Income Tax Act 2007 section 694

Abnormal dividends: the excessive accrual condition

Section 694 defines the "excessive accrual condition," which is one of the tests used to determine whether a dividend paid by a company should be treated as an abnormal dividend for income tax purposes.

• The excessive accrual condition applies when a dividend is paid on shares and the amount of that dividend substantially exceeds what would be a normal return on those shares, taking into account the share's market value at the time the dividend accrued.
• To assess whether the condition is met, one must compare the actual dividend received against a reasonable commercial return that would be expected on a holding of shares of that class, based on their market value.
• The test looks at the period over which the dividend accrued, so it is not simply a snapshot at the date of payment but considers the accumulation of value that the dividend represents.
• This condition is part of a broader set of anti-avoidance rules designed to prevent individuals from obtaining a tax advantage by converting what would normally be taxable income into a form that is taxed at lower rates or not at all, through the use of abnormally large dividends.