Brain Pickup and Marion Fraser, 26 November 2013
In 2004 the ATO issued Interpretative Decision ATO ID 2004/462. This ATO ID explains that taxation law will prevent a payment by a private company being a deemed dividend where, amongst other things, that payment discharges an “obligation” of the private company. In this respect the view expressed is that no relevant “obligation” can arise as a result of an order under section 79 of the FLA 1975 where the private company is not a party to the relevant proceedings. The 2004 ATO ID is silent on what is the interpretation of the law if the Orders do bind the private company.
The ATO’s long standing administrative practice in this respect has been to not regard the transfer of money (not property) by a private company to a former spouse (ie. an “associate”), under a complying family law obligation to which the private company is a party, as a constructive dividend. This has been confirmed in a significant number of private rulings issued to taxpayers since the 2004 ATO ID was issued.
Draft Taxation Ruling TR 2013/D6 addresses this specific issue and re-affirms the Tax Commissioner’s original policy intention that the transfer of money by a private company in these circumstances will be regarded as the payment of a constructive dividend – contrary to the ATO’s long standing administrative practice, which will cease to be applied.
IMPACT OF NEW DRAFT RULING
In brief, the Draft Taxation Ruling relates to payments, or the transfer of property, to a shareholder or an associate pursuant to an Order made under Section 79 of the FLA 1975.
Where an order requires a private company, or a party to the matrimonial proceedings to cause a private company, to pay money or transfer property to a party to the matrimonial proceedings who is a shareholder, the payment of money or transfer of property in satisfaction of that Order will be regarded as an ordinary dividend, assessable under section 44 of the ITAA 1936.
Where an order requires a private company, or a party to the matrimonial proceedings to cause a private company, to pay money or transfer property to a party to the matrimonial proceedings who is an associate of a shareholder, the payment of money or transfer of property in satisfaction of that Order will be regarded as a constructive dividend, assessable under section 109C (3) of the ITAA 1936.
In addition, the Draft Taxation Ruling states that when the final Ruling is issued, ATO ID 2004/462 (Div 7A: section 109J and court orders under the Family Law Act 1975) will be withdrawn.
When the final Ruling is issued, it is proposed to apply both before and after its date of issue.
Needless to say, the retrospective application of the Tax Commissioner’s views could have a significant, adverse impact on parties who have agreed to matrimonial property settlements on the basis that such a payment that has been received (prior to the 13th November 2013) should in fact be regarded as an assessable dividend.
If such payments are now to be so regarded, the consequent tax liabilities that would be crystallised and how this will be funded and settled by the respective parties, will no doubt be a source of significant angst and an absolute ‘mine field’ for their lawyers and accountants to work through.
Of some comfort is the fact that the final Ruling (when issued) will not apply to taxpayers to the extent that it conflicts with a private binding ruling obtained by them prior to the date of issue of the final Ruling.
Further, where the views expressed in the final Ruling is less favourable to a taxpayer than the Tax Commissioner’s previous administrative practice in respect of such Orders against a private company, the Tax Commissioner proposes not to undertake active compliance activities so as to apply that view in respect of any such Orders made before the date the final Ruling is issued.
However, whilst it would ordinarily be prudent to seek a private ruling on the application of the law to the facts, if the Tax Commissioner is asked today or in the future to state a view in respect of such Orders (in a private binding ruling or in submissions in a litigation matter), the Tax Commissioner intends to do so consistent with the views set out in the Draft Taxation Ruling.
Pickup B & Fraser, M. 2013, ‘ Matrimonial Payments to Transfers to Shareholders and Associates– Draft Taxation Ruling TR 2013/D6’, Mondaq
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