Dividend access shares and section 177E
Business Succession Update – Summer 2013
Before discretionary trust structures became widely utilized, taxpayers would use companies with different classes of shares carrying differential dividend rights which were then issued to the members of the relevant taxpayer’s family.
This type of corporate structure conferred on the directors a discretion as to whom to declare and pay dividends from year to year. Thus, dividends could be directed to certain shareholders in a tax-effective manner, to the exclusion of other shareholders.
Such corporate structures provided many of the benefits that have more recently been provided by a discretionary trust structure, albeit only after payment of tax at the corporate rate.
As far as we know, it has never been suggested that these corporate structures constituted dividend stripping arrangements.
In addition, it has been expressly acknowledged at paragraph 3.36 and 3.37 of the explanatory memorandum to the New Business Tax System (Imputation) Bill 2002 that the payment of a dividend by a company with differential classes of shares would not constitute streaming for the purposes of s 204-30 ITAA1997. In many respects, the economic effect of such a corporate structure similar to the economic effect of the arrangement described in the draft TD 2013/D5.
In light of TD 2013/D5, the bottom line is that taxpayers should avoid deriving profits in structures which are sufficiently inflexible to necessitate the use of dividend access shares. If profits have been derived, the issue of a dividend access share and the payment of a dividend to someone other than the original shareholder are likely to attract considerable scrutiny from the Commissioner.