The Tax Acts have long treated dividends paid from private
companies to the trustees of superannuation funds as "special
income", which means they are taxed at the top marginal tax
rate rather than the normal concessional rates for superannuation
These special income provisions are often overlooked.
Prior to the introduction of simpler super rules, private
company dividends were automatically special income unless the ATO
otherwise determined the dividends were not special income (section
Section 273 listed a number of factors to be taken into account
(including "any other matters that the Commissioner considers
From 1 July 2007, private company dividends are
"non-arm's length income" unless "the amount of
the dividend and circumstances in which they are paid are
consistent with an arm's length dealing" (section
An ATO determination is no longer necessary, but in determining
whether the dividend satisfies the arm's length criteria there
are a number of factors to be taken into account, similar to the
factors in the old section 273.
In a recent decision, the AAT upheld the ATO's decision that
dividends paid by a private company to the trustee of a
self-managed superannuation fund were special income under section
273 ((FFWX and Commissioner of Taxation  AATA 657)).
In the case:
the trustee of the fund owned 4% and one member owned a further
6% of shares in a private company, which in turn owned a large
majority interest in a listed public company;
the trustee of the fund bought shares in the private company
that had originally been offered to a member of the fund at what
the AAT found to be only 10% of the value of the shares at that
the trustee of the fund received the same dividend per share as
the other shareholders, and
the rate of the dividend was "unquestionably
enormous" and more than the cost of the shares in each of the
years in question.
The following factors were of particular importance to the
The size of the dividends received compared to the amount paid
for the shares.
The fact the price paid for the shares was only 10% of the
market value of the shares at the time of acquisition.
The decision reinforces the need to be careful when the trustees
of superannuation funds are considering investing in private
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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