to the affairs of a particular company constitute its profits is determined by the courts with close regards to the views of the accountancy profession. The courts are influenced by professional accountancy bodies and men of business and the evidence of accountants is given great weight by the courts.”
Further, Taxation Ruling TR 2003/8 states as follows:
“In most cases, a company which distributes property to its shareholders and debits part of the value of that property to its share capital account would debit the remaining part to another account or reserve. Where that account or reserve does not represent share capital, it would, for subsection 44(1) purposes, represent profits derived by the company so that the amount debited to it would be included in the shareholder’s assessable income under that subsection. This is so irrespective of whether or not the account or reserve is termed a ‘profit and loss’ account. It could, for example, be an asset revaluation reserve…”
It must be further noted that for the purposes of the ITAA 1936, a dividend paid out of an amount other than profits is taken to be a dividend paid out of profits (s 44(1A).
Any amount drawn from a company will be treated as a dividend by the company to its shareholders, unless an exception in s 6 applies. However, this does not automatically mean that the amount will be subject to tax. [07.09.2012]
Q. Can a self-managed super fund (SMSF) lend money of the fund on commercial terms to a partnership where the partners are also fund members?
All legislative references are to the Superannuation Industry (Supervision) Act 1993 (SISA) unless specified otherwise.
Lending to a partnership
Except as permitted by the SISA, the trustee (or investment manager) of a regulated superannuation fund is prohibited from lending money of the fund or giving any other financial assistance using resources of the fund to a member or a relative of a member of the fund (SISA s 65).
The prohibition has two limbs – lending money and giving financial assistance (para 65(1)(a) and (b)).
The prohibition in s 65 applies to dealings with a member or a relative, rather than the wider concept of a related party.
While loans to related parties are permitted and are treated as in-house assets under Part 8 of the SISA, the lending of money or provision of financial assistance to a member or relative remains prohibited under s 65 (s 65(7)). This is to remove any doubt about the interaction of the Part 8 in-house asset provisions and the s 65 prohibition. It overrides the potential application of the in-house asset rules.
A loan includes the provision of credit or any other form of financial accommodation whether or not enforceable, or intended to be enforceable, by legal proceedings (SISA s 10(1)).
Giving financial assistance is not defined, but the expression under its ordinary meaning would cover transactions such as providing guarantees for private loans of members, charging fund assets for the benefit of members, the release of an obligation and the forgiveness of a debt.
A partnership does not have a separate legal identity; rather, it is two or more persons carrying on a business in common. A loan by a fund to a partnership made up of fund members would breach s 65, as the loan to the partnership is actually a loan to the members (ID 2003/711).
ATO ruling SMSFR 2008/1, which deals with the giving financial assistance limb in s 65, indicates that the Commissioner takes a very broad view of the scope of the s 65 prohibition. While SMSFR 2008/1 deals with the giving financial assistance limb, the ATO’s views may also be of general application to the first limb.
Among other things, the Commissioner states that:
- the expression ‘financial assistance’ extends beyond other kinds of disposition of money or property. It can take the form of the giving of a security, charge or guarantee or the taking on of an obligation or any other arrangement that, on an objective assessment of the purpose of the arrangement, is in substance a financial accommodation (para 7);
- the requirement in s 65(1)(b) that assistance must be given to a member of the fund or a relative of a member of the fund for paragraph 65(1)(b) does not limit the application to transactions directly between the SMSF and a member or relative of a member. Paragraph 65(1)(b) is also contravened if the SMSF enters into an arrangement whereby SMSF resources are used to give financial assistance to a member or a relative of a member through a third party or an interposed entity (para 10, 18);
- assistance is given to a member or a relative of a member if there is some benefit, aid or help given to that person. It is not necessary to determine the purpose for which the financial assistance is given. Paragraph 65(1)(b) will be contravened if financial assistance is given to a member or a relative of a member using the resources of the SMSF, irrespective of the purpose for which such assistance might be given or whether the member or member’s relative sought such assistance (para 51).
The prohibition in s 65 of SISA has the effect of overriding Part 8 in-house asset provisions. [09.09.2012]
The date given in the square brackets after each answer is the date on which the answer was sent out. The above information is based on CCH’s understanding of the law as at that date.
