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Will a transfer from a company's share capital account to reflect the anticipated loss on the planned sale of an asset be an 'excluded transfer' for the purposes of subsection 46J(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. Where a company makes a transfer out of its share capital account to reflect the anticipated loss on the planned sale of an asset, the transfer will not be an 'excluded transfer' for the purposes of subsection 46J(2) of the ITAA 1936.

A company plans to sell an asset and expects to realise a loss upon that sale. It revalues the asset and debits the reduction in value against its Retained Profits account. On the expectation of this loss being realised, the company transfers an amount from its share capital account to its Retained Profits account to reflect the value that it expects will no longer be represented by assets.

Section 46M of the ITAA 1936 operates to deny frankability to dividends to the extent that they are: • debited from a company's disqualifying account, or • debited from a company's non-disqualifying account to the extent that there is a debit to its notional disqualifying account.

The company's share capital account is a 'disqualifying account' (subsection 46H(1) of the ITAA 1936). A 'non-disqualifying account' is any account that is not a disqualifying account (subsection 46H(3) of the ITAA 1936). The company's 'notional disqualifying account' is credited if the company has transferred money from its share capital account into a non-disqualifying account (subsection 46I(3) of the ITAA 1936). As a result, it will have a surplus in its notional disqualifying account.

When the company pays a dividend from a non-disqualifying account and the notional disqualifying account was in surplus immediately before that payment, there will be a debit to its notional disqualifying account (subsection 46I(5) of the ITAA 1936). To the extent that the dividend is debited from the company's notional disqualifying account, it will not be frankable (subsections 46M(3) and 46M(4) of the ITAA 1936).

Section 46M of the ITAA 1936 does not have this effect, however, if the transfer from the share capital account is an 'excluded transfer' (subsection 46I(3) of the ITAA 1936). In this event, the notional disqualifying account will not be credited by the transfer. A transfer will be an excluded transfer where the disqualifying account is a share capital account and the transfer 'gives effect to a reduction in paid-up share capital that has been permanently lost or has permanently ceased to be represented by assets' (subsection 46J(2) of the ITAA 1936).

A 'permanent loss' is one where the loss has been realised and there is no presently foreseeable prospect of its recovery ( Re Jupiter House Investments (Cambridge) Ltd [1985] 1 WLR 975 per Harman J at 979).

In this instance the company has not sold the asset and has not realised a loss. It is foreseeable that the anticipated loss may not be realised. For example, the company may elect not to sell the asset; negotiations for its sale may fall through; or the company may receive a better price than expected. Merely anticipating that a loss will be realised and revaluing an asset to an estimated recoverable amount does not constitute a permanent loss. Accordingly, the transfer is not an excluded transfer for the purposes of subsection 46J(2) of the ITAA 1936.