Dividends as special income of superannuation funds

Whether the Commissioner will exercise the discretion in subsection 273(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to determine that dividends received by the superannuation fund from the private company do not constitute special income.

The Commissioner will not exercise the discretion under subsection 273(2) (ITAA 1936). The dividends are special income of the superannuation fund.

The superannuation fund (the fund) acquires 10 shares of $1.00 each in a private company (the company) in October 1987. The par value of the shares is reduced to $0.50 in November 1987 and the fund's shareholding is increased to 20 shares. The fund's shareholding represents 9.8% of the total shareholding in the company.

The fund's two members, member A and member B (husband and wife) are also both trustees of the fund and shareholders of the company. Member A owns 62 shares (30.4% of the share holding) in the company and member B owns 20 shares (9.8% of the share holding). Member A is also a director of the company.

The company bought business assets for $900,000, the purchase of which was financed by borrowings, which were secured by a charge over a property owned by the shareholders other than the fund.

A franked dividend of $500 per share was paid during the year ended 30 June 1994. All shareholders received the same rate of dividend. A further dividend of $1,000 was paid during the year ended 30 June 1996 and was also paid to all shareholders at the same rate.

Subsection 273(2) (ITAA 1936) deals with dividends paid to a complying superannuation fund by a private company. Such dividends are classed as the special component of the fund's taxable income, and subject to tax at 47% under paragraph 26(b) of the Income Tax Rates Act 1986 , unless the Commissioner is of the opinion that it would be reasonable not to treat the dividend as special income after taking into consideration a number of factors.

The factors that the Commissioner must consider are listed at paragraphs 273(2)(a)-(f) (ITAA 1936), and have been further developed in case law. Paragraph 273(2)(f) (ITAA 1936) specifically allows the Commissioner to examine any other matters that the Commissioner considers to be relevant.

In this case, the following considerations support the Commissioner's decision not to exercise the discretion: • the dividends received by the fund are considered to be excessive relative to the amount paid for the shares (paragraph 273(2)(c) (ITAA 1936)); and • the level of shareholdings of the director of the private company (member A) is sufficiently high to raise the concern that the director may be in a position to significantly influence dividend payments (paragraph 273(2)(f) (ITAA 1936)). After all, as member A is a trustee of the fund and also owns shares individually, member A has effective control of 40% of the company's shareholding.

Consequently, the Commissioner will not exercise the discretion in subsection 273(2) (ITAA 1936) and therefore, dividend paid to the fund by the private company is special income of the fund.