Deemed Dividend

Liquidator Distribution
Trust Issue and Loss
Deemed Dividend
Consolidation
TAX ENTITY ISSUES
Company Loss Debt Equity Rule

LIQUIDATOR DISTRIBUTION distribution of profit to Shareholder (SH) in form of loan,

payments or debt forgiveness.
General rule: Distribution made by Liquidator upon winding
If there is profit any outflow company to SH to be assessable
up are NOT INCOME [DCT (NSW) v Stevenson]
as dividend unless certain exclusion applies.
S47 of ITAA 1936 outline that certain distribution by Liquidator
The three forms can be either payment (s109C), loan-not fully
will be assessable as income to the extent it represents
repaid (s109D&E) and debt forgiveness (s109F)
income derived by the company (as dividend out of retained
Excluded loans (s109N) if all these criteria are satisfied:
profits)
Loan is made under written agreement
S47(1A) the distribution excludes net capital gains (include
Interest on the loan made equal or exceed the
full capital gain that use reduced cost base)
benchmark
Arches Bros Pty Ltd v FCT, Liquidators can distribute out of
Maximum term fully secure loan is <25 years and
certain profit by keep account in the same way of accountant,
unsecured loan <7 years
keep proper bookkeeping.
No requirement interest is paid under loan in which it
Glenville Pastoral Co Pty Ltd v FCT where Liquidator apply to is first made
repay paid up capital as it not amounted to income.
Steps to be taken:
i. Identify the Loan (L)
ii. Identify any Distribution Surplus (DS)
DEEMED DIVIDEND [C] Division 7A iii. What is the deemed dividend (the lesser of L and DS)
Division 7A of ITAA 1936 is an
integrity measure to prevent private
company from making tax-free
DEEMED DIVIDEND [T] Subdivision EA CONSOLIDATION

Subdivision EA replaced s109UB. For income tax purposes, group is treated as single entity
S109XF and s109XG apply where a (maintain common tax accounting period for all, keep single
company has Unpaid Present account, lodge single tax return)
Entitlement (UPE) of the trust net Consolidation allow the use of losses made by entities before
income, the trustee makes a loan or the time they consolidated but subject to fraction test.
payment or debt forgiveness Subdivision 707C limit the use of transferred losses as the
Steps to be taken: available fraction method which the fraction need to be
i. Identify UPE rounded to three decimal places.
ii. Identify the Loan Steps that to be considered:
iii. Identify any Distribution Surplus (DS) i. Calculate the loss factor (Market value over total market
iv. What is the deemed dividend (the lesser of UPE, L and value of group)
DS) ii. Calculate the maximum losses amount that can be
recouped
iii. The total taxable income of the group after the effect of
DEBT EQUITY RULES
transferred losses.
Interest on debt is deductible but not frankable and interest Noted that if the loss incurred exceed the maximum losses
on equity is not deductible but frankable. calculated out of the factor, it will be carried forward to next
Division 974 of ITAA 1997 require four steps to distinguish period.
between debt and equity.
i. Is it equity interest under s974-75 e.g. shares, variable or
fixed interest, payable at discretion, may convert to COMPANY LOSS
equity.
There are two tests for carry forward losses which are:
ii. Is it debt interest under s974-20, financial benefit
i. Continuity of ownership test: from the start of loss to the
provided at least equal to financial benefit received.
end of income year must have more than 50%
iii. If it is both debt and equity, tie-breaker rule applies and it
ownership (s165-12)
becomes debt interest.
ii. Same business test: maintain same business as what
iv. If it is neither debt nor equity, common law rules apply.
before the test period (s165-210)
TRUST ISSUE AND LOSS

Two types of trust, fixed and non-fixed.

For non-fixed trust, it can deduct its prior losses if there is
continuity of ownership and control [s267-40(2)]
Four rules that non-fixed trust must all meet are:
50% Stake test (Div 267)
Control test (s267-45)
Income injection (Div 270)
Pattern of income distribution (s267-30&35)
i. The relevant period for the test will be the nearest
year of distribution of income to the loss year.
ii. Compare the percentage of income distribution
between two relevant years and select the smallest
percentage.
iii. To satisfy this test, the total of smallest percentage
distributed must exceed 50%.