This Ruling, released on Wed 27.6.2012, is about the taxation of dividends paid in compliance with s 254T of the Corporations Act 2001 from 28 June 2010.
The Corporations Amendment (Corporate Reporting Reform) Act 2010 changed the prohibitions in s 254T of the Corporations Act governing the circumstances in which a company can pay a dividend from a “profits test” to a 3-part “balance sheet test”, with effect from 28 June 2010.
The Ruling states that para 202-45(e) of the ITAA 1997 does not prevent a company from franking a dividend paid to its shareholders:
- that is paid out of profits recognised in the company’s accounts and available for distribution, and is paid in accordance with the company’s constitution and without breaching s 254T or Pt 2J.1 of the Corporations Act, merely because the company has unrecouped accounting losses accumulated in prior years or has lost part of its share capital;
- out of an unrealised capital profit of a permanent character recognised in its accounts and available for distribution, provided the company’s net assets exceed its share capital by at least the amount of the dividend, and the dividend is paid in accordance with the company’s constitution and without breaching s 254T or Pt 2J.1 of the Corporations Act.
However, the ATO says para 202-45(e) does prevent the franking of a distribution paid by a company to its shareholders where that distribution is a reduction or return of share capital, including an unauthorised reduction or return of share capital that does not comply with s 254T or Pt 2J.1 of the Corporations Act, even if it is labeled as a dividend.
The Ruling was previously released in December 2011 as Draft TR 2011/D8.
DATE OF EFFECT: The Ruling applies from 28 June 2010.
[FJM Note: s202-45(e) simply prevents franking any distribution from the ‘share capital account’.
Further FJM Note: Though the 2010 Corps Act change to s254T was meant to get rid of the rule that dividends must be paid out of profits, it appears that it hasn’t.]
[LTN 122, 27/6]