27/11/2009

Ordinarily the income of a complying superannuation fund is taxed at the concessional rate of 15%.  However, under tax legislation certain super fund income may be subject to the top marginal rate of 45%.  An example is income derived from the payment of private company dividends.

Under former section 273 of Income Tax Assessment Act 1936, dividends from a private company were deemed special income (and taxed at 45%) unless the Commissioner determined otherwise, having regard to certain factors.  One of the factors was the difference between the price paid for the shares and their market value.

The operation of this section was illustrated in a recent Administrative Appeals Tribunal Case of FFWX v. Commissioner of Taxation.

In that case, a super fund trustee purchased shares in a private company at a price equal to about 1/10th of the share’s market value.  The trustee received substantial dividend payments following the purchase. 

The Commissioner determined the dividends were special income on the basis that the shares were purchased at a price substantially less than their market value. The trustee applied for the decision to be reviewed at the Tribunal. 

The Tribunal upheld the Commissioner’s determination despite:

-       the super fund holding only a minority shareholding;

-       that the shares carried the same rights as other issued shares;

-       that the fund members were not company directors and did not control the company; and

-       it meant dividends received from the company would forever be classified as special income.

Section 273 has been replaced by section 295-550 of Income Tax Assessment Act 1997 which provides that income is non-arm’s length income (and taxed at 45%) if the amount is not consistent with an arm’s length dealing.  The section is substantially the same as its predecessor (including the factors to be taken into account in determining an arm’s length dealing), although the Commissioner no longer needs to make the determination.

The Tribunal’s decision provides a timely reminder to trustees to take care in investing in private company shares and of the importance in always transacting with parties on an arm’s length basis. 

If you any questions regarding Superannuation, please contact Shannon Lee at Townsends Business & Corporate Lawyers (02) 8296 6222.