Issue
Is a court order made under section 79 of Part VIII of the Family Law Act 1975 (FLA 1975) in relation to the parties to a marriage and which results in a private company making a payment (for the purposes of section 109C of the Income Tax Assessment Act 1936 (ITAA 1936)) to a party to that marriage an obligation of the private company to pay money to an entity for the purposes of section 109J of the ITAA 1936?
Decision
No. A court order made under section 79 of Part VIII of the FLA 1975 in relation to the parties to a marriage and which results in a private company making a payment (for the purposes of section 109C of the ITAA 1936) to a party to that marriage is not an obligation of the private company to pay money to an entity for the purposes of section 109J of the ITAA 1936.
Facts
A private company holds an investment property.
E, an individual is the sole shareholder and employee of the private company. E and their spouse (the taxpayer) are involved in proceedings in the Family Court.
The private company is not a party to the proceedings in the Family Court.
Pursuant to a court order under section 79 of Part VIII of the FLA 1975 made as a result of the proceedings in the Family Court the private company transfers the investment property to the taxpayer in the 2003-04 income year.
This transfer of property is a payment for the purposes of section 109C of the ITAA 1936 and would meet the requirements to be treated as a dividend under subsection 109C(1) of the ITAA 1936.
Reasons for Decision
Subdivision B of Part III of Division 7A of the ITAA 1936 deals with the circumstances under which certain private company payments will be treated as dividends.
In the circumstances here the transfer of property is a payment for the purposes of section 109C of the ITAA 1936 and would meet the requirements to be treated as a dividend for the purposes of subsection 109C(1) of the ITAA 1936.
However Subdivision D of Division 7A of Part III of the ITAA 1936 sets out rules about some payments which are not treated as dividends under subsection 109C(1) of the ITAA 1936. Section 109J of the ITAA 1936 in Subdivision D may be relevant to the circumstances here.
Section 109J of the ITAA 1936 provides that A private company is not taken under section 109C to pay a dividend because of the payment of an amount to the extent that the payment: (a) discharges an obligation of the private company to pay money to the entity; and (b) is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length.
The term 'obligation' is not expressly defined for the purposes of section 109J of the ITAA 1936 and therefore adopts its ordinary meaning. The Macquarie Dictionary 2003 rev. 3rd edn, The Macquarie Library Pty Ltd, NSW defines 'obligation' as follows: a binding requirement as to action; the binding power or force of a promise, law, duty, agreement, etc. ; a binding promise or the like.
Where there is a court order in relation to a party to a marriage with respect to the property of the party, for example under section 79 or section 74 of Part VIII (Property, Spousal Maintenance and Maintenance Agreements) of the FLA 1975, the property of the party is treated by the Family Court as including any property the party has an ability to unilaterally invest in or divest as controlling shareholder, trustee or otherwise ( In the Marriage of Harris (1991) F.L.C. 92-254).
An order under the FLA 1975 as a result of proceedings in the Family Court may therefore result in an entity who is not a party to the Court proceedings (for example, a company or trust) making a transfer of property under the terms of that court order.
However it is necessary to consider whether the court order under section 79 of the FLA 1975 creates an obligation on the private company, who was not a party to the proceedings, to pay money to the taxpayer.
There are two elements to paragraph 109J(a) of the ITAA 1936, both of which need to be met for section 109J of the ITAA 1936 to exclude a payment from the operation of section 109C of the ITAA 1936. These elements are: • the payment must discharge an obligation of the private company, and • that obligation must be to pay money to the entity.
Addressing first element, there is no obligation on the part of the private company to the taxpayer. This is because an order under section 79 of the FLA 1975, although it may seek action on the part of a third party, only 'binds' a party to the proceedings who is subject to the order: In the Marriage of Prince (1984) F.L.C. 91-501. In the circumstances here the private company was not a party to the proceedings and not subject to the order. Hence, there is no, 'binding requirement as to action ..etc' on the part of the private company that would constitute an obligation within the Macquarie Dictionary ordinary meaning of that word.
In terms of the second element, it is clear that the section 79 order made by the Family Court, if it were an 'obligation' on the private company, was not an obligation to 'pay money'. Rather, the order requires a transfer of property.
Therefore, the two elements required in paragraph 109J(a) of the ITAA 1936 are not satisfied. Accordingly section 109J of the ITAA 1936 does not prevent the operation of subsection 109C(1) of the ITAA 1936 to deem a dividend in respect of the transfer of property by the private company to the taxpayer.