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The solvency test for the payment of dividends has been in
effect for two years. It was hailed as enabling the liberation of
about $100 billion in franking credits on corporate Australia's
collective balance sheet to Australian investors.
However, the ATO's final view in Taxation Ruling TR
2012/5 (released last week on the eve of the reporting season
for the 2012 financial year) threatens this objective. The ATO have
held firm in their general position that any dividends paid by
companies where net assets are below share capital are unfrankable,
but with particular exceptions. Accordingly, companies should now
be able to consider the declaration and payment of franked
dividends with a higher degree of certainty than has been the case
in this past 12 months.
We disagreed with the blanket position taken by the ATO in their
Draft Fact Sheet released in June 2011 as we considered it to be
contrary to the policy intent of this law reform.
Our understanding of the initial ATO view was that any dividends
paid by companies where net assets are below share capital cannot
be franked, irrespective of source (be it current-period profits or
a reserve). Our view has always been that a dividend can be franked
if it can be sourced from a positive 'profit' account,
despite net assets being less than share capital.
The ATO seemed to soften their position in Draft Taxation
Ruling TR 2011/D8 (released on 21 December 2011). In this
Draft Ruling, the general ATO view was that dividends paid out of
profits in accordance with the new section 254T of the
Corporations Act 2001 can be franked, notwithstanding the
existence of prior year losses or net assets being less than share
capital. For further information on the Draft Ruling, please read
the
Moore Tax News article prepared by Stephen O'Flynn, Simon
Tucker and Gopi Yogeswaran of Moore Stephens Melbourne on 17
January 2012.
The Final Ruling provides further clarification on a number of
issues raised in submissions made for the Draft Ruling. In
particular, it:
specifically excludes amounts disclosed as 'Other
comprehensive income' from the definition of 'profits'
for the purposes of this Ruling;
confirms that 'profits' must be recognised in the
stand-alone accounts of the company (as opposed to the consolidated
accounts of a corporate group);
approves the practice of transferring current-year profits to a
separate 'profit appropriation reserve' from which
frankable dividends could be paid both now and in the future. This
can only be done as a result of a directors resolution reflected in
the accounts or approving the accounts. Without this evidence,
profits offset or netted against accumulated losses in the accounts
will generally be viewed as being no longer available for dividend
distribution; and
states that it also applies to private companies even if they
are not required to maintain audited accounts kept in accordance
with Australian Accounting Standards.
If you have any questions in relation to this Ruling, please
contact the author or your Moore Stephens relationship partner.
