Private ruling: Capital Return
Date of advice: 8 October 2015
Published: October 2015
Ruling period: 1 July 2015 to 30 June 2016
Date scheme commenced: The day the Company X makes the Capital Return distribution under the proposed scheme

Ruling: Q1: Will the Commissioner make a determination under subsection 45C(3) of the Income Tax Assessment Act 1936 (ITAA 1936) for a franking debit to arise in Company X's franking account in respect of the Capital Return? | A1: No | Q2: Will Company X be required to withhold and remit dividend withholding tax pursuant to section 12-210 of Schedule 1 to the Taxation Administration Act 1953 in respect of the Capital Return? | A2: No

Relevant facts and circumstances: 1. Company X was established in the 20XX income year following a debt/equity swap arrangement. Since that time, Company X has made losses and has accumulated losses. 2. Company X does not have a pattern of distributions, be it dividends or capital returns as the proposed capital return would be the first distribution of any kind to shareholders. 3. The Capital Return will be implemented to optimise the Company X group's capital position by increasing its debt. 4. Company X is making payment of $x to its shareholders in the 20YY income year, debited entirely to the company X's share capital account, which is not tainted for income tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 45C(3). | Taxation Administration Act 1953 section 12-210 of Schedule 1.

Reasons for decision: Summary: Pursuant to subsection 45C(3) of the ITAA 1936, if the Commissioner makes a determination under section 45B for the whole or part of a capital benefit and makes a further written determination that the capital benefit was paid for a purpose of avoiding franking debits arising from the distribution of the company, a franking debit of the company may arise in respect of the capital benefit. Subsection 45B(2) of the ITAA 1936 provides that section 45B applies if: (a) there is a scheme under which a person is provided with a capital benefit by a company; (b) under the scheme a 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 persons who entered into or carried out the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit. Based on the information provided by the Applicant, paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are satisfied. Paragraph 45B(2)(c) of the ITAA 1936 is not satisfied because the required element of purpose is not present. Accordingly, the Commissioner will not make a determination under section 45B of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the scheme. The Commissioner can only make a determination under subsection 45C(3) of the ITAA 1936 for a franking debit to arise if the Commissioner has made a determination under subsection 45B(3) of the ITAA 1936 in respect of the capital benefit arising in connection with the capital return. On this basis, the Commissioner will not make a determination under subsection 45C(3) of the ITAA 1936 for a franking debit to arise in Company X's franking account in respect of the Capital Return. Pursuant to section 12-210 of Schedule 1 to the Taxation Administration Act 1953, an Australian resident company must withhold an amount from a dividend it pays if: (a) according to the register of the company's members, the entity, or any of the entities, holding the shares on which the dividend is paid has an address outside Australia; or (b) that entity, or any of those entities, has authorised or directed the company to pay the dividend to an entity or entities at a place outside Australia. This requires a consideration of whether any part of the capital return by Company X to its shareholders will be treated as a dividend within the meaning of subsection 6(1) of the ITAA 1936. The term 'dividend' is defined in subsection 6(1) of the ITAA 1936 and 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. The capital return by Company X satisfies paragraph (a) of the definition of dividend in subsection 6(1) of the ITAA 1936 being a cash distribution made by Company X to its shareholders. However, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 excludes from the definition of 'dividend' any: 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... Section 975-300 of the ITAA 1997 defines a 'share capital account' as an account a company keeps of its share capital. However, if a company's share capital account is tainted then that account is taken not to be a share capital account for the purposes of paragraph (d) of the definition of dividend in subsection 6(1) of the ITAA 1936, except for some select purposes stated in subsection 975-300(3) (of which section 6(1) of the ITAA 1936 is not included). As Company X's share capital account is not tainted within the meaning of section 197-50 of the ITAA 1997, paragraph (d) of the definition of dividend in subsection 6(1) of the ITAA 1936 will apply to the capital return. Accordingly, no part of the capital return by Company X to its shareholders (that is debited entirely to the Company X's issued share capital account) will be treated as a dividend within the meaning of subsection 6(1) of the ITAA 1936. On this basis, Company X will not be required to withhold and remit dividend withholding tax pursuant to section 12-210 of Schedule 1 to the Taxation Administration Act 1953 in respect of the Capital Return.