Part IX taxation of superannuation entities: Special income of superannuation funds

Is the dividend income paid to a superannuation fund by a private company 'special income' of the fund within the meaning of section 273 of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The Commissioner of Taxation (Commissioner) exercised the discretion available in subsection 273(2) of the ITAA 1936 to determine that the dividends did not constitute 'special income' of the company.

A superannuation fund holds shares in a private company. The private company is the holding company of another private company which deals in franchises. The trustee of the superannuation fund is a franchisee (through a family trust) of the franchise operation of the subsidiary company.

Neither the trustee of the fund or the members of the fund are directors or shareholders of the private holding company or of the subsidiary company.

The amount of dividends paid to the superannuation fund was the same as the amount paid to other shareholders of the private company.

The Commissioner's discretion under subsection 273(2) of the ITAA 1936 is exercised to determine whether the dividends paid to a superannuation fund from a private company constitute 'special income' of the fund. Income is determined to be 'special income' if the parties to the transaction are not dealing with each other at arm's length and that income is greater than the income that might have been expected to be derived by the entity from the transaction if those parties had been dealing with each other at arm's length.

The factors taken into consideration in reaching the conclusion that the dividends did not constitute 'special income' included the following: • the shares were acquired at approximately the market value at the time of the acquisition. Therefore, the acquisition of the shares was an arm's length transaction; • the dividends paid were identical for all shares issued in the company; • there were no shares issued by the company in satisfaction of the dividends; and • neither the trustees or members of the fund have any direct relationship with the company in which the fund holds the shares.