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Australian outbound investments: eligibility for dividend exemption

Eligibility for dividend exemption

Jenny Wong examines a recent ATO draft ruling regarding eligibility for exemptions on foreign dividends.

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Director, Tax

KPMG Australia

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The Australian Taxation Office (ATO) recently issued draft ruling TR 2016/D2 addressing an interpretive issue that goes to the heart of whether a taxpayer can get an exemption for a dividend it receives from a foreign company. This issue originally arose from a question raised by a taxpayer of whether the dividend was non assessable, non-exempt income where a share buyback occurred that resulted in their participation interest dropping to 10 percent immediately after the buy back.


How s768-5(1)(b) is interpreted is key: “at the time the distribution is made, the entity satisfies the participation test in section 768-15 in relation to the company that made the distribution”. To obtain the dividend exemption under this section, the Australian Taxation Office (ATO) sets out 3 key principles:

  • To have a participation interest in a foreign company, an entity must be a registered member of the foreign company at the start of the day the distribution is made.
  • Where the distribution is a dividend or a non-share dividend, the distribution is made on the day that the foreign company pays or credits the distribution.
  • Where the distribution is a deemed dividend, the distribution is made on the day the tax legislation deems the dividend to have been taken to be paid.

An entity can have a participation interest where the foreign company makes a distribution on the cancellation of its equity interest provided that the entity is a registered member at the start of the day the distribution is paid.

Also, where the distribution is made under an off-market share buy back, an entity will have a participation interest equal to the registered membership that it holds at the start of the day that it enters into the share buy-back contract with the foreign company.

The draft ruling also clarifies the situation where there are timing differences between when the foreign company makes a dividend or non-share dividend payment and when the payment is received by an equity holder e.g. if the dividend is passed through a trust. Whether an Australian corporate taxpayer passes the participation test must be ascertained on the day that the foreign company makes the distribution rather than on the day in which the Australian corporate taxpayer (or any interposed trust or partnership) receives that distribution.

If you are considering recalibrating your shareholdings in foreign companies, this draft ruling provides helpful clarity on whether you are entitled to an exemption for any dividends paid.

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