Private ruling: Return of share capital
Published: May 2012
Ruling period: 1 January 2012 to 31 December 2012
Date scheme commenced: 12 June 2012

Ruling: Q1: Will the Commissioner confirm that no Capital Gains Tax (CGT) will arise for its Shareholder B in relation to any CGT events which would arise as a result of the share capital reduction? | A1: Yes

Relevant facts and circumstances: Description of the group Structure A non-resident Shareholder B, is the parent of the Australian Company C Shareholder B is the sole shareholder of Company C. Proposed Transaction Return of share capital Company C raised $XXX amounts of share capital in the 2009 and 2010 income years from Shareholder B to fund its objective of expanding its business operations and acquisition of suitable land or properties. Shareholder B funded its investment through debt borrowed from various foreign financial institutions. Company C proposes to return share capital to Shareholder B during this income year. The return of share capital is proposed to be implemented by way of a pro-rata reduction of capital on all shares issued by Company C to Shareholder B without a cancellation of shares. That is, there will be no change in the number ordinary shares on issue and held by Shareholder B in Company C. The commercial reasons for the return of share capital are to meet the financial requirements and achieve efficient utilisation of funds at Shareholder B. Dividend policy Company C has not paid any dividends nor return any share capital since incorporation. Company C has no formal dividend or capital distribution policy. Other information Shareholders B's CGT cost base in each share in Company B is $X. The applicant contends that the cash position of Company C will not be materially affected by the transfer of share capital to Shareholder B. The applicant advises that the share capital account of Company C (as defined in section 975- 300 of the ITAA 1997) is not tainted (within the meaning of Division 197 of the ITAA 1997). The applicant advises that Division 855 of the ITAA 1997 would not apply to exempt Shareholder B from any Australian Capital Gains Tax given the current asset profile of Company C.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6(1), | Income Tax Assessment Act 1936 section 6(4), | Income Tax Assessment Act 1936 subsection 6BA(5), | Income Tax Assessment Act 1936 subsection 45A(2), | Income Tax Assessment Act 1936 subsection 45B(3), | Income Tax Assessment Act 1936 section 45C, | Income Tax Assessment Act 1936 subsection 45C(1), | Income Tax Assessment Act 1936 subsection 45C(2), | Income Tax Assessment Act 1936 section 47, | Income Tax Assessment Act 1936 section 94L, | Income Tax Assessment Act 1997 section 104-135, | Income Tax Assessment Act 1997 subsection 104-135(3), | Income Tax Assessment Act 1997 subsection 104-135(4), | Income Tax Assessment Act 1997 Division 197, | Income Tax Assessment Act 1997 Division 855, | Income Tax Assessment Act 1997 section 855-15, | Income Tax Assessment Act 1997 section 975-300, and | Income Tax Assessment Act 1997 subsection 995-1(1).

Reasons for decision: Summary: The proposed return of share capital will not result in any CGT liability for Shareholder B. However, the cost base and the reduced cost base of the Company C shares will be reduced by the amount of the non-assessable part of the payment. | Detailed Reasoning - Detailed reasoning: CGT event G1 (section 104-135 of the ITAA 1997) happens when a company makes a payment to a shareholder in respect of a share they own and some or all of the payment (the non-assessable part) is not a dividend as defined in subsection 995-1(1) of the ITAA 1997 or an amount that is taken to be a dividend under section 47 of the ITAA 1936. Under subsection 995-1(1) of the ITAA 1997, 'dividend' has the meaning given by subsections 6(1), 6(4), 6BA(5) and 94L of the ITAA 1936. Where a determination is made under subsection 45A(2) or 45B(3) of the ITAA 1936, the amount of the capital benefit is taken, for the purposes of the ITAA 1936 and the ITAA 1997 to be an unfranked dividend that is paid out of the profits of the company (subsections 45C(1) and 45C(2) of the ITAA 1936). This brings the amount within the meaning of a dividend in subsection 6(1) of the ITAA 1936 and therefore within the definition of 'dividend' in subsection 995-1(1) of the ITAA 1997. Accordingly, CGT event G1 will happen when Company C pays the proposed return of share capital to Shareholder B in respect of a share that they own at the record date and continue to own at the time of the payment provided that some or all of the payment is not a dividend as defined in subsection 995-1(1), and is not taken to be a dividend under section 45C of the ITAA 1936 (the non-assessable part). The applicant states that the Company C shares are 'taxable Australian property' for the purpose of section 855-15 of the ITAA 1997. Accordingly this CGT exemption provision does not apply to Shareholder B despite the fact that it is a foreign resident shareholder. The amount of the non-assessable part of the proposed return of share capital is $X cents per Company C share. If the non-assessable part of the payment ($X cents per share) is equal to or less than the cost base of the Company C share at the time of the payment, the cost base and reduced cost base of the share will be reduced by the amount of the non-assessable part (subsection 104-135(4) of the ITAA 1997). Shareholder B will make a capital gain if the non-assessable part of the payment ($X cents per share) is more than the cost base of the Company C share (subsection 104-135(3) of the ITAA 1997). The amount of the capital gain is equal to that excess. The proposed pro-rata reduction of capital in Company C is $X cents per share (non-assessable part) when compared with the stated issue price and cost base of the share of $X. A capital gain will therefore not arise under the proposed capital reduction. On this basis the proposed return of share capital without any cancellation of shares will not result in any CGT liability for Shareholder B. However, the cost base and the reduced cost base of the Company C shares will be reduced by the amount of the non-assessable part of the payment.

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