Private ruling: Application of section 6(1) of the ITAA 1936 and 45B of the ITAA 1936 on distribution to shareholders
Published: August 2013
Ruling period: Year ending XX/XX/XXXX
Date scheme commenced: XX/XX/XXXX

Ruling: Q1: Will any part of the distribution made by Company B to shareholders, that is debited against the share capital account of Company B, be treated as a dividend within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No | Q2: Will the Commissioner seek to make a determination under subsection 45B(3) of the ITAA 1936 that section 45C applies to deem any part of the distribution made by Company B to the Shareholder, that is debited against the share capital account of Company B, to be a dividend paid out of profits? | A2: No | Q3: Will the Commissioner make a determination under subsection 45C(3) of the ITAA 1936 and thereby impose a debit to the franking account of Company B under subsection 45C(3) in respect of the distribution? | A3: No

Relevant facts and circumstances: Background 1. The Company B Group operates various business activities and various supporting business activities. 2. Company B is the ultimate holding company for the Company B Group of entities. Company B Group is an Australian resident for Australian income tax purposes. 3. Company B elected to form a tax consolidated group which consists of itself as the head company with Company C and Company D as its subsidiary members. 4. In XX/XXXX, the Company B Group was acquired by Company B. 5. The acquisition of the Company B Group was funded from equity contributions from Company B to Company E, Company F and Company G and from borrowings from Company C and Company D. 6. As a result of this, the Company B Australian group of entities joined the Company B tax consolidated group. Subsequent to this, the Company B Group has acquired additional businesses and sold its interest in other businesses. 7. Company C and Company D have acted as the Company B Group financing entities since XX/XXXX and currently have a combination of external senior debt and subordinated debt of $XXXX million in aggregate. 8. The balance of the amount received by Company B will be applied to repay Company B Group external debt as discussed below. Distribution history 1. Since its acquisition of the Company B Group in XX/XXXX, Company B has not paid any distributions to its shareholders. This is consistent with expectations given the initial level of gearing in the Company B Group. 2. As at XX/XX/XXXX, Company B had retained losses of $XXXX and share capital of $XXXX. Company B also had an equity warrant reserve of $XXXX. 3. There have been no transfers of amounts to the share capital account of Company B thus the share capital account of Company B is not a tainted share capital account within the meaning of section 197 of the Income Tax Assessment Act 1997 (ITAA 1997). 4. Management accounts for Company B discloses net assets of $XXXX, comprising of contributed equity, reserves and accumulated profits. Proposed refinancing 1. Company B is in the process of refinancing its external borrowings and increasing its gearing ratio. The existing external senior bank facility and mezzanine facilities are due for repayment in the near-term. 2. Company B also intends to return capital to investors for the first time in X years of ownership. This distribution is outlined in more detail below. 3. Company B is considering refinancing opportunities offering lower interest rates and an extended maturity profile. This includes opportunities in overseas markets. 4. The existence of opportunities in the overseas markets in particular would allow the Company B Group to: · Diversify away from the domestic Australian bank market. · Access the deeper and more liquid overseas loan market. · Extend the maturity of existing debt facilities. · Enhance the Company B Group's financing flexibility. 5. The refinancing and distribution is expected to increase the Company B Group's overall debt to equity ratio. 6. It is anticipated that Company B will raise funds from external borrowings. 7. The proceeds from the external borrowings will be used for the following purposes: · $XXXX will be used to repay existing debt of Company C and Company D taking into consideration anticipated up-front fees expected to be incurred and to close out existing hedging arrangements in relation to the existing borrowings. · $XXXX will be used to make an interest bearing loan to subsidiaries and repay its existing debt. · Some or all of the balance of the external borrowings of will be used to pay a dividend and a return of capital totalling $XXXX by Company B to its shareholders. The precise amount depends ultimately upon the level of debt that is secured, the relevant exchange rate and Company B Group's need for working capital. 8. Company D proposes to enter into a cross currency swap to hedge its foreign currency exposure back into Australian dollars. Proposed distribution 1. Company B is proposing to make a distribution to its shareholders of $XXXX to be funded from the cash from the external borrowings. This is proposed to take the form of a dividend (to be paid out of retained profits of Company B) and a return of capital (to be debited against the share capital account of Company B). · Company D will make a loan of $XXXX (or approximately XX% of the proposed distribution amount) to Company K to fund distributions of its retained earnings ultimately to Company B. 2. The amounts of the relevant dividends will be determined to ensure that Company B has retained earnings immediately prior to the distribution of XX% of the proposed distribution. 3. Company D will make a loan of XX% of the proposed distribution amount to Company E. Company E will make a distribution of approximately XX% of the proposed distribution amount to Company B in the form of a return of capital. 4. It is expected that at the time of the proposed distribution, Company B will have retained profits approximately equal to the proposed dividend and share capital of approximately $XXXX. 5. The proposed distribution of $XXXX is to be accounted for by Company B as debit to share capital account, debit to retained earnings account and credit to cash. The amount debited against the share capital account will be determined based on the proportion of the share capital account as compared to the realised and unrealised profits of Company B at the time of the distribution. 6. The percentage of the proposed distribution that is debited to share capital will reflect the share capital account of Company B Group relative to its estimated market value. 7. Whilst Company B has sufficient share capital in order pay a distribution entirely out of its share capital account, the directors of Company B believe it is more appropriate to pay the distribution as a dividend and return of capital by applying a proportionate approach to determine the part of the distribution that is a dividend (and debited to retained earnings of Company B) and the part of the distribution that is a return of capital (and debited against the share capital account of Company B).

Relevant legislative provisions: Income Tax Assessment Act 1936 , subsection 6(1) | Income Tax Assessment Act 1936, paragraph 6(1)(d) | Income Tax Assessment Act 1936 , section 45B | Income Tax Assessment Act 1936 , subsection 45B(2) | Income Tax Assessment Act 1936 , paragraph 45B(2)(a) | Income Tax Assessment Act 1936 , paragraph 45B(2)(b) | Income Tax Assessment Act 1936 , paragraph 45B(2)(c) | Income Tax Assessment Act 1936 , subsection 45B(3) | Income Tax Assessment Act 1936 , subsection 45B(5) | Income Tax Assessment Act 1936, paragraph 45B(5)(b) | Income Tax Assessment Act 1936, subsection 45B(8) | Income Tax Assessment Act 1936, paragraph 45B(8)(a) | Income Tax Assessment Act 1936, paragraph 45B(8)(b) | Income Tax Assessment Act 1936, paragraph 45B(8)(c) | Income Tax Assessment Act 1936, paragraph 45B(8)( d) | Income Tax Assessment Act 1936, paragraph 45B(8)(e) | Income Tax Assessment Act 1936, paragraph 45B(8)(f) | Income Tax Assessment Act 1936, paragraph 45B(8)(g) | Income Tax Assessment Act 1936, paragraph 45B(8)(h) | Income Tax Assessment Act 1936, paragraph 45B(8)(i) | Income Tax Assessment Act 1936, paragraph 45B(8)( j) | Income Tax Assessment Act 1936, paragraph 45B(8)(k) | Income Tax Assessment Act 1936, subsection 45B(9) | Income Tax Assessment Act 1936, subsection 45B(10 ) | Income Tax Assessment Act 1936, section 45C | Income Tax Assessment Act 1936, subsection 45C(3) | Income Tax Assessment Act 1936, section 318 | Income Tax Assessment Act 1936, subsection 177A(1) | Income Tax Assessment Act 1936, paragraph 177D(b)(i) | Income Tax Assessment Act 1936, paragraph 177D(b)(ii ) | Income Tax Assessment Act 1936, paragraph 177D(b)(iii ) | Income Tax Assessment Act 1936, paragraph 177D(b)(iv) | Income Tax Assessment Act 1936, paragraph 177D(b)(v ) | Income Tax Assessment Act 1936, paragraph 177D(b)(vi) | Income Tax Assessment Act 1936, paragraph 177D(b)(vii ) | Income Tax Assessment Act 1936, paragraph 177D(b)(viii ) | Income Tax Assessment Act 1997, section 104-135 | Income Tax Assessment Act 1997, section 197 | Income Tax Assessment Act 1997, Division 855 | Income Tax Assessment Act 1997, section 855-25 | Income Tax Assessment Act 1997, subsection 995-1(1)

Reasons for decision: Summary: No. No part of the distribution made by Company B to shareholders debited against Company B's share capital account will be treated as a dividend within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). | Detailed Reasoning - Detailed reasoning: Dividend is defined, for taxation law purposes, under subsection 6(1) of the ITAA 1936. Subsection 6(1) of the ITAA 1936 states that 'dividend' includes: (a) any distribution made by a company to any of its shareholders, whether in money or other property; and (b) any amount credited by a company to any of its shareholders as shareholders; but does not include: (d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or (e) moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if: (i) the company gives the holder of the share a notice when it redeems or cancels the share; and (ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and (iii) the amount is debited to the company's share capital account; except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or (f) a reversionary bonus on a life assurance policy. Applying this provision to your circumstances, the proposed distribution would be paid to the shareholders and the distribution would be debited against Company B's share capital account. Paragraph 6(1)(d) would apply. Therefore, the distribution, where it is debited against the Company B's share capital account, is not included under definition of a dividend under subsection 6(1) of the ITAA 1936. | Summary: No. The Commissioner will not make a determination pursuant to section 45C of the ITAA 1936 because subsection 45B(3) of the ITAA 1936 will not apply to the scheme. | Detailed Reasoning - Detailed reasoning: Section 45B of the ITAA 1936 - schemes to provide capital benefits Section 45B applies where certain capital payments are made in substitution for dividends. Specifically, the provision applies where: (a) there is a scheme under which a person is provided with a capital benefit by a company; (b) under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the capital benefit, obtains a tax benefit; and (c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a tax benefit Each of these conditions is considered below. | Detailed Reasoning - Scheme: A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as provided in subsection 177A(1) of Part IVA of the ITAA 1936 pursuant to the reference to the meaning of the term in subsection 995-1(1) of the ITAA 1997 provided in subsection 45B(10) of the ITAA 1936. That definition is wide and includes: · any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and · any scheme, plan, proposal, action, course of action or course of conduct. The proposed return of capital will, given the wide definition of the scheme, constitute a scheme for the purposes of section 45B of the ITAA 1936. | Detailed Reasoning - Capital benefit: The phrase 'provided with a capital benefit' is defined in subsection 45B(5) of the ITAA 1936. It states that a person is provided with a capital benefit if: (a) an ownership interest in a company is issued to the person; (b) there is a distribution to the person of share capital or share premium; or (c) something is done in relation to an ownership interest that has the effect of increasing the value of the ownership interest (which may or may not be the same interest) that is held by the person. As the capital distribution of $ XXXX is proposed to be debited against the share capital account of Company B, shareholders will obtain a capital benefit as defined in paragraph 45B(5)(b) of the ITAA 1936 under the scheme. A taxpayer 'obtains a tax benefit', as defined in subsection 45B(9) of the ITAA 1936, if: (a) the amount of tax payable; or (b) any other amount payable under the ITAA 1936 or the ITAA 1997 by the taxpayer would, apart from the operation of section 45B of the ITAA 1936: i. be less than the amount that would have been payable; or ii. be payable at a later time than it would have been payable if the capital benefit had instead been a dividend. Ordinarily, a return of capital would be subject to the CGT provisions of the income tax law. Unless the amount of the distribution exceeds the cost base of the shares, there will only be a cost base reduction under CGT event G1 (section 104-135 of the ITAA 1997). It is only to the extent (if any) that the distribution exceeds the cost base of the shares that a capital gain is made. For a foreign resident shareholder the provisions of Division 855 of the ITAA 1997 will operate to disregard any capital gain or capital loss provided that the CGT asset is not 'taxable Australian property'. By contrast a dividend would generally be included in the assessable income of a resident shareholder or in the case of a foreign resident, be subject to dividend withholding tax under section 128B of the ITAA1936. Accordingly, Company B shareholders will obtain tax benefits from the proposed return of capital. | Detailed Reasoning - Relevant circumstances of the scheme: For the purposes of paragraph 45B(2)(c) of the ITAA 1936, the Commissioner is required to consider the 'relevant circumstances' set out under subsection 45B(8) of the ITAA 1936 to determine whether any part of the scheme would be entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit. The test of purpose is an objective one. The question is whether, objectively, it would be concluded that a person who entered into or carried out the scheme did so for the purpose of obtaining a tax benefit for the relevant taxpayer in respect of the capital benefit. The purpose does not have to be the most influential or prevailing purpose, but it must be more than an incidental purpose. The relevant circumstances under subsection 45B(8) of the ITAA 1936 include the circumstances of the company and the tax profile of the shareholders. Each of the relevant circumstances listed in subsection 45B(8) is addressed below: Paragraph 45B(8)(a) of the ITAA 1936 Paragraph 45B(8)(a) directs attention to the extent to which, despite the distribution taking the form of share capital, it can be ascribed as belonging to or appropriate to the company's share capital or the profits of the company or its associates. This requires careful consideration of the characteristics of share capital and profits and the availability of each in the particular circumstances of the company. This is illustrated in paragraph 1.35 of the Explanatory Memorandum to the Taxation Laws Amendment (Company Law Review) Bill 1998 (EM) which states: if a company makes a profit from a transaction, for example the disposal of business assets, and then returns capital to shareholders equal to the amount of the profit that would suggest that the distribution of capital is a substituted dividend. On the other hand, if a company had disposed of a significant part of its business at a profit and distributed an amount of share capital which could reasonably be regarded as the share capital invested in that part of the business, the distribution of capital would not be seen as a substituted dividend because no amount would be attributable to profits. The amount that Company B will debit against the share capital account will be determined based on the proportion of the share capital account as compared to the realised and unrealised profits of Company B at the time of the distribution. Based on an estimated market value of $XXXX and a share capital account of approximately $XXXX, the result is that approximately XX% of the proposed distribution is being debited to the share capital account and XX% of the proposed distribution is being debited against retained earnings. Company B itself has minimal unrealised/realised profits in its accounts to fund the dividend component of the proposed distribution. However, its' subsidiary, Company K, contains retained earnings of $ XXXX which are sufficient to fund the proposed dividend, and this entity proposes to borrow sufficient funds to enable it to distribute these retained earnings to Company B via a chain of other subsidiaries to fund a dividend to the extent of XXXX% of the proposed distribution. Some of the entities through which the dividend from Company K will pass contain significant negative retained earnings balances, totalling approximately $XXXX (net of retained earnings in the chain). As this amount is greater than the distribution from Company K, it is implicit that the existing losses in the chain of companies will not be offset against the Company K dividend distribution as it passes through the chain. Otherwise the distribution would be fully appropriated by the existing losses and Company B would not receive any dividend amount and would have insufficient retained earnings of its own from which to declare a dividend. Swinfen Eady L J in Ammonia Soda Co LTD v Chamberlin [1918] 1 Ch 266 at 283 noted that the law does not require a company to not distribute as a dividend profit it has made from trading unless or until it has made good all its losses incurred in previous years. Therefore, Company B will not need to make good losses in its subsidiaries as the dividend moves through the subsidiaries that have carry forward losses. Although there are other companies within the group that also contain significant retained earnings, it is considered that the proposed distribution is not attributable to those profits, as they will not be used to fund either the proposed dividend or capital distribution and will remain intact after the transaction. Utilising the slice approach, as set out in paragraph 74 of PS LA 2008/10, Company B intends to debit XX% of the total distribution of $XXXX (XX cents per share or $XXXX) to its share capital account. Company B intends to debit XX% of the total distribution of $XXXX, (XX cents per share or $XXXX) to a profit or loss account. This component will be partially franked. Company B intends to fund the return of capital by way of debt and the borrowing is stated to be being undertaken to re-weight the existing debt/equity mix of Company B. Company B consolidated group had accumulated retained profits of only $XXXX in its accounts for the period ending XX/XX/XXXX and was in an accumulated retained loss position for the period XX/XX/XXXX through to XX/XX/XXXX. In this case, the capital being returned to the shareholders pursuant to the scheme is capital that is stated to be surplus to needs of Company B. Given the amount of external funds borrowed, Company B no longer needs the same quantum of capital to carry out its objects as was previously the case. Information provided by the applicant demonstrates that the proportion of retained earnings to share capital will remain the same both before and after the transaction. As paragraph 74 of PS LA 2008/10 notes, the occasion should affect both capital and profit on a proportionate basis. In view of the above the applicant contends that the capital reduction of $XXXX is not in substitution for a dividend. The Commissioner accepts that the proportion of the proposed distribution allocated to the share capital account is in accordance with the methodology set out in PS LA 2008/10 and is considered to be appropriate in the circumstances. Therefore, this factor does not tend toward the requisite purpose. Paragraph 45B(8)(b) of the ITAA 1936 Paragraph 45B(8)(b) directs attention to the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or an associate (within the meaning in section 318 of the ITAA 1936). Company B has not previously made a distribution to its shareholders since its acquisition of the Company B Group in XX/XXXX. The applicant states that Company B does not have a distribution policy which would be interrupted by the proposed distribution. The presence of profits within the operating companies in the group is offset by the losses made by the financing entities for Company B. Therefore, this circumstance does not incline toward the requisite purpose. Paragraph 45B(8)(c) of the ITAA 1936 Paragraph 45B(8)(c) concerns whether the relevant taxpayer has capital losses that, apart from the scheme, would be carried forward to a later year of income. In this case the capital benefit is provided to the relevant taxpayer, the shareholders. The Shareholder anticipates that there would be capital losses not fully utilised in the year ended 30 June 2013 and carried forward to future years. The Applicant has no knowledge of whether the other shareholders have capital losses. Further, Company B anticipates that the cost bases of the shares will exceed the aggregate of the proposed capital return. Accordingly, the circumstances are considered neutral as to the requisite purpose in paragraph 45B(2)(c) of the ITAA 1936. Paragraph 45B(8)(d) of the ITAA 1936 Paragraph 45B(8)(d) provides for consideration of whether some or all of the ownership interests in the company or in an associate (within the meaning of section 318) of the company held by the relevant taxpayer were acquired, or taken to have been acquired, by the relevant taxpayer before 20 September 1985. In general terms, this circumstance looks at whether the relevant taxpayer escapes CGT consequences from the provision of a capital benefit due to the fact that their interests or some of their interests in the company providing the benefit are pre-CGT assets. In this instance, shareholders acquired their shares in Company B after 20 September 1985. Therefore, this circumstance is irrelevant and tends neither for nor against the requisite purpose. Paragraph 45B(8)(e) of the ITAA 1936 Paragraph 45B(8)(e) requires consideration of 'whether the relevant taxpayer is a non resident'. The implication of non-residency is that it would ordinarily point towards a tax preference for a receipt on capital account over a distribution on revenue account, that is, a dividend. Normally, non-residents are liable for dividend withholding tax on dividend paid to them by a resident company, but they are not exposed to the CGT regime in relation to shares unless the shares are 'indirect real property interests' as defined in section 855-25 of the ITAA 1997. Approximately XX% of Company B shareholders are non-residents. Company B's majority shareholder, which will hold XX% of the company's shares, is Company L. The shareholder is a resident for Australian tax purposes, as are approximately XX% of the shareholders of Company B. The fact that the proposed distribution will only be partly franked, may point towards a tax preference for a receipt on capital account over a distribution on revenue account for Australian resident shareholders. Therefore, this circumstance inclines toward the requisite purpose. Paragraph 45B(8)(f) of the ITAA 1936 Paragraph 45B(8)(f) requires consideration of whether the cost base (for the purposes of the ITAA 1997) of the relevant ownership interests are not substantially less than the value of the applicable capital benefit. The cost base of the Company B shares for each shareholder may vary. In the case of the shareholder, the Applicant estimates that the total cost base of its shares in Company B is approximately $XX per share. Under the proposed distribution, the Applicant notes that the shareholder will receive a total distribution of $XX per share (in case of minimum distribution) or a total distribution of $XX per share (in case of maximum distribution). Accordingly, the proportion of the capital return which the shareholder is to receive under the proposed distribution will be XX% of the cost base. The cost base of the shares will therefore be more than the value of the proposed capital distribution. The Applicant contends that Company B anticipates that the cost base of the shares generally will exceed the proposed capital return on the basis that they expect that the distribution will be less than the contributed capital amount and therefore less than the cost base of the shares. Paragraph 88 of PS LA 2008/10 provides that where a capital distribution will not expose the relevant taxpayer to a capital gain in situations where the cost base of the ownership interest is similar or greater in value than the capital benefit, this could point towards the requisite purpose. On balance, it is considered that this factor is neutral as it does not involve a cancellation of a share. Paragraph 45B(8)(g) of the ITAA 1936 Repealed Paragraph 45B(8)(h) of the ITAA 1936 Paragraph 45B(8)(h) examines if the scheme involves the distribution of share capital or share premium is distributed and whether the interest held by the relevant taxpayer after the distribution is the same as it would be had a dividend been paid instead. The objective of this relevant circumstance is to determine if the proposed return of capital would have the same effect on a taxpayer's membership interest as a dividend distribution. The Applicant states that the number of shares held by each shareholder will not change as a result of proposed share capital distribution. Also, the Applicant noted that management shareholders will only participate in the proposed distribution to the extent of their fully paid ordinary shares. As their shareholding is less than approximately XX% of total shares, their other shareholdings should not materially affect the distribution or the position of shareholders as a whole. Paragraph 92 of PS LA 2008/10 provides that where the proportionate rights of a shareholder remain unchanged as part of a share capital reduction; this may point towards the capital reduction being made in substitution of a dividend. Therefore, the proportional interest held by the shareholders after the proposed distribution will be the same as that which would have been held had an equivalent dividend been paid instead of the capital benefit. Therefore, this factor points towards the requisite purpose. Paragraph 45B(8)(i) of the ITAA 1936 Paragraph 45B(8)(i) examines whether the scheme involves the provision of ownership interests and the later disposal of those interests or an increase in the value of ownership interests and the later disposal of those interests. No ownership interests are provided in the scheme. Further, there is no increase in the value of ownership interests and there is no subsequent disposal of the interests. Therefore, this factor is not relevant. Paragraph 45B(8)(j) of the ITAA 1936 This factor is relevant to demergers only. Paragraph 45B(8)(k) of the ITAA 1936 Paragraph 45B(8)(k) refers to the matters in paragraphs 177D(b)(i) to (viii) of the ITAA 1936. These are matters by reference to which a scheme is able to be examined from a practical perspective in order to identify and compare its tax and non-tax objectives. The eight matters referred to in subparagraphs 177D(b)(i) to (viii) of the ITAA 1936 are as follows: i. The manner in which the scheme was entered into or carried out This factor examines the method or the manner in which the scheme is carried out. The proposed restructure and the decisions, steps and events which comprise the scheme are considered to be consistent with Company B's intended business purpose. The manner in which the scheme is entered into is consistent with the stated commercial objectives. ii. The form and substance of the scheme The form of the scheme is consistent with an equal reduction of share capital under the Corporations Act 2001 . Economically, the relevant taxpayers receive cash some of which is debited to against share capital. An advantage is obtained due to the tax preferred treatment of receiving share capital as opposed to a dividend. The relevant taxpayer will receive cash to reflect the decrease in their investment in the company. Therefore the form of the scheme equates with its substance. In this case, Company B returns surplus capital as a result of the refinancing of its external borrowings which will increase its gearing ratio. As long as the amount returned to shareholders is attributable to the share capital invested in the business, the substance of the scheme would accord with its form. iii. The time at which the scheme was entered into and the length of the period during which the scheme was carried out This factor requires consideration of the extent to which, on the one hand, the timing and duration of the scheme go towards delivering the relevant tax benefit or, on the other hand, are related to commercial opportunities or requirements. The proposed distribution of capital will occur in certain month of the recent year, coinciding with Company B's refinancing of its external borrowings. It is considered that the timing of the transaction has no particular significance that would incline toward the requisite purpose. iv. The result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme This factor requires identifying the tax results of the scheme and consideration of the situation if section 45B did not apply. In its absence, the relevant taxpayer would receive the distribution of share capital and trigger CGT Event G1. However it is noted that Company B would not otherwise have the capacity to pay a cash dividend to the full extent of the distribution given its retained earnings position. v. Any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme From an income tax perspective, the relevant taxpayer increases its financial position because it does not have to pay tax on the distribution of share capital as opposed to a dividend returned on its investment in Company B. However, the entitlement of a shareholder to the capital of Company B will be reduced by a corresponding amount. vi. Any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme This matter looks to any change in the financial position of any person connected with the relevant taxpayer. In relation to a share capital reduction the company would generally be the only other party whose financial position will change as a result of the scheme. In this case, the principal financial consequences arising to Company B as a result of proposed distribution will be to increase their quantum of debt and their gearing ratio. The share capital reduction will increase Company B's gearing ratio as equity is substituted for debt. As equity is generally more expensive than debt (depending on prevailing interest rates), substituting debt for equity can reduce the company's cost of funds, which in turn may increase company profitability, shareholder returns and the share price. The company would exhaust its franking credits as it is franking some of the dividend. vii. Any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out This matter requires consideration of any other consequences of the scheme for the relevant taxpayer. The Applicant advises that the distribution will exhaust the franking account as the company intends to frank the dividend to the extent that there are franking credits available. The company will be able to fully frank the dividend distribution only up to an amount of approximately $ XXXX. The balance will be an unfranked dividend. Objectively viewed this is not an outcome which inclines to the requisite purpose. viii. The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi) This matter requires consideration of the nature of any connection between the shareholders and any person referred to in subparagraph 177(b)(vi) of the ITAA 1936. The relationship between Company B and the shareholders is relevant in this regard because there is an element of control in view of the proportion of share held in Company B. It is noted that all shareholders will receive a distribution as a result of the scheme and any connection will not be used to get an advantage over other shareholders. All entities that are involved in the proposed capital reduction are part of the Company B tax consolidated group. Accordingly, this factor is neutral in considering the requisite purpose. | Detailed Reasoning - Conclusion: The Applicant has submitted persuasive factors supporting the commercial objectives for the equal reduction of share capital and distribution to shareholders. Principally, these can be summarised as follows: · The proposed distribution is stated to be directed at restructuring the business in the interest of operating efficiency. · The existence of opportunities in the overseas market in particular are stated to allow the Company B Group to: o Diversify away from the domestic Australian bank market. o Access the deeper, more liquid overseas loan market. o Extend the maturity of existing debt facilities. o Enhance the Company B Group's financing flexibility. · The existing external Australian senior bank facility and mezzanine facilities are due for repayment in the near future. The refinancing and distribution is expected to increase the Company B Group's overall debt to equity ratio. These objectives are considered to be against the factors that would incline towards the conclusion that the proposed scheme is being implemented for a more than an incidental purpose for the relevant tax payer to obtain a tax benefit. In particular, the Commissioner considers that the proposed split of the distribution between capital and revenue is appropriate in the above circumstances. Therefore, notwithstanding that subparagraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are satisfied and having regard to the relevant circumstances of the scheme as stipulated within subsection 45B(8) of the ITAA 1936, it is concluded that the proposed scheme has not been implemented for a more than incidental purpose of enabling the relevant person to obtain a tax benefit for the purposes of paragraph 45B(2)(c) of the ITAA 1936. As the Commissioner will not make a determination under subsection 45B(3) in relation to the scheme as described, section 45C will not deem any part of the return of share capital to be an unfranked dividend for the purposes of the ITAA 1936 or the ITAA 1997. | Summary: No. The Commissioner will not make a further determination pursuant to subsection 45C(3) of the ITAA 1936 because subsection 45B(3) of the ITAA 1936 will not apply to the scheme. | Detailed Reasoning - Detailed reasoning: For the above reasons outlined in the answer to question 2, the Commissioner will not make a further determination under subsection 45C(3) of the ITAA 1936 that the whole or any part of the capital return was paid under a scheme for the purpose of avoiding franking debits arising in relation to the distribution from Company B.