ATO ID 2002/857: 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
Will the return of capital trigger the application of section 45A of the Income Tax Assessment Act 1936 ('ITAA 1936') to enable the Commissioner to treat the distribution as a dividend for income tax purposes?

Decision
No. It is considered the return of capital does not trigger the streaming of dividends in terms of section 45A. Section 45C is not invoked.

Facts
The sole shareholder had acquired all the issued share capital from a company incorporated and resident in the USA. Following the acquisition the company was subsequently "migrated" and is now an Australian resident. Additional capital had resulted from earlier conversions to equity of all debt resulting in the company being 100% financed by equity. Retained earnings have been accumulated since incorporation in the USA and there is no pattern of distribution of dividends. 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. 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 has not been paid out of profits.

Reasons for decision
Summary: Section 45A relates to dividend streaming where capital benefits are received by "advantaged shareholders" to the detriment of "disadvantaged shareholders". As there is only one shareholder (the taxpayer) no particular shareholder would derive a greater benefit than another shareholder. The capital reduction is accepted as being made to the sole shareholder for purposes of optimum commercially acceptable gearing levels.

Legislative references: Income Tax Assessment Act 1936 Section 45A Section 45C
Related ATO interpretative decisions: ATO ID 2002/858 | ATO ID 2002/859 | ATO ID 2002/860
Subject references: Share capital Capital reductions