Issue
Is the dividend income paid by a private company to the superannuation fund 'special income' of the fund within the meaning of subsection 273(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. The dividend paid by the private company to the superannuation fund is 'special income' of the fund. The Commissioner of Taxation (Commissioner) is not of the opinion that it would be reasonable not to treat the dividend as 'special income' having regard to various factors as detailed in subsection 273(2) of the ITAA 1936.
Facts
A superannuation fund held 70,000 fully paid $1 ordinary shares in a private company. All shares issued were ordinary class shares. These shares represented 36.36% of the issued shares of the company.
The private company is a property investor and its only source of income in all years since its inception was rental income from a property leased to a company operating as a child care provider.
The superannuation fund received total dividends of $3,636 from the private company during the year of income.
The sole member of the superannuation fund was also a director of the corporate trustee of the fund as well as a director of the private company.
Reasons for Decision
Subsection 273(2) of the ITAA 1936 provides that a dividend paid to a superannuation fund from a private company will be 'special income' to the superannuation fund unless the Commissioner is of the opinion that it would be reasonable not to treat the dividend as 'special income' of the fund. In exercising this discretion, the Commissioner is to have regard to the matters set out in paragraphs (a) to (f) of subsection 273(2) of the ITAA 1936.
Where income is found to be 'special income' within the terms of subsection 273(2) of the ITAA 1936 the income is not subject to the concessional rate of tax but is taxed at the highest marginal tax rate.
The Commissioner did not exercise the discretion available under subsection 273(2) of the ITAA 1936 for the following reasons: • The dividend was paid at the same rate on all the shares issued in the private company and the rate of the dividend paid did not appear to be excessive given the amount paid to acquire the shares. However, the dividend may be considered excessive given that the private company had substantial accumulated losses from previous years. (paragraph 273(2)(c) and 273(2)(d) of the ITAA 1936); • The private company had two sets of statements - one for taxation purposes and the other for accounting purposes. The taxation statements showed that the company had never made a profit and depreciation was $19,643. The accounting statements showed that the private company had depreciation at $9,850. There was no justification for this difference in the statements. This disparity was an indicator that the Commissioner's discretion should not be exercised (paragraph 273(2)(f) of the ITAA 1936); • The member of the superannuation fund was a director of the private company and indirectly (via the superannuation fund) controlled 36.36% shares of the private company. As a result of this directorship, the superannuation fund member was in a position to significantly influence the decisions of the private company including the timing and amount of the payment of dividends.
In Case M63 80 ATC 440, the Board of Review considered that a share holding by a superannuation fund of 26.63% was excessive. Levels of share holding by superannuation funds in private companies that have previously been considered excessive range from 17% (Case B15 70 ATC 61) to 26.63% (Case M63 80 ATC 440).
The superannuation fund held 36.36% in the private company. Although this amount, in itself, was not sufficient to withhold the Commissioner's discretion, when viewed in light of other factors considered above, it was an unfavourable indicator.
As there were a number of indicators that were detrimental to the exercise of the Commissioner's discretion, the Commissioner's discretion under subsection 273(2) of the ITAA 1936 was not exercised. The dividends were accordingly treated as 'special income' of the superannuation fund and taxed at the highest marginal tax rate.