Private ruling: Share capital account
Date of advice: 3 April 2020
Published: May 2020
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 30 June 20XX

Ruling: Q1: Has an amount been transferred to the share capital account of Company for the purposes of subsection 197-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in the circumstances set out in this Ruling relating to the two accounting journal entries identified? | A1: No, no amount has been transferred to Company's share capital account for the purposes of subsection 197-5(1) of the ITAA 1997 in the circumstances set out in this Ruling.

Relevant facts and circumstances: Company conducted a review of its share capital account and identified two accounting journal entries with respect to which it sought a ruling from the Commissioner regarding the application of Division 197. Company has not made any distribution to its shareholders which were debited to its share capital account.

Relevant legislative provisions: Section 197-5 of the ITAA 1997 | Subsection 197-50(1) of the ITAA 1997 | Section 975-300 of the ITAA 1997

Reasons for decision: Summary: All legislative references are to the ITAA 1997 unless otherwise specified. | Detailed Reasoning - Meaning of a transferred amount: Under subsection 197-5(1), Division 197 applies to an amount that is transferred to a company's share capital account from another of the company's account, if the company was an Australian resident immediately before the time of the transfer. The meaning of a company's share capital account includes 'an account that the company keeps of its share capital' (paragraph 975-300(1)(a)). A company's share capital account becomes 'tainted' when an amount to which Division 197 applies is transferred to that share capital account, unless the account is already tainted (subsection 197-50(1)). The Revised Explanatory Memorandum to Taxation Laws Amendment (2006 Measures No. 3) Act 2006 (the EM) provides the context of Division 197: 4.4... The share capital tainting rules are integrity rules designed to prevent a company from disguising a distribution of profits as a tax-preferred capital distribution by transferring profits into its share capital account and subsequently making distributions from that account. Division 197 does not define when an amount is transferred from one account to another. However, the EM provides the following explanation of when an amount is transferred for the purposes of Division 197: When is an amount transferred from one account to another account? 4.12 An amount is transferred from one account to another where that amount is moved from one account to another. This, in turn, requires the balance of the first account to be reduced, while the balance of the second account is increased by the same amount. 4.13 An amount is not transferred from one account to another where the particular accounting entries result in the balances of both accounts increasing in size. Accordingly, an accounting entry of the form 'debit asset, credit share capital account' does not represent a transfer in the relevant sense. Furthermore, a transfer to the share capital account will not arise if an expense account is debited at the same time that the share capital account is credited. | Detailed Reasoning - Application to these circumstances: Having regard to the circumstances of the journal entries and to the purpose of Division 197, it is considered that the specific entries described in this Ruling do not cause an amount to be transferred to Company's share capital account for the purposes of subsection 197-5(1) of the ITAA 1997.