When will a private company dividend be NALI?
Taxation Ruling (‘TR’) 2006/7 provides guidance on the ATO’s view of when income will be NALI (or ‘special income’, as it was previously called under former S.273 of the ITAA 1936). The following summarises the explanations provided by the ATO in TR 2006/7, as to how the Commissioner will have regard to relevant matters (now contained in S.295-550(3)).
- ‘Value’ and ‘cost’ of the shares (refer to S.295-550(3)(a) and (b))
The market value of the shares at the time the superannuation fund acquired them should be compared to the cost of the shares.
If a superannuation fund acquired shares in a company for an amount less than the market value of those shares, this will be a significant factor in determining whether the payment of the dividend is consistent with an arm's length outcome. This will especially be the case where other shareholders in the company paid market value for their shares.
Further, the market value of the shares should be compared to the rate of return on investment to determine whether the rate of return is consistent with an arm's length outcome.
- Rate of the dividend and whether a dividend is paid on any other shares in the company
The rate of the dividend needs to be considered in comparison with the rate of dividend paid on any other shares in the company. Where the shares in the private company are of different classes, differing rates of dividend to shareholders will be an unfavourable factor unless the rate of dividend reflects the level of investment risk and is consistent with an arm's length outcome.
Note, however, in GYBW’s case, the SMSF unsuccessfully argued that the rate of the dividend paid was the only relevant factor in determining whether private company dividends received were NALI. As noted above, the Tribunal decision reinforces that other relevant matters must also be considered.