ATO ID 2002/860: Proposed share capital reduction
Date of decision: 29 June 2001
Year of income: Year ended 30 June 2001
Business line: Public Groups and International

Issue
Whether subsection 6(4) of the Income Tax Assessment Act 1936 ('ITAA 1936') will apply to deem a return of capital from the share capital account to be a dividend for income tax purposes.

Decision
No. Subsection 6(4) of the ITAA 1936 would not apply to deem the return of capital to be a dividend for income tax purposes.

Facts
The financing profile of the company was considered to be undergeared so that the company wished to obtain additional debt financing to increase its gearing levels to an optimum commercially acceptable level. As such, the company proposed to borrow funds to undertake a distribution of share capital by way of a capital reduction and the return of capital has clearly been established as by way of borrowings and not paid out of profits.

Reasons for decision
Summary: A dividend defined in subsection 6(1 ) of the ITAA 1936 includes any distribution made by a company to any of its shareholders but does not include moneys debited against an amount standing to the credit of the share capital account. An exception exists in terms of subsection 6(4) if paid under an arrangement between the parties involved. The previous shareholder contributed the capital by way of a debt/equity swap which was not related to the distribution to be paid out of the share capital account.

Legislative references: Income Tax Assessment Act 1936 Subsection 6(1) Subsection 6(4)
Related ATO interpretative decisions: ATO ID 2002/857 | ATO ID 2002/858 | ATO ID 2002/859
Subject references: Share capital Capital reductions Tainted share capital account