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03 May 10 Private company dividends were special income - Darrelen

The Full Federal Court (Stone, Edmonds and Jagot JJ) has dismissed the taxpayer's appeal from the decision of the AAT in FFWX and FCT [2009] AATA 657 (Block DP and Frost M, 1 September 2009). In that case, the AAT held that dividends paid to the trustee of a superannuation fund, in respect of 4 shares acquired in a private company at an undervalue, were "special income" for the purposes of the former s 273 of ITAA 1936 and upheld the Commissioner's decision not to exercise his discretion in favour of the taxpayer to treat the dividends otherwise than as special income.

Before  the Full Court, the taxpayer argued that if in the year of income the fund derived dividends from a private company which represented distributions at a rate per share equal to the rate per share paid on all shares in the private company then, that was the end of the inquiry and the Commissioner cannot be concerned with other matters referred to in s 273(2) and should or, to be more accurate, must, therefore, exercise his discretion not to treat the dividends as special income. The Full Court described this argument as "flawed on at least two bases".

The Court said at para 31:

 "First, it is not supported by the text of s 273(2). Second, its embrace would undermine the policy underlying s 273(2), and its predecessors, of enabling the Commissioner to deny the concessional taxation of income where the income had been diverted from taxpayers not enjoying that concessional basis, through a non-arm’s length acquisition of the shares, rather than through non-arm’s length distributions by way of dividend."

In relation to the circumstances surrounding the acquistion of the shares, the Court said, at para 34:

"If the price at which the four shares in [the private company] were sold to the Fund had been set at their market value, the price at which they were sold would not have secured the sale of even one share; the dividends on those four shares would have continued to accrue to the transferor, a non-concessional taxpayer. So understood, the income diversion has occurred by recourse to a non-arm’s length transaction on the acquisition of the shares. The Commissioner, in our view, was entitled to have regard to that matter in declining to exercise his discretion not to treat the dividends as special income even where those dividends are paid rateably by reference to the number of shares held."

Darrelen Pty Ltd v FCT [2010] FCAFC 35 (Full Federal Court; Stone, Edmonds and Jagot JJ; 30 April 2010).


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