Private ruling: Dividend and share capital return
Date of advice: 17 January 2023
Published: 6 March 2023
Ruling period: Income year ended XXXX
Date scheme commenced: XXXX

Ruling: Q1: Will the dividend in specie consisting of the transfer of the shares in Foreign SubCo2 by Foreign SubCo1 to Aus Co (Dividend in Specie) be a foreign equity distribution that is non-assessable non-exempt income pursuant to subsection 768-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) of Aus Co? | A1: Yes. | Q2: If the answer to question 1 is yes, will the amount of the foreign equity distribution referred to in question 1 that is non-assessable non-exempt income pursuant to subsection 768-5(1) of the ITAA 1997 be the market value of the shares in Foreign SubCo2 at the time they are transferred to Aus Co? | A2: Yes. | Q3: Will the transfer of the shares in Foreign SubCo2 by Foreign SubCo1 to Aus Co in satisfaction of the reduction of share capital of Foreign SubCo1 (Distribution) to the extent that the amount of the market value of those shares is greater than the amount of the reduction of share capital of Foreign SubCo1 (Dividend Component), be a foreign equity distribution that is non-assessable non-exempt income pursuant to subsection 768-5(1) of the ITAA 1997 of Aus Co? | A3: Yes. | Q4: Does CGT event G1 in subsection 104-135(1) of the ITAA 1997 happen in relation to the shares in Foreign SubCo1 owned by Aus Co upon the Distribution to the extent of the amount of the reduction of share capital of Foreign SubCo1 (Capital Component)? | A4: Yes. | Q5: Will the first element of the cost base and reduced cost base of each share in Foreign SubCo2 transferred by Foreign SubCo1 to Aus Co upon the Dividend in Specie or upon the Distribution be its market value at the time it is transferred pursuant to the application of the market value substitution rule in subsection 112-20(1) of the ITAA 1997? | A5: Yes

Relevant facts and circumstances: Background Transfer of shares in Foreign SubCo2 by Foreign SubCo1 to Aus Co Assumption(s)

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1997 Section 104-135 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Subsection 112-20(1) | Income Tax Assessment Act 1997 Section 768-5 | Income Tax Assessment Act 1997 Section 768-10

Reasons for decision: Summary: Yes, the Dividend in Specie will be a foreign equity distribution that is non-assessable non-exempt income of Aus Co pursuant to subsection 768-5(1). | Detailed Reasoning - Detailed reasoning: Subdivision 768-A provides that an equity distribution received by an Australian corporate tax entity from a foreign company is non-assessable non-exempt income in certain circumstances. Subsection 768-5(1) deals, relevantly, with foreign entity distributions received directly on participation interests. Pursuant to subsection 768-5(1), a 'foreign equity distribution' is not assessable income, and is not exempt income, of the entity to which it is made if: (a) the entity is an Australian resident and a *corporate tax entity; and (b) at the time the distribution is made, the entity satisfies the participation test in section 768-15 in relation to the company that made the distribution; and (c) the entity: (i) does not receive the distribution in the capacity of a trustee; or (ii) receives the distribution in the capacity of a trustee of a *public trading trust; and (d) the distribution is not one to which section 768-7 (which is about foreign income tax deductions) applies. | Detailed Reasoning - Foreign equity distribution: 'Foreign equity distribution' is defined in section 768-10 as follows: A foreign equity distribution is a *distribution or *non-share dividend made by a company that is not a Part X Australian resident (within the meaning of Part X of the Income Tax Assessment Act 1936 ) in respect of an *equity interest in the company. In the present case, the Dividend in Specie will be made by a company that is not a Part X Australian resident as required under section 768-10. This is because Foreign SubCo1 is a company incorporated in Country X and Foreign SubCo1 is not a Part X Australian resident as defined in section 317 of the ITAA 1936 as Foreign SubCo1 is not a resident within the meaning of section 6 of the ITAA 1936. | Detailed Reasoning - Distribution: A 'distribution' made by a company is defined in item 1 of the table in subsection 960-120(1) as 'a dividend, or something that is taken to be a dividend, under this Act'. Amendments to the former Corporations Law 1989 (Corporations Law) in 1998 abolished the concept of par value shares and associated concepts of share premium, share premium accounts and paid-up capital. As a result of these Corporations Law amendments, consequential amendments were made to the taxation laws by the Taxation Laws Amendment (Company Law Review) Act 1998 (Amending Act). These amendments included amending the definition of dividend in subsection 6(1) of the ITAA 1936, amending subsection 6(4) of the ITAA 1936, repealing the definition of share premium account and repealing subsection 6(5) of the ITAA 1936. These provisions as enacted prior to the amendments contained in the Amending Act will be referred to hereafter as the 'former provisions'. However, the amendments only have effect from 1 July 1998 for companies that do not have on issue par value shares. For those companies that continue to have par value shares on issue, the former provisions, including the former definition of dividend, continue to apply [1] . In the present case, as Foreign SubCo1 is a company with par value shares on issue, the former provisions, including the former definition of 'dividend' in subsection 6(1) of the ITAA 1936, continue to apply for Foreign SubCo1. The former definition of 'dividend' in subsection 6(1) of the ITAA 1936 provides as follows: dividend includes: (a) any distribution made by a company to any of its shareholders, whether in money or other property; (b) any amount credited by a company to any of its shareholders as shareholders; and, (c) the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits; 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), 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 a share premium account of the company; (e) moneys paid or credited, or property distributed, by a company by way of repayment by the company of moneys paid up on a share except to the extent that: (i) if the share is cancelled or redeemed-the amount of those moneys or the value of that property, as the case may be, is greater than the amount to which the share was paid up immediately before the cancellation or redemption; or (ii) in any other case-the amount of those moneys or the value of that property, as the case may be, is greater than the amount by which the amount to which the share was paid up immediately before the repayment exceeds the amount to which the share is paid up immediately after the repayment; or (f) a reversionary bonus on a policy of life-assurance; Under paragraph (a) of the former definition of 'dividend' in subsection 6(1) of the ITAA 1936, a dividend includes any distribution made by a company to any of its shareholders, whether in money or other property. In the present case, the Dividend in Specie will satisfy paragraph (a) of the former definition of 'dividend' in subsection 6(1) of the ITAA 1936 as it involves a payment consisting of the transfer of property, being the shares in Foreign SubCo2, by Foreign SubCo1 to its shareholder Aus Co as shareholder. Therefore, the Dividend in Specie will be a 'dividend' unless excluded by paragraphs (d), (e) or (f) of the former definition of 'dividend'. Pursuant to paragraph (d), an amount paid, credited or distributed to a shareholder out of a 'share premium account' of a company will not be treated as a 'dividend'. The definition of 'share premium account' was repealed by Schedule 5 of the Amending Act. Broadly, a 'share premium account' is, irrespective of any description a company may give it, an account credited with amounts of premiums received by the company on shares issued by it but does not include accounts credited with amounts that were not in respect of share premiums received or with amounts that could no longer be identified in the company's books as share premiums. Former subsection 6(4) of the ITAA 1936, in broad terms, captures agreements or arrangements entered into for the purpose of exploiting the exclusion of distributions from share premium accounts from the former definition of 'dividend', subject to former subsection 6(5) of the ITAA 1936. In the present case, no amount of the Dividend in Specie will be debited against an amount standing to the credit of a share premium account of Foreign SubCo1. Accordingly, the exclusion in paragraph (d) will not apply. Pursuant to paragraph (e), moneys paid or credited, or property distributed by a company by way of repayment by the company of moneys paid up on a share in, relevantly, circumstances other than where the share is cancelled or redeemed, will not be a 'dividend' except to the extent that the amount of those moneys or the value of that property is greater than the amount by which the amount to which the share was paid up immediately before the repayment exceeds the amount to which the share is paid up immediately after the repayment. In the present case, the exclusion in paragraph (e) will not apply as the Dividend in Specie will not constitute a repayment by Foreign SubCo1 of moneys paid up on the shares issued by it. The exclusion in paragraph (f) will not apply as the Dividend in Specie will not be a reversionary bonus on a policy of life-assurance. Accordingly, the Dividend in Specie will be a 'dividend' as defined in the former definition of 'dividend' in subsection 6(1) of the ITAA 1936. | Detailed Reasoning - Equity interest: 'Equity interest' in an entity is defined in subsection 995-1(1). In the case of a company, it has the meaning given by Subdivision 974-C. Subsection 974-70(1) in Subdivision 974-C provides as follows: A scheme gives rise to an equity interest in a company if, when the scheme comes into existence: (a) the scheme satisfies the equity test in subsection 974-75(1) in relation to the company because of the existence of an interest; and (b) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a debt interest in the company, or a connected entity of the company, under Subdivision 974-B. Under item 1 of the table in subsection 974-75(1), an interest in the company as a member or stockholder of the company is an equity interest. In the present case, the Dividend in Specie will be made in respect of the shares in Foreign SubCo1. Each share in Foreign SubCo1 is an interest in Foreign SubCo1 as a member. Therefore, the scheme giving rise to the shares in Foreign SubCo1 satisfies the equity test in subsection 974-75(1). The shares in Foreign SubCo1 are not also characterised as debt interests under Subdivision 974-B. Accordingly, the shares in Foreign SubCo1 are equity interests in Foreign SubCo1 as defined in subsection 995-1(1). Conclusion The Dividend in Specie will be a foreign equity distribution pursuant to section 768-10 as it will be a distribution made by Foreign SubCo1, a company that is not a Part X Australian resident, in respect of an equity interest in Foreign SubCo1. | Detailed Reasoning - Recipient entity must be an Australian resident and a corporate tax entity - paragraph 768-5(1)(a): Paragraph 768-5(1)(a) requires the entity to which the foreign equity distribution is made to be an Australian resident and a corporate tax entity. An entity that is a company is a corporate tax entity pursuant to section 960-115. In the present case, the Dividend in Specie will be made by Foreign SubCo1 to Aus Co. Aus Co is the recipient entity for the purposes of applying subsection 768-5(1) to the Dividend in Specie. Aus Co is a company that was incorporated in Australia and is a resident of Australia as defined in subsection 6(1) of the ITAA 1936. Accordingly, the requirement in paragraph 768-5(1)(a) will be met. | Detailed Reasoning - Participation test - paragraph 768-5(1)(b): In the present case, paragraph 768-5(1)(b) requires that at the time the Dividend in Specie is made, Aus Co must satisfy the participation test pursuant to section 768-15 in relation to Foreign SubCo1. Section 768-15 relevantly provides that: An entity satisfies the participation test in this section in relation to another entity at a time if, at that time, the sum of the following is at least 10%: (a) the *direct participation interest the entity would have in the other entity if rights on winding-up were disregarded; | Detailed Reasoning - ...: The 'direct participation interest' that one entity holds in another entity is worked out using the table in subsection 960-190(1) and depends on what type of entity the other entity is. Item 1 of the table in subsection 960-190(1) provides that the direct participation interest in a company (within the meaning of Part X of the ITAA 1936) is the direct control interest (within the meaning of section 350 of the ITAA 1936 as modified by subsection 960-190(2)) that the entity holds in that company. Section 350 of the ITAA 1936 relevantly provides that: ...an entity holds a direct control interest in a company at a particular time equal to the percentage that the entity holds, or is entitled to acquire, at that time of: (a) the total paid-up share capital of the company; or ... Aus Co directly owns, legally and beneficially, all the shares in Foreign SubCo1 at the time the Dividend in Specie will be made. Therefore, as Aus Co holds 100% of the total paid-up share capital of Foreign SubCo1, it holds a direct control interest and therefore a direct participation interest in Foreign SubCo1 of 100% at the time the Dividend in Specie will be made. Accordingly, as Aus Co will satisfy the participation test in relation to Foreign SubCo1, the requirement in paragraph 768(5)(1)(b) will be met. | Detailed Reasoning - Distribution not received in the capacity of a trustee - paragraph 768-5(1)(c): In the present case, Aus Co directly owns, legally and beneficially, all the shares in Foreign SubCo1. Therefore, Aus Co will not receive the Dividend in Specie in a capacity of a trustee or in the capacity of a trustee of a public trading trust. Accordingly, the requirement in paragraph 768-5(1)(c) will be met. | Detailed Reasoning - Distribution is not one to which section 768-7 applies - paragraph 768-5(1)(d): Subsection 768-7(1) relevantly provides: This section applies to a *foreign equity distribution if: (a) all or part of the distribution gives rise to a *foreign income tax deduction; and (b) the exception in subsection (2) does not apply to the distribution. A foreign income tax deduction is defined in section 832-120. Subsection 832-120(1) provides: An amount of a loss or outgoing is a foreign income tax deduction in a foreign country in a *foreign tax period to which an entity is entitled, if the entity is entitled to deduct the amount in working out its tax base for the foreign tax period under a law of the foreign country dealing with *foreign income tax (except a tax covered by subsection 832-130(7). On the basis that the Dividend in Specie will not give rise to such a foreign income tax deduction, the requirement in paragraph 768-5(1)(d) will be met. | Detailed Reasoning - Conclusion: As the requirements of subsection 768-5(1) will be met, the Dividend in Specie will be a foreign equity distribution that is non-assessable non-exempt income of Aus Co. | Detailed Reasoning - Question 2: If the answer to question 1 is yes, will the amount of the foreign equity distribution referred to in question 1 that is non-assessable non-exempt income pursuant to subsection 768-5(1) of the ITAA 1997 be the market value of the shares in Foreign SubCo2 at the time they are transferred to Aus Co? | Summary: Yes, the amount of the foreign equity distribution referred to in question 1 that is non-assessable non-exempt income pursuant to subsection 768-5(1) will be the market value of the shares in Foreign SubCo2 at the time they are transferred to Aus Co. | Detailed Reasoning - Detailed reasoning: As explained in Taxation Ruling TR 2003/8: Income tax: distributions of property by companies to shareholders - amount to be included as an assessable dividend , to the extent relevant for present purposes, the amount of a dividend in respect of a distribution of property (including shares held by the company in another company) to a shareholder in their capacity as a shareholder will be the money value of the property at the time it is distributed (see paragraph 4). The value of property ordinarily means the fair market value of property: see Taxation Ruling IT 2668. On this basis it is accepted that the amount of the foreign equity distribution referred to in question 1 that is non-assessable non-exempt income pursuant to subsection 768-5(1) will be the market value of the shares in Foreign SubCo2 at the time they are transferred to Aus Co. | Detailed Reasoning - Question 3: Will the transfer of the shares in Foreign SubCo2 by Foreign SubCo1 to Aus Co in satisfaction of the reduction of share capital of Foreign SubCo1 (Distribution) to the extent that the amount of the market value of those shares is greater than the amount of the reduction of share capital of Foreign SubCo1 (Dividend Component), be a foreign equity distribution that is non-assessable non-exempt income pursuant to subsection 768-5(1) of the ITAA 1997 of Aus Co? | Summary: Yes, the Dividend Component of the Distribution will be a foreign equity distribution that is non-assessable non-exempt income pursuant to subsection 768-5(1) of Aus Co. | Detailed Reasoning - Detailed reasoning: Pursuant to subsection 768-5(1), a 'foreign equity distribution' is not assessable income, and is not exempt income, of the entity to which it is made if: (a) the entity is an Australian resident and a *corporate tax entity; and (b) at the time the distribution is made, the entity satisfies the participation test in section 768-15 in relation to the company that made the distribution; and (c) the entity: (i) does not receive the distribution in the capacity of a trustee; or (ii) receives the distribution in the capacity of a trustee of a *public trading trust; and (d) the distribution is not one to which section 768-7 (which is about foreign income tax deductions) applies. | Detailed Reasoning - Foreign equity distribution: 'Foreign equity distribution' is defined in section 768-10 as follows: A foreign equity distribution is a *distribution or *non-share dividend made by a company that is not a Part X Australian resident (within the meaning of Part X of the Income Tax Assessment Act 1936 ) in respect of an *equity interest in the company. In the present case, the Distribution will be made by a company that is not a Part X Australian resident as required under section 768-10. This is because Foreign SubCo1 is a company incorporated in Country X and Foreign SubCo1 is not a Part X Australian resident as defined in section 317 of the ITAA 1936 as Foreign SubCo1 is not a resident within the meaning of section 6 of the ITAA 1936. Distribution A 'distribution' made by a company is defined in item 1 of the table in subsection 960-120(1) as 'a dividend, or something that is taken to be a dividend, under this Act'. As discussed in Question 1, as Foreign SubCo1 is a company with par value shares on issue, the former provisions, including the former definition of 'dividend' in subsection 6(1) of the ITAA 1936 continue to apply for Foreign SubCo1 [2] . The former definition of 'dividend' in subsection 6(1) of the ITAA 1936 provides as follows: dividend includes: (a) any distribution made by a company to any of its shareholders, whether in money or other property; (b) any amount credited by a company to any of its shareholders as shareholders; and, (c) the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits; 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), 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 a share premium account of the company; (e) moneys paid or credited, or property distributed, by a company by way of repayment by the company of moneys paid up on a share except to the extent that: (i) if the share is cancelled or redeemed-the amount of those moneys or the value of that property, as the case may be, is greater than the amount to which the share was paid up immediately before the cancellation or redemption; or (ii) in any other case-the amount of those moneys or the value of that property, as the case may be, is greater than the amount by which the amount to which the share was paid up immediately before the repayment exceeds the amount to which the share is paid up immediately after the repayment; or (f) a reversionary bonus on a policy of life-assurance; Under paragraph (a) of the former definition of 'dividend' in subsection 6(1) of the ITAA 1936, a dividend includes any distribution made by a company to any of its shareholders, whether in money or other property. In the present case, the Distribution will satisfy paragraph (a) of the former definition of 'dividend' in subsection 6(1) of the ITAA 1936 as it involves a payment consisting of the transfer of property, being the shares in Foreign SubCo2, by Foreign SubCo1 to its shareholder Aus Co as shareholder. Therefore, the Distribution will be a 'dividend' unless excluded by paragraphs (d), (e) or (f) of the former definition of 'dividend'. Pursuant to paragraph (d), an amount paid, credited or distributed to a shareholder out of a 'share premium account' of a company will not be treated as a 'dividend'. In the present case, no amount of the Distribution will be debited against an amount standing to the credit of a share premium account of Foreign SubCo1. Accordingly, the exclusion in paragraph (d) will not apply. Pursuant to paragraph (e), moneys paid or credited, or property distributed by a company by way of repayment by the company of moneys paid up on a share will not be treated as a 'dividend' except to the extent that subparagraph (e)(i) or (e)(ii) applies. In the present case, the transfer of the shares in Foreign Subco2 by Foreign SubCo1 to its shareholder Aus Co will constitute a repayment by Foreign SubCo1 of moneys paid up on its shares under paragraph (e) because this transfer will satisfy in kind Foreign SubCo1's obligation to return the sum arising from the reduction of Foreign SubCo1's total allotted, called up and fully paid share capital to its shareholder Aus Co. The Distribution will therefore not be treated as a 'dividend' except to the extent that subparagraph (e)(i) or (e)(ii) will apply. In the present case, subparagraph (e)(i) will not apply. Subparagraph (e)(i) may only apply if the share is cancelled or redeemed. In the present case, Foreign SubCo1's total allotted, called up and fully paid share capital will be reduced by reducing the nominal value of each of the Foreign SubCo1's issued ordinary shares. No shares in Foreign SubCo1 will be cancelled or redeemed upon the Distribution. Subparagraph (e)(ii) will apply in any other case if the amount of the moneys paid or credited, or the value of the property distributed is greater than the amount by which the amount to which the share was paid up immediately before the repayment exceeds the amount to which the share is paid up immediately after the repayment. In the present case, subparagraph (e)(ii) will apply because the amount of the market value of the shares in Foreign SubCo2 that will be transferred by Foreign SubCo1 to Aus Co upon the Distribution will be substantially greater than the amount of the reduction of share capital of Foreign SubCo1, i.e. the amount by which the amount to which the shares in Foreign SubCo1 will be paid up immediately before the Distribution, being X ordinary shares with a nominal value of $Y, will exceed the amount to which the shares in Foreign SubCo1 will be paid up immediately after the Distribution, being X ordinary shares with a nominal value of $Z. The Distribution will therefore have 2 parts for present purposes. One part is the part of the Distribution to the extent that the amount of the market value of the shares in Foreign SubCo2 that will be transferred will be greater than the amount of the reduction of share capital of Foreign SubCo1 (the Dividend Componentof theDistribution). The other part of the Distribution is equivalent to the amount of the reduction of share capital of Foreign SubCo1 (the Capital Component of the Distribution). As mentioned above, the Distribution will not be treated as a 'dividend' pursuant to paragraph (e) except to the extent that, relevantly, subparagraph (e)(ii) will apply. Because of the application of subparagraph (e)(ii) as outlined above, the Dividend Component of the Distribution will not be excluded from the former definition of 'dividend' pursuant to paragraph (e). As a result, only the Capital Component of the Distribution will be excluded from the former definition of 'dividend' pursuant to paragraph (e). The exclusion in paragraph (f) will not apply as the Distribution will not be a reversionary bonus on a policy of life-assurance. Accordingly, the Dividend Component of the Distribution will be a 'dividend' as defined in the former definition of 'dividend' in subsection 6(1) of the ITAA 1936. | Detailed Reasoning - Equity interest: 'Equity interest' in an entity is defined in subsection 995-1(1). In the case of a company, it has the meaning given by Subdivision 974-C. Subsection 974-70(1) in Subdivision 974-C provides as follows: A scheme gives rise to an equity interest in a company if, when the scheme comes into existence: (a) the scheme satisfies the equity test in subsection 974-75(1) in relation to the company because of the existence of an interest; and (b) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a debt interest in the company, or a connected entity of the company, under Subdivision 974-B. Under item 1 of the table in subsection 974-75(1), an interest in the company as a member or stockholder of the company is an equity interest. In the present case, the Distribution will be made in respect of the shares in Foreign SubCo1. Each share in Foreign SubCo1 is an interest in Foreign SubCo1 as a member. Therefore, the scheme giving rise to the shares in Foreign SubCo1 satisfies the equity test in subsection 974-75(1). The shares in Foreign SubCo1 are not also characterised as debt interests under Subdivision 974-B. Accordingly, the shares in Foreign SubCo1 are equity interests in Foreign SubCo1 as defined in subsection 995-1(1). | Detailed Reasoning - Conclusion: The Dividend Component of the Distribution will be a foreign equity distribution pursuant to section 768-10 as it will be a distribution made by Foreign SubCo1, a company that is not a Part X Australian resident, in respect of an equity interest in Foreign SubCo1. | Detailed Reasoning - Recipient entity must be an Australian resident and a corporate tax entity - paragraph 768-5(1)(a): Paragraph 768-5(1)(a) requires the entity to which the foreign equity distribution is made to be an Australian resident and a corporate tax entity. An entity that is a company is a corporate tax entity pursuant to section 960-115. In the present case, the Distribution will be made by Foreign SubCo1 to Aus Co. Aus Co is the recipient entity for the purposes of applying subsection 768-5(1) to the Distribution. Aus Co is a company that was incorporated in Australia and is a resident of Australia as defined in subsection 6(1) of the ITAA 1936. Accordingly, the requirement in paragraph 768-5(1)(a) will be met. | Detailed Reasoning - Participation test - paragraph 768-5(1)(b): In the present case, paragraph 768-5(1)(b) requires that at the time the Distribution is made, Aus Co must satisfy the participation test pursuant to section 768-15 in relation to Foreign SubCo1. Section 768-15 relevantly provides: An entity satisfies the participation test in this section in relation to another entity at a time if, at that time, the sum of the following is at least 10%: (a) the *direct participation interest the entity would have in the other entity if rights on winding-up were disregarded; | Detailed Reasoning - ...: The 'direct participation interest' that one entity holds in another entity is worked out using the table in subsection 960-190(1) and depends on what type of entity the other entity is. Item 1 of the table in subsection 960-190(1) provides that the direct participation interest in a company (within the meaning of Part X of the ITAA 1936) is the direct control interest (within the meaning of section 350 of the ITAA 1936 as modified by subsection 960-190(2)) that the entity holds in that company. Section 350 of the ITAA 1936 relevantly provides that: ...an entity holds a direct control interest in a company at a particular time equal to the percentage that the entity holds, or is entitled to acquire, at that time of: (a) the total paid-up share capital of the company; or ... Aus Co directly owns, legally and beneficially, all the shares in Foreign SubCo1 at the time the Distribution will be made. Therefore, as Aus Co holds 100% of the total paid-up share capital of Foreign SubCo1, it holds a direct control interest and therefore a direct participation interest in Foreign SubCo1 of 100% at the time the Distribution will be made. Accordingly, as Aus Co will satisfy the participation test in relation to Foreign SubCo1, the requirement in paragraph 768(5)(1)(b) will be met. | Detailed Reasoning - Distribution not received in the capacity of a trustee - paragraph 768-5(1)(c): In the present case, Aus Co directly owns, legally and beneficially, all the shares in Foreign SubCo1. Therefore, Aus Co will not receive the Distribution in a capacity of a trustee or in the capacity of a trustee of a public trading trust. Accordingly, the requirement in paragraph 768-5(1)(c) will be met. | Detailed Reasoning - Distribution is not one to which section 768-7 applies - paragraph 768-5(1)(d): Subsection 768-7(1) relevantly provides: This section applies to a *foreign equity distribution if: (a) all or part of the distribution gives rise to a *foreign income tax deduction; and (b) the exception in subsection (2) does not apply to the distribution. A foreign income tax deduction is defined in section 832-120. Subsection 832-120(1) provides: An amount of a loss or outgoing is a foreign income tax deduction in a foreign country in a *foreign tax period to which an entity is entitled, if the entity is entitled to deduct the amount in working out its tax base for the foreign tax period under a law of the foreign country dealing with *foreign income tax (except a tax covered by subsection 832-130(7). On the basis that the Distribution will not give rise to such a foreign income tax deduction, the requirement in paragraph 768-5(1)(d) will be met. | Detailed Reasoning - Conclusion: As the requirements of subsection 768-5(1) will be met, the Dividend Component of the Distribution will be a foreign equity distribution that is non-assessable non-exempt income of Aus Co. | Detailed Reasoning - Question 4: Does CGT event G1 in subsection 104-135(1) of the ITAA 1997 happen in relation to the shares in Foreign SubCo1 owned by Aus Co upon the Distribution to the extent of the amount of the reduction of share capital of Foreign SubCo1 (Capital Component)? | Summary: Yes, CGT event G1 in subsection 104-135(1) will happen in relation to the shares in Foreign SubCo1 owned by Aus Co upon the Distribution to the extent of the Capital Component of the Distribution. | Detailed Reasoning - Detailed reasoning: Subsection 104-135(1) provides that CGT event G1 happens if: (a) a company makes a payment to you in respect of a *share you own in the company (except for *CGT event A1 or C2 happening in relation to the share); and (b) some or all of the payment (the non-assessable part ) is not a *dividend, or an amount that is taken to be a dividend under section 47 of the Income Tax Assessment Act 1936; and (c) the payment is not included in your assessable income. The payment can include giving property: see section 103-5. | Detailed Reasoning - Paragraph 104-135(1)(a): Paragraph 104-135(1)(a) will be satisfied if a company makes a payment (which may include giving property) to a shareholder in respect of a share they own in the company (except for CGT event A1 or C2 happening in relation to the share). In present case, Foreign SubCo1 is a company that will make a payment to Aus Co in respect of the shares it owns in Foreign SubCo1 as Foreign SubCo1 will transfer shares in Foreign SubCo2 to Aus Co in respect of the ordinary shares that Aus Co owns in Foreign SubCo1 upon the Distribution. The Distribution will involve the reduction of the nominal value of each of the Foreign SubCo1's issued ordinary shares rather than the disposal of the shares in Foreign SubCo1 by Aus Co or the cancellation, surrender or similar ending of Aus Co's shares in Foreign SubCo1. CGT event A1 or C2 will therefore not be happening in relation to shares in Foreign SubCo1 upon the Distribution. Accordingly, paragraph 104-135(1)(a) will be satisfied. | Detailed Reasoning - Paragraph 104-135(1)(b): As concluded in Question 3, the Dividend Component of the Distribution will be a 'dividend' as defined in the former definition of 'dividend' in subsection 6(1) of the ITAA 1936. However, the Capital Component of the Distribution that will be excluded from the former definition of 'dividend' pursuant to paragraph (e) will not be a dividend, or an amount that is taken to be a dividend under section 47 of the ITAA 1936. Subsections 104-135(1A) and (1B) do not apply to reduce this amount. The Capital Component of the Distribution will therefore be the 'non-assessable part' of the payment as referred to in paragraph 104-135(1)(b). Accordingly, paragraph 104-135(1)(b) will be satisfied. | Detailed Reasoning - Paragraph 104-135(1)(c): Paragraph 104-135(1)(c) will be satisfied on the basis that the Capital Component of the Distribution will not be included in the assessable income of Aus Co. | Detailed Reasoning - Conclusion: As all of the requirements under subsection 104-135(1) will be satisfied, CGT event G1 will happen in relation to the shares in Foreign SubCo1 owned by Aus Co upon the Distribution to the extent of the amount of the reduction of share capital of Foreign SubCo1 (Capital Component of the Distribution). | Detailed Reasoning - Question 5: Will the first element of the cost base and reduced cost base of each share in Foreign SubCo2 transferred by Foreign SubCo1 to Aus Co upon the Dividend in Specie or upon the Distribution be its market value at the time it is transferred pursuant to the application of the market value substitution rule in subsection 112-20(1) of the ITAA 1997? | Summary: Yes, the first element of the cost base and reduced cost base of each share in Foreign SubCo2 transferred by Foreign SubCo1 to Aus Co upon the Dividend in Specie or upon the Distribution will be its market value at the time it is transferred pursuant to the application of the market value substitution rule in subsection 112-20(1). | Detailed Reasoning - Detailed reasoning: Each share in Foreign SubCo2 that will be transferred by Foreign SubCo1 to Aus Co upon the Dividend in Specie or upon the Distribution is a CGT asset (section 108-5). Section 110-25 contains the general rules about cost base of a CGT asset. Subsection 110-25(1) provides that the cost base of a CGT asset consists of 5 elements. Subsection 110-25(2) relevantly provides: | Detailed Reasoning - 110-25(2): The first element is the total of: (a) the money you paid, or are required to pay, in respect of *acquiring it; and (b) the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). | Detailed Reasoning - Note 1:: There are special rules for working out when you are required to pay money or give other property: see section 103-15. | Detailed Reasoning - Note 2:: This element is replaced with another amount in many situations: see Division 112. Section 110-55 contains the general rules about reduced cost base of a CGT asset. The first element of the reduced cost base of a CGT asset is the same as that for the cost base (subsection 110-55(2)). However, Division 112 may modify the general rules about the cost base and reduced cost base of a CGT asset. Section 112-20 contains the market value substitution rule. Paragraph 112-20(1)(a) relevantly provides that the first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from CGT event D1 happening or another entity doing something that did not constitute a CGT event happening. In respect of the Dividend in Specie, Aus Co will not incur expenditure to acquire the shares in Foreign SubCo2, as the shares in Foreign SubCo2 will be transferred by Foreign SubCo1 to Aus Co for no consideration, as a distribution in specie under Country X corporate law. In respect of the Distribution, Aus Co will not incur expenditure to acquire the shares in Foreign SubCo2, as the shares in Foreign SubCo2 will be transferred by Foreign SubCo1 to Aus Co in satisfaction of the reduction of share capital of Foreign SubCo1 under Country X corporate law. The exceptions in paragraph 112-20(1)(a) will not apply as the acquisition of the shares in Foreign SubCo2 by Aus Co upon the Dividend in Specie or upon the Distribution will be a result of CGT event A1. This is because pursuant to section 104-10 a change of ownership will occur to a CGT asset being a change of ownership to the shares in Foreign SubCo2 from Foreign SubCo1 to Aus Co. Therefore, paragraph 112-20(1)(a) will be satisfied as Aus Co will not incur expenditure to acquire the shares in Foreign SubCo2 upon the Dividend in Specie or upon the Distribution and the exceptions under paragraph(1)(a) do not apply. Subsection 112-20(3) provides for exceptions to the market value substitution rule. These exceptions will not apply in the present case. Aus Co will acquire the shares in Foreign SubCo2 at the time that these shares will be transferred by Foreign SubCo1 upon the Dividend in Specie or upon the Distribution as at this time Foreign SubCo1 stops being the owner of the shares in Foreign SubCo2 (subsection 109-5(2)). As such, pursuant to the application of the market value substitution rule in subsection 112-20(1), the first element of the cost base and reduced cost base of each share in Foreign SubCo2 transferred by Foreign SubCo1 to Aus Co upon the Dividend in Specie or upon the Distribution will be its market value at the time it is transferred. [1] See Item 8 (Application) of Schedule 3 to the Amending Act in relation to the definition of dividend and as upheld by subsection 3(2) of the Amending Acts 1990 to 1999 Repeal Act 2016 . [2] See Item 8 (Application) of Schedule 3 to the Amending Act in relation to the definition of dividend and as upheld by subsection 3(2) of the Amending Acts 1990 to 1999 Repeal Act 2016 .

Aus Co is a company incorporated in Australia. Aus Co is the parent entity of the Aus Co group. | Aus Co is a resident of Australia for Australian income tax purposes as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). | Aus Co directly owns, legally and beneficially, all the shares in Foreign SubCo1. Foreign SubCo1 is a private limited company incorporated in Country X and a resident of Country X for Country X income tax purposes. Foreign SubCo1 is not a resident of Australia for Australian income tax purposes as defined in subsection 6(1) of the ITAA 1936. | Foreign SubCo1 owns several foreign subsidiaries in the Aus Co group, including Foreign SubCo2. | Foreign SubCo1 directly owns, legally and beneficially, all the shares in Foreign SubCo2. Foreign SubCo2 is a private limited company incorporated in Country X and a resident of the Country X for Country X income tax purposes. Foreign SubCo2 is not a resident of Australia for Australian income tax purposes as defined in subsection 6(1) of the ITAA 1936. | The Aus Co group will be undertaking a restructure that will include the transfer of all the shares in Foreign SubCo2 by Foreign SubCo1 to Aus Co in two separate transactions under Country X corporate law. | One transaction will involve a dividend in specie to be paid by Foreign SubCo1 to AusCo in respect of the ordinary shares in the capital of Foreign SubCo1 consisting of the transfer of shares held by Foreign SubCo1 in the capital of Foreign SubCo2 (Dividend in Specie). These shares will be transferred for no consideration. The Dividend in Specie will be covered by distributable profits and will be a distribution in specie under Country X corporate law. | The other transaction will involve the following: | Foreign SubCo1's total allotted, called up and fully paid share capital to be reduced from X ordinary shares with a par value of $Y each to X ordinary shares of $Z each, by reducing the nominal value of each of the Foreign SubCo1's issued ordinary shares from $Y to $Z, and | Foreign SubCo1's obligation to return the sum arising from the share capital reduction to the holder of its ordinary shares, being Aus Co, to be satisfied in kind with the transfer from Foreign SubCo1 to Aus Co of shares, including legal and beneficial title, in the issued share capital of Foreign SubCo2 (Distribution). | At the time that the shares in Foreign SubCo2 will be transferred by Foreign SubCo1 to Aus Co upon the Distribution, the amount of the market value of these shares is expected to be greater than the amount of the reduction of share capital of Foreign SubCo1. The part of the Distribution to the extent that the amount of the market value of these shares is greater than the amount of the reduction of share capital of Foreign SubCo1 is referred to as the Dividend Component of theDistribution. The remaining part of the Distribution, equivalent to the amount of the reduction of share capital of Foreign SubCo1, is referred to as the Capital Component of the Distribution. | There will be no amount debited to Foreign SubCo1's share premium account in respect of either the Dividend in Specie or Distribution. | At the time that the shares in Foreign SubCo2 will be transferred by Foreign SubCo1 to Aus Co upon the Dividend in Specie or upon the Distribution, the market value of these shares will be substantially higher than the book value of these shares in Foreign SubCo1's accounts. | All or part of the Dividend in Specie and all or part of the Distribution will not give rise to any deductions that satisfy the definition of a foreign income tax deduction under subsection 832-120(1) of the ITAA 1997. | Reasons for decision: All legislative references in these reasons for decision are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.