Monday, March 29, 2010

When is a share not a share?

Special classes of shares have, at least in recent years, always been a hallmark of company structures.

One of the most common descriptions of shares that provide no other rights than simply a dividend at the complete discretion of the directors from time to time is a 'dividend access' or 'dividend only' share.

Last week, we helped an accountant whose client was the subject of a wider ATO audit. For the third time I am personally aware of in the last twelve months, one of the core issues the ATO was pursuing related to the application of the debt equity rules to a purported dividend access share.

For anyone that has spent time considering the debt equity rules, they will know how complex they are (indeed the position paper from the ATO on this point ran to around 15 A4 pages).

The bottom line in a practical sense is if you have clients wanting to implement a dividend access share arrangement and they are not willing to have you provide formal advice about the application (or otherwise) of the debt equity rules, you should get as a minimum confirmation from them that they understand the consequences of a share being treated as debt instead of equity.

More conservatively, you should probably refuse to implement the structure at all, although obviously commercially, this raises a number of difficulties.

For the client last week, if the ATO is successful in arguing that the dividend access share was in fact a debt instrument for tax purposes, it will mean that the 7-digit dividend that had been declared will be completely unfrankable.

Until next week.

Matthew Burgess