Income tax: capital gains: does the exclusion of capital losses in subparagraph 47(1A)(b)(ii) of the Income Tax Assessment Act 1936 (the Act) affect the application of the Archer Brothers principle*?

No. If a liquidator makes a distribution in accordance with the Archer Brothers principle, subsections 47(1A) and 47(1) of the Act can only apply to a distribution appropriated by the liquidator from 'income' derived by the company.

We recognise, for example, that where a capital loss results in a loss of distributable funds, there may be insufficient funds to distribute a notional capital gain calculated under paragraph 47(1A)(b). In this case, the exclusion of capital losses in subparagraph 47(1A)(b)(ii) may have no practical effect because the subsection 47(1) deemed dividend cannot exceed the amount of distributable funds.

The wording of subsection 47(1) limits the deeming of dividends to amounts actually distributed by the liquidator. Thus, if the recalculated subsection 47(1A) amount exceeds the distributable funds, the excess cannot be deemed a dividend under subsection 47(1). * The Archer Brothers principle is discussed in TD94/D109.