ATO ID 2004/653: Return of Capital - section 45A does not apply
Date of decision: 08 April 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Does section 45A of the Income Tax Assessment Act 1936 (ITAA 1936) apply such that the Commissioner is able to make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the amount of a return of capital as an unfranked dividend paid out of the profits of the company?

Decision
No. Section 45A of the ITAA 1936 does not apply to treat the amount of a return of capital as an unfranked dividend paid out of the profits of the company.

Facts
The company distributed funds to its shareholders as a return of capital in proportion to their shareholding. The return of capital was debited to the company's share capital account and funded out of its existing borrowing facilities.

Reasons for decision
Summary: Section 45A of the ITAA 1936 applies in circumstances where capital benefits are streamed to certain shareholders who derive a greater benefit from the receipt of capital (the advantaged shareholders) and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or would receive dividends. By distributing an amount as a return of capital, the company will provide shareholders with a 'capital benefit' (as defined in paragraph 45A(3)(b) of ITAA 1936). However, there is nothing in the arrangement to indicate that there is a 'streaming' of capital benefits to some shareholders and dividends to other shareholders as all shareholders will receive the capital return in direct proportion to their shareholding. Therefore section 45A of the ITAA 1936 does not apply to the distribution.

Legislative references: Income Tax Assessment Act 1936 section 45A
Related ATO interpretative decisions: ATO ID 2002/857
Subject references: Share capital Capital reductions Return of capital on shares