Issue
Whether a company's dividend reinvestment plan results in a 'tainted' share capital account in accordance with section 160ARDM (Income Tax Assessment Act 1936 (ITAA 1936).
Decision
No. The company's dividend reinvestment plan does not result in a 'tainted' share capital account in accordance with section 160ARDM (ITAA 1936).
Facts
An Australian resident public company maintains a dividend reinvestment plan whereby shareholders may elect to apply the amount of a dividend entitlement to subscribe for new shares in the company.
Under the dividend reinvestment plan the amount of dividend payable from retained earnings is credited to share capital account, as a result of a short cut for two entries. The resulting entry is: DR Retained Earnings CR Share Capital Account
Reasons For Decision
'Tainted' share capital is defined in subsection 160ARDM(1) (ITAA 1936). Under this provision a company's share capital account is 'tainted' if the company transfers an amount to its share capital account from any of its other accounts.
Although on face value the condensed accounting entry appears to result in amounts being transferred from 'other accounts' (retained earnings) to the share capital account, this does not result in 'tainted' share capital account. Dividend reinvestment plans involve a constructive payment of dividends by the company to the shareholder to acquire new shares in the company. In this case, however, there is no direct transfer of amounts from retained earnings to share capital account. There is, in fact, a subscription of new capital in the company by shareholders who participate in the dividend reinvestment plan (see CGT Determination No.55). Therefore, the share capital account will not be 'tainted 'as a result of the company's dividend reinvestment plan.