This Draft Ruling, released on Wed 13.11.2013, outlines the tax effect under s 44 of the ITAA 1936 and Div 7A of Pt III of the ITAA 1936 of private companies paying money or transferring property in satisfaction of Family Court orders in matrimonial property proceedings under s 79 of the Family Law Act 1975.
Broadly, the Draft states that where an order is made under s 79 of the Family Law Act that requires a private company or a party to the matrimonial proceedings to cause the private family to pay money or transfer property to a party to the matrimonial proceedings who is:
- A shareholder of the private company – the payment of money or transfer of property in satisfaction of that order is generally an ordinary dividend and is assessable under s 44 of the Income Tax Assessment Act 1936 (‘ITAA 1936’).
- An associate of a shareholder of the private company – the payment of money or transfer of property in satisfaction of that order is a payment for the purposes of s 109C(3) of the ITAA 1936 [and thus a deemed dividend].
The Draft contains 8 examples to illustrate various scenarios of payments or property transfers to shareholders or associates of shareholders of private companies.
In addition, it states that when the final Ruling is issued, ATO ID 2004/462 (Div 7A: section 109J of the ITAA36 and court orders under the Family Law Act 1975) will be withdrawn.
DATE OF EFFECT: When the final Ruling is issued, it is proposed to apply both before and after its date of issue.
COMMENTS are due by 8 January 2014. ATO contact: David Newland – Tel: (03) 6221 0625; Fax: (03) 6221 0460; Email: David.Newland@ato.gov.au.
[LTN 220, 13/11/13]
s109J of the ITAA36 – Payments discharging pecuniary obligations not treated as dividends
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.
[FJM Note: A Family Court order that obliged applied to company (not just a party to the marriage) and obliged it to pay money (not just transfer property) could still apply to avoid the amount paid being deemed a dividend – though such a payment to an actual shareholder would still be an actual ‘dividend’.]