ATO ID 2006/232: Return of share capital to overseas parent company
Date of decision: 23 August 2006
Year of income: Year ended 31 December 2003
Business line: Public Groups and International

Issue
Will the Commissioner make a determination under sections 45A or 45B of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C of the ITAA 1936 will apply to a return of share capital from an Australian-resident subsidiary to its overseas parent.

Decision
No. The Commissioner will not make a determination under sections 45A or 45B of the ITAA 1936 that section 45C of the ITAA 1936 will apply to a return of share capital from the Australian-resident subsidiary to its overseas parent.

Facts
The Australian-resident subsidiary is wholly owned by its overseas parent. Several years ago, the subsidiary acquired land and constructed thereon premises from which it conducts its business. The acquisition and construction costs were initially funded from working capital and local bank borrowings. While it was intended from the outset that the overseas parent would fund the project, economic conditions prevented this. When conditions improved the overseas parent injected additional equity into the subsidiary - sufficient to retire bank loans and improve its financial position. The business premises have now been sold under a sale and leaseback arrangement. The sale generated a profit of several million dollars. The Australian-resident subsidiary now proposes to undertake an equal reduction of share capital under subsection 256B(1) of the Corporations Act 2001 by returning an amount from the proceeds of the sale of the business premises equal to the acquisition and construction costs. The main reason for the capital reduction is to return that part of the capital contributed by the overseas parent to indirectly finance the acquisition and construction costs, given that the level of share capital in the Australian-resident company is now far in excess of requirements. No element of the profit under the arrangement is returned to the parent. The Australian-resident subsidiary has not paid any dividend or returned capital to the overseas parent since incorporation.

Reasons for decision
Summary: Section 45A of the ITAA 1936 applies in a situation where capital benefits are received by shareholders (advantaged shareholders) who would, in the same year of income in which the capital benefits are provided, derive a greater benefit from the capital benefits than other shareholders and it is reasonable to assume that the other shareholders (disadvantaged shareholders) have received or will receive dividends. Implicit in the section's operation is the 'streaming' of benefits, that is, the provision of different benefits to different shareholders. In the present case, there is only one shareholder who will receive a capital benefit and there is no streaming of capital benefits and dividends among different shareholders of the company. Accordingly, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the proposed return of capital. In the present case, section 45B of the ITAA 1936 applies to ensure that relevant amounts are treated as dividends for taxation purposes if certain payments, allocations and distributions are made in substitution for dividends. Specifically, the provision applies where: In this case, whilst the conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are met in relation to the provision of a capital benefit (as defined in subsection 45B(5) of the ITAA 1936), the requisite purpose of enabling the overseas parent to obtain a tax benefit through the provision of the capital benefit is not present. In other words, having regard to the relevant circumstances of the scheme as set out in subsection 45B(8) of the ITAA 1936, it would not be concluded that the person or persons who entered into or carried out the scheme did so for a purpose of obtaining a relevant tax benefit. It is considered that no part of the proposed return of capital is attributable to the profit arising from the sale of the business premises. Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the proposed return of capital.

Legislative references: Income Tax Assessment Act 1936 section 45A section 45B section 45C
Related ATO interpretative decisions: ATO ID 2002/857
Subject references: Capital benefit Commissioner's discretion Deemed dividends Distributions Dividend streaming arrangements Return of capital on shares