Private ruling: Return of Capital
Published: November 2013
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: If XYZ Pty Ltd makes a distribution to its shareholders in circumstances described in the facts, will all or part of the distribution be a dividend for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No | Q2: If XYZ Pty Ltd makes a distribution to its shareholders in circumstances described in the facts, will the Commissioner make a determination under subsection 45A(2) of the ITAA 1936 that section 45C applies to deem all or part of the distribution to be an unfranked dividend? | A2: No | Q3: If XYZ Pty Ltd makes a distribution to its shareholders in circumstances described in the facts, will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C applies to deem all or part of the distribution to be an unfranked dividend? | A3: No

Relevant facts and circumstances: XYZ Pty Ltd ('XYZ') returned capital to its shareholders in the form of a pro-rata reduction to the share capital held by its shareholders (prior to the Restructure). No shares were cancelled. The distribution comprised of an amount debited to XYZ's share capital account. The total amount of the return of capital was less than XYZ's share capital account at the time. XYZ's Tax Profile XYZ is an Australian taxable company. XYZ had no carried forward losses. XYZ'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). XYZ's General Profile At the time immediately before the Restructure, XYZ had: · A number ordinary shares on issue and a share capital account balance; · A franking account balance; and · No accumulated losses. XYZ has consistently made distributions to its shareholders in the past. XYZ will continue to pay dividends at the same projected levels after the return of capital. There was a Restructure of XYZ. The return of capital represents funds that are surplus to the needs of XYZ. The distribution will not be paid in substitution for dividends because XYZ intends to continue to pay dividends at the same ratio after the restructure as it did before the restructure.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6(1) | Income Tax Assessment Act 1936 paragraph 6(1)(a) | Income Tax Assessment Act 1936 section 45A | Income Tax Assessment Act 1936 subsection 45A(2) | Income Tax Assessment Act 1936 subsection 45A(3) | Income Tax Assessment Act 1936 section 45B | Income Tax Assessment Act 1936 subsection 45B(2) | Income Tax Assessment Act 1936 subsection 45B(3) | Income Tax Assessment Act 1936 subsection 45B(5) | Income Tax Assessment Act 1936 subsection 45B(8) | Income Tax Assessment Act 1936 paragraph 45B(8)(a) | Income Tax Assessment Act 1936 paragraph 45B(8)(b) | Income Tax Assessment Act 1936 paragraph 45B(8)(c) | Income Tax Assessment Act 1936 paragraph 45B(8)(d) | Income Tax Assessment Act 1936 paragraph 45B(8)(e) | Income Tax Assessment Act 1936 paragraph 45B(8)(f) | Income Tax Assessment Act 1936 paragraph 45B(8)(g) | Income Tax Assessment Act 1936 paragraph 45B(8)(h) | Income Tax Assessment Act 1936 paragraph 45B(8)(i) | Income Tax Assessment Act 1936 paragraph 45B(8)(j) | Income Tax Assessment Act 1936 paragraph 45B(8)(k) | Income Tax Assessment Act 1936 subsection 45B(9) | Income Tax Assessment Act 1936 section 318 | Income Tax Assessment Act 1936 subparagraph 177D(b)(i) | Income Tax Assessment Act 1936 subparagraph 177D(b)(ii) | Income Tax Assessment Act 1936 subparagraph 177D(b)(iii) | Income Tax Assessment Act 1936 subparagraph 177D(b)(iv) | Income Tax Assessment Act 1936 subparagraph 177D(b)(v) | Income Tax Assessment Act 1936 subparagraph 177D(b)(vi) | Income Tax Assessment Act 1936 subparagraph 177D(b)(vii) | Income Tax Assessment Act 1936 subparagraph 177D(b)(viii) | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1997 section 975-300 | Income Tax Assessment Act 1997 subsection 975-300(3) | Income Tax Assessment Act 1997 Division 197

Reasons for decision: Summary: The distribution will not be a dividend for the purposes of subsection 6(1). | Detailed Reasoning - Detailed reasoning: The term 'dividend' in subsection 6(1) includes any distribution made by a company to any of its shareholders. However, paragraph 6(1)(d) of the definition of 'dividend' excludes a distribution from the meaning of 'dividend' if the amount of the distribution is debited against an amount standing to the credit of the company's share capital account. In this regard, the term 'share capital account' is defined in section 975-300 of the ITAA 1997 as an account which the company keeps of its share capital, or any other account created on or after 1 July 1998 where the first amount credited to the account was an amount of share capital. However, subsection 975-300(3) of the ITAA 1997 states that an account is not a share capital account if it is tainted. In this case the distribution has been debited against an amount standing to the credit of XYZ's share capital account. As XYZ's share capital account is not tainted within the meaning of Division 197 of the ITAA 1997, paragraph 6(1)(d) of the ITAA 1936 of the definition of 'dividend' applies. Therefore the distribution does not constitute a dividend. | Summary: The Commissioner will not make a determination under subsection 45A(2) that section 45C applies to deem all or part of the distribution to be an unfranked dividend. | Detailed Reasoning - Detailed reasoning: Section 45A will apply where the following criteria are satisfied: · A company streams the provision of capital benefits and the payment of dividends to its shareholders, whether in the same income year or in different income years; · The capital benefits are received by shareholders (advantaged shareholders) of the company who would, in the relevant income year, derive a greater benefit from their receipt than other shareholders in the company; and · It is reasonable to assume that the other shareholders (disadvantaged shareholders) have received or will receive dividends. Subsection 45A(3) sets out the circumstances in which a shareholder will be taken to have been provided with a capital benefit by a company. These circumstances include where a company distributes share capital to its shareholders. On the basis that XYZ has debited the entire amount of the distribution to its share capital account, XYZ has provided its shareholders with a capital benefit by way of return of capital for the purposes of section 45A. XYZ has not streamed capital benefits to any shareholders to the exclusion of others on the basis that the distribution involved a pro-rata reduction of share capital to all XYZ Shareholders in respect of their ordinary shares. Accordingly, the requirements for section 45A have not been satisfied in the present circumstances, and as such, the Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the distribution. | Summary: The Commissioner will not make a determination under subsection 45B(3) that section 45C applies to deem all or part of the distribution to be an unfranked dividend. | Detailed Reasoning - Detailed reasoning: Section 45B does not apply because not all the conditions in subsection 45B(2) are satisfied. Subsection 45B(2) sets out the conditions under which section 45B applies. This section applies if: · there is a scheme under which a person is provided with a capital benefit by a company · 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, and · 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. The distribution is a 'scheme' within the broad meaning of that term, for the purposes of section 45B. The meaning of 'provided with a capital benefit' is found in subsection 45B(5). A person is provided with a capital benefit if: · shares in a company are issued to the person · there is a distribution to the person of share capital, or · the company does something in relation to shares that has the effect of increasing the value of the shares held by that person. As the distribution will be debited against the company's share capital account, there will be a provision of a capital benefit as defined by subsection 45B(5). A further requirement of subsection 45B(2) is that a taxpayer (the relevant taxpayer) must obtain a tax benefit. The relevant taxpayer need not be the person who is provided with the capital benefit. Obtaining a tax benefit is defined in subsection 45B(9) to mean circumstances where the amount of tax payable, or any other amount payable under the income tax law 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 capital benefit had been a dividend. The tax effect of paying the amount as a dividend must be taken into account in determining whether the taxpayer has obtained a tax benefit or not. In this regard, the tax payable (or any other amount payable under the Act) on the notional dividend is ascertained in a continuum and not just for the year in which the dividend is received. In other words, the provision acknowledges that the notional dividend might not give rise to an amount payable for the year in which it is received, due, for example, to the taxpayer's having carried forward losses or the dividend's being franked; but the provision also recognises that the absorption of those losses or the use of those franking credits means they are not available in future years to reduce tax in those years, as they would have been if a capital benefit had been paid instead of a dividend. Thus, the preservation of tax losses or franking credits for use in the future would ordinarily mean that a tax benefit is obtained within the meaning of subsection 45B(9). Although there is a scheme under which shareholders are provided with a capital benefit and would obtain a tax benefit, it is not considered that the scheme was entered into, or carried out, for a more than incidental purpose of enabling shareholders to obtain the tax benefit. Subsection 45B(8) sets out circumstances that are relevant to determining whether any person has the requisite degree of purpose of enabling a taxpayer to obtain a tax benefit. In this case because the return of capital has been made to all XYZ shareholders, paragraphs 45B(8)(c) to 45B(8)(h) do not incline for or against a conclusion as to purpose. The circumstances covered by paragraphs 45B(8)(i) and 45B(8)(j), pertaining to the provision of ownership interests and demerger respectively, are not relevant. The relevant matters are those covered by paragraphs 45B(8)(a), 45B(8)(b) and 45B(8)(k). Paragraph 45B(8)(a) refers to the extent to which the capital benefit is attributable to capital and profits (realised or unrealised) of the company or an associate (within the meaning of section 318) of the company. In the present circumstances, XYZ has derived accounting profits in a number of preceding income years. In the next three income years XYZ will derive accounting profits and pay dividends. These circumstances could support the existence of the requisite purpose under section 45B, on the basis that a small part of the distribution could be taken to be referable to the profits of XYZ. However, the availability of profits is just one matter to be considered and the existence of profits will not automatically trigger the application of section 45B. Paragraph 45B(8)(b) refers to the pattern of distributions made by a company or an associate (within the meaning of section 318) of the company. XYZ has a regular pattern of paying dividends. Overall the pattern of distributions made by XYZ does not suggest that the capital return has been made in substitution for dividends. Paragraph 45B(8)(k) refers to the matters in subparagraphs 177D(b)(i) to 177D(b)(viii). These are matters by reference to which a scheme is able to be examined from a practical perspective in order to identify and compare its tax and non-tax objectives. The matters include the manner in which the scheme is carried out, the timing of the scheme, its form and substance, and the financial and other implications for the parties involved. In this case, the form and substance of XYZ return of capital does not lead to a conclusion that the requisite purpose exists that the scheme was carried out for the purpose of enabling the relevant taxpayer to obtain a tax benefit. These circumstances indicate that enabling shareholders to obtain a tax benefit is no more than an incidental purpose of entering into, or carrying out, the scheme. The Commissioner will not make a determination in terms of subsection 45B(3) that section 45C of the ITAA 1936 applies in relation to the capital benefit.

Reasons for decision: Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1936 (ITAA 1936).