Issue
Is a payment to a shareholder of a private company which is taken to be a dividend under section 109C of the Income Tax Assessment Act 1936 (ITAA 1936), and reduced to nil as the private company has nil distributable surplus in the year the payment is made, treated as a dividend in a future year if there is a distributable surplus in that future year?
Decision
No. If the amount taken to be a dividend is reduced to nil under section 109C of the ITAA 1936 because there is nil distributable surplus, the payment will not be treated as a dividend in a future year in which there is a distributable surplus because the payment was not made in that future year.
Facts
The private company made a payment to the taxpayer during the 2001-02 income year.
The taxpayer was a shareholder in the private company at the time the payment was made.
The payment was not a loan as there was no obligation to repay the amount.
The distributable surplus of the private company for the 2001-02 income year was nil.
The private company had a distributable surplus in the 2002-03 income year.
Reasons for Decision
Paragraph 109C(1)(a) of the ITAA 1936 provides that a private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and the payment is made when the entity is a shareholder or an associate of such a shareholder.
Entity is defined in section 109ZD of the ITAA 1936 and has the meaning given by section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997). An entity includes an individual.
Subdivision D of Division 7A of the ITAA 1936 sets out payments and loans that are not treated as dividends. The exclusions in Subdivision D do not apply to the taxpayer in this case.
Subsection 109C(2) of the ITAA 1936 provides that the amount of the dividend is taken to equal the amount paid, subject to section 109Y of the ITAA 1936.
Subsection 109Y(1) of the ITAA 1936 limits the dividends that a private company is taken to pay at the end of the year of income under Division 7A of the ITAA 1936 to the company's distributable surplus for that year.
The distributable surplus is worked out using the formula in subsection 109Y(2) of the ITAA 1936.
The payment from the private company to the taxpayer will be taken to be a dividend and reduced to nil in the 2001-02 income year, as the private company had nil distributable surplus.
As subsection 109C(1) of the ITAA 1936 states that the dividend arises at the end of the year in which the private company pays the amount to the shareholder, the payment will not be taken to be a dividend in a future year in which there is a distributable surplus.
Therefore, the payment from the private company will not be taken to be a dividend in the 2002-03 income year or any future year in which there is a distributable surplus.