Private ruling: Capital Return
Date of advice: 27 September 2018
Published: November 2018
Ruling period: Year ended 31 December 20XX | Year ended 31 December 20XX
Date scheme commenced: The date of the distribution

Ruling: Q1: Will the Commissioner seek to make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to deem any part of the Capital Return made by Company A (that is debited against the share capital account of Company A) to Company A’s shareholder to be a dividend paid out of profits? | A1: No

Relevant facts and circumstances: Company A intends to make a distribution to its shareholders. The distribution will consist of a Capital Return and a Dividend. The Capital Return will be undertaken as an equal reduction of capital in accordance with section 256B of the Corporations Act 2001 . Company A will debit the entire Capital Return to its share capital account. Company A’s share capital account (as defined in section 975-300 of the Income Tax Assessment Act 1997 (ITAA 1997)) is not tainted (within the meaning of Division 197 of the ITAA 1997).

Relevant legislative provisions: Income Tax Assessment Act 1936 section 45B

Reasons for decision: Summary: Section 45B of the ITAA 1936 applies where certain capital payments are made to shareholders 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 (paragraph 45B(2)(a) of the ITAA 1936); (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 paragraph 45B(2)(b) of the ITAA 1936); 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 (paragraph 45B(2)(c) of the ITAA 1936). | Detailed Reasoning - The scheme: Subsection 45B(10) of the ITAA 1936 provides that ‘scheme’ for the purposes of section 45B of the ITAA 1936 has the meaning given in subsection 995-1(1) of the ITAA 1997. The proposed Capital Return by Company A to its shareholders will constitute a scheme for the purpose of paragraph 45B(2)(a) of the ITAA 1936. | Detailed Reasoning - Tax benefit: Subsection 45B(9) of the ITAA 1936 states: A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable, at a later time than it would have been payable, if the demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend. Company A’s shareholder will obtain a tax benefit. | Detailed Reasoning - Purpose: The final condition to the application of section 45B of the ITAA 1936 is that having regard to the relevant circumstances of the scheme, it would be concluded that a person entered into the scheme (or any part of the scheme) for a purpose of enabling a taxpayer to obtain a tax benefit. This purpose does not have to be the most influential or prevailing purpose, but it must be a more than incidental purpose of enabling a taxpayer to obtain a tax benefit. In determining the purpose of the person (or one of the persons) who entered into or carried out the scheme or any part of it, regard must be had to the relevant circumstances listed in subsection 45B(8) of the ITAA 1936. | Detailed Reasoning - Conclusion: Having regard to the relevant circumstances of the scheme, it should be concluded on balance that the proposed Capital Return was not undertaken for more than an incidental purpose of enabling Company A’s shareholder to obtain a tax benefit. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to deem any part of the Capital Return made by Company A to Company A’s shareholder to be a dividend paid out of profits.