ATO Rulings and Determinations
Division 7A distributable surplus calculation
25.03.2009
A final 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 a private 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 2009/5). In other words, the Commissioner’s power under sec 109Y(2) ITAA 1936 to adjust the value of the company’s assets is not limited by the omission to assign a value to a particular asset in the company’s accounting records.
The determination states that it is evident from the purpose of the provision 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 the assets (or overstatement of specified provisions), in the company’s accounting records, with a view to circumventing the operation of Div 7A ITAA 1936.
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 ITAA 1936. Subject to the qualification which follows, the Commissioner will not exercise his 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. However, where it is plain 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 ITAA 1936 is directed is present, the Commissioner may, and generally will, substitute their true value.
