DIVIDENDS (COMPANIES) s 995-1 ITAA97 Company - A body corporate or any other unincorporated association or body or persons.

s 103A(1) ITAA36 A company is a private company in an income year if it is not a public company for the year. s 103A(2) ITAA36 Public companies generally include companies that are listed on the Australian or an overseas stock exchange on the last day of an income year. Dividends represent a distribution or liberation of the company's profits. They should be distinguished from returns of share capital. (FCT v Brewing Investments Ltd) A company cannot claim deductions for payment of dividends to its shareholders (Macquarie Finance Ltd v FCT) Dividend - general definition in s 6(1) ITAA36 Positive elements: a distribution made by a company to its shareholders, whether in money or other property (para (a)) any amount credited by a company to its shareholders as shareholders (para (b)) DFCT v Black (Mere forgiveness of a debt by a company does not satisfy the requirement where a company must make a payment in order for there to be a distribution.) Crediting an amount by a company only constitutes a dividend if the amount is credited to a person in their capacity as shareholder. (DFCT v Black) Negative elements: A dividend excludes amounts debited against the company's share capital account (para (d)) A dividend excludes money paid/credited, or property distrubuted, by a company for redemption/cancellation of a redeemable preference share (para (e)) A company's share capital account does not include a tainted share capital account. (s 975-300 ITAA97). A share capital account is tainted if amounts from other accounts have been transferred to it (Subdiv 197-A ITAA97). Distributions out of tainted share capital accounts are treated as dividends (rather than capital distributions). The tainting rules are designed to stop companies transferring profits to their share capital accounts and disguise profits as share capital.

Most important provision s 44(1) ITAA36 s 44(1) ITAA36 shareholders are required to include dividends that are paid out of a company's profits in their assessable income.

Patcorp Investments Ltd & Ors v FCT (Shareholders) [page 611] CT (Vic) v Nicholas (Paid) [page 611] Blankfield v FCT [page 611] a dividend can be paid even if the shareholder is restricted from accessing it. Brookton Co-operative Society Ltd v FCT [page 611] a declaration of an interim dividend did not create a debt owing by the company FCT v Slater Holdings Ltd (No 2) [page 612] A dividend, which had been sourced partly out of a company's capital reserves, had been paid out of profits and was therefore assessable under s 44(1) ITAA36. s 44(1A) ITAA36 a dividend paid out of an amount other than profits is taken to be a dividend paid out of profits. [Deemed paid out of profits rule] Dividends paid to resident shareholders General rule Most dividends paid to resident shareholders are assessable. This is a consequence of s 44(1)(a), which provides that assessable income of a resident shareholder includes dividends paid to shareholder out of a company's profits, regardless of whether the paying company is a resident/non-resident and regardless of the source of profits. Special rules: s 23AJ ITAA36 treats non-portfolio foreign dividends paid to a resident company by a foreign company as non-assessable non-exempt income. s 23AI & s 23 AK ITAA36 (ignore) Dividends paid to non-resident shareholders General rule Assessable income of a non-resident shareholder includes dividends paid to the shareholder by a company to the extent that dividends paid out of profits are from Australian sources. (s 44(1)(b) ITAA36) However, s 44(1)(b) ITAA36 operates subject to s 128D ITAA36, which provides that dividends upon which withholding tax is payable under s 128B, or upon which withholding tax would be payable but for s 128B(3)(ga), constitute non-assessable non-exempt income. s 128B(1) requires resident companies to withhold tax from dividends paid to non-residents at prescribed rates (30% or 15% where the recipient is a resident of a tax treaty country). s 128B(3)(ga) provides that s 128B(1) does not apply to franked part of a dividend. Dividends paid by a resident companies to non-resident shareholders are not assessable under s 44(1)(b) ITAA36, but may be subject to withholding tax if the dividends are unfranked. This section can only apply to assess dividends paid by non-resident companies to non-resident shareholders to the extent that Special rule special dividend taxation rules apply to a non-resident shareholder that carries on business in Australia through a permanent establishment (PE). s 44(1)(c) assessable income includes dividends paid to shareholder by a resident company that are attributable to PE to the extent that dividends are paid out of profits from non-Australian sources.

Imputation system Division 200 to 220 of ITAA97 It applies to corporate tax entities, where it is defined under s 960-115 ITAA97 as a company, corporate limited partnership, corporate unit trust & public trading trust. EXAMPLE ON PAGE 617 618 Franking distributions s 205-10 ITAA97 Corporate tax entities are required to maintain franking accounts. Franking accounts are running balance accounts made up of franking credit and franking debit entries. Most franking credits & debits can only arise if the corporate tax entity satisfies the residency requirement for the income year in which the relevant entry occurs (s 205-25 ITAA97) In the case of a company, the residency requirement is satisfied if the company is an Australian resident: for more than half of the 12 months immediately preceding the event (if the event occurs before end of income year), at all times during the income year when the entity exists (if the event occurs after end of income year), OR for more than half of income year (whether or not the event occurs before end of income year) Non-resident (foreign) companies do not generate franking credits and franking debits in their franking accounts. Franking credit entries (s 205-15 ITAA97): pay income tax or PAYG instalments (amount of payment) received franked distributions either directly from another corporate tax entity or indirectly from a trust/partnership (amount of franking credit on distribution) liability to pay franking deficit tax (amount of liability and arises immediately after liability is incurred) Franking debit entries (s 205-30 ITAA97): pay franked distributions (amount of franking credit on distribution) receive tax refunds (amount of refund) underfrank distributions (debit worked out under s 203-50(2)(b) and arises on day specified in s 203-50(4) page 698-699 of thick law book) transfer amounts to share capital account from certain other accounts (s 197-45 ITAA97 page 684 of thick law book) EXAMPLE OF FRANKING ACCOUNT ON PAGE 621

Corporate tax entities can only allocate franking credits to frankable distributions, which is a distribution that is not unfrankable (s 202-40 ITAA97) A distribution is unfrankable if it falls within s 202-45 ITAA97 [page 692 of thick law book]: distributions from a company's share capital account deemed dividends falling within s 109 and Div 7A of Part III ITAA36 demerger dividends distributions in respect of non-equity shares s 202-20 ITAA97 As a general rule, corporate tax entities that are residents at the time of making frankable distributions can frank such distributions. Maximum franking credit = Amout of frankable distribution X 30/70 [s 202-60 ITAA97] If the amount > maximum franking credit for distribution, then it is limited to equal maximum franking credit. Ex. Amount $350 > Maximum franking credit $300 $300 = $300 s 202-75 ITAA97 A distribution statement must be provided by a corporate tax entity to its memebers whenever it pays them a frankable distribution. [page 623 of textbook] Distributions may be fully franked, partly franked or unfranked. The franked part of a distribution is worked according to the following formula (s 976-1 ITAA97): Franked part of distribution = Franking credit on distribution X 70/30 The unfranked part of a distribution is the amount of distribution that is left after deducting the franked part of the distribution (s 976-5 ITAA97) Ex. A company pays a $700 dividend and allocates $90 of franking credits to the dividend. The franked part of the dividend is $210 ($90 X 70/30) and the unfranked part of the dividend is $490 ($700 $210). Benchmark rule s 203-25 ITAA97 The benchmark rule provides that a corporate tax entity must not make a frankable distribution if its franking percentage differs from irs benchmark franking percentage for the franking period in which the distribution is made. s 203-45 ITAA97 For a corporate tax entity that is a private company, its franking period is the same as its income year. [Franking period] s 203-40 ITAA97 Other corporate tax entities generally have 2 franking periods during their income year (i.e. 1st 6 months of income year & balance of income year) [Franking period] s 203-35 ITAA97 Franking percentage for a frankable distribution is calculated according to the following formula (it cannot exceed 100%): Franking percentage = Franking credit allocated / Maximum franking credit X 100% [textbook

page 624] s 203-30 ITAA97 Benchmark franking percentage is the same as franking percentage of the 1st frankable distribution that the corporate tax entity made during the relevant franking period. Ex. If the 1st frankable distribution that a company makes in a franking period is $700 and it allocates $150 of franking credits to the distribution, its benchmark franking percentage for the period is 50% ($150/$300 X 100%). In order not to breach the benchmark rule, any subsequent frankable distributions it makes in the same franking period must also be franked to 50% CONSEQUENCES OF BREACHING BENCHMARK RULE (page 625 of textbook) FRANKING DEFICIT TAX (page 626 of textbook) Gross-up and credit mechanism for franked distributions Under the general rule in Subdiv 207-A ITAA97, the entity that receives a franked distribution: is required to include the amount of franking credit allocated to distribution in assessable income (s 207-20(1) ITAA97) is entitled to a tax offset for franking credit (s 207-20(2) ITAA97) The amount included in assessable income under s 207-20(1) is added to assessable income under s 44(1) ITAA36. EXAMPLE ON PAGE 627 628 OF TEXTBOOK FOR OTHER EXAMPLES, PAGE 630 631 OF TEXTBOOK