ATO Rulings and Determinations
Div 7A: distributable surplus calculation
19.12.2008
A draft taxation determination has been issued to the effect that in exercising the discretion under sec 109Y(2) ITAA 1936 to substitute an appropriate value for a private company’s assets for the purpose of calculating the company’s distributable surplus the Commissioner can take into account the value of the company’s assets not shown in the company’s accounting records (TD 2008/D19).
In exercising the discretion to substitute an appropriate value for a company’s assets, it is necessary to compare the value assigned in the company’s accounting records to the totality of the company’s assets and whether that value is substantially correct.
The draft determination states that it is evident from the purpose of sec 109Y(2) ITAA 1936 that the power to substitute the value should be exercised in a case where there has been a deliberate, significant understatement of the value of assets (or overstatement of specified provisions), in the company’s accounting records, with a view to circumventing the operation of Div 7A.
Where the company’s accounting records understate the value of the company’s assets because they are required to do so (for example where accounting standards require the value of internally generated goodwill to be omitted), the understatement is not itself an attempt to circumvent the operation of Div 7A. The Commissioner will not exercise the power under sec 109Y(2) ITAA 1936 whenever accounting standards require the total value of assets to be understated; to do so would defeat the compliance simplification objective of the provision.
Where it is plain, however, that the company, its shareholders and directors have acted, in making loans or other payments, in a way that treats the real and higher value of assets as their true value, that is, regardless of their value shown in the accounting records, and that the mischief against which Div 7A is directed is present, the Commissioner may, and generally will, substitute their true value.
