ATO ID 2004/652: Return of Capital: not a dividend
Date of decision: 08 April 2004
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
Will a return of capital paid by a company to its shareholders fall within the definition of dividend in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. A return of capital paid by a company to its shareholders falls within the exclusion in paragraph (d) in the definition of dividend in subsection 6(1) of the ITAA 1936.

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 the company's existing borrowing facilities. The company had not transferred any amount to its share capital account that could constitute the tainting of the share capital account.

Reasons for decision
Summary: The distribution was debited against an amount standing to the credit of the company's share capital account. The definition of a 'dividend' contained in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders but excludes moneys debited against an amount standing to the credit of the share capital account. By virtue of paragraph (d) of the definition of a dividend contained in subsection 6(1) of the ITAA 1936, moneys debited against an amount standing to the credit of the share capital account are not defined as dividends except to the extent that subsection 6(4) of the ITAA 1936 excludes those monies from this definition. In this instance the paragraph (d) exclusion does not apply as the arrangement is not one that triggers the operation of subsection 6(4) of the ITAA 1936, that is, the capital reduction is not part of an arrangement where: As subsection 6(4) of the ITAA 1936 does not apply to negate the effect of paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936, the moneys paid by the company to its shareholders as a capital return do not constitute a dividend under subsection 6(1) of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 subsection 6(1) subsection 6(4)
Related ATO interpretative decisions: ATO ID 2002/860
Subject references: Share capital Capital reductions Dividend income