Private ruling: Section 45B and return of capital
Date of advice: 25 January 2018
Published: June 2018
Ruling period: 31 December 2018
Date scheme commenced: 1 January 2018

Ruling: Q1: Will the proposed return of capital by Company A constitute a dividend as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) for income tax purposes? | A1: No. The proposed return of capital by Company A will not constitute a dividend as defined in subsection 6(1) of the ITAA 1936. | Q2: Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the proposed return of capital by Company A? | A2: No. The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the proposed return of capital by Company A. | Q3: Will the Commissioner make a further determination under subsection 45C(3) of the ITAA 1936 that the whole or part of the return of capital by Company A was paid under a scheme for a purpose of avoiding franking debits arising in relation to the distribution from the company? | A3: No. The Commissioner will not make a further determination under subsection 45C(3) of the ITAA 1936 that the whole or part of the return of capital by Company A was paid under a scheme for a purpose of avoiding franking debits arising in relation to the distribution from the company.

Relevant facts and circumstances: The current structure Company A is an Australian proprietary company. Company B, a foreign company, is the immediate parent of Company A. Company A is an indirect wholly-owned subsidiary of foreign Company C. Company F, Company D and Company E are in each case an Australian proprietary company and a direct and wholly-owned subsidiary of Company A. The proposed return of capital Company A will make a capital distribution to Company B of $X+Y amount. The proposed steps for effecting the capital distribution are as follows: Step 1: Company C makes a partial repayment to Company A under a loan facility agreement between Company C (the borrower) and Company A (the lender) in the amount of $ X+Y. Step 2: Company A lends $X amount in cash to Company D on a non-interest bearing basis. Step 3: Company D makes a partial repayment to Company E the promissory note issued by Company D (the borrower) to Company E (the lender) in the amount of $X. Step 4: Company E makes a capital return to Company A in the amount of $X. Step 5: Company A makes a partial repayment to Company F under a loan facility agreement between Company A (the borrower) and Company F (the lender) in the amount of $Y. Step 6: Company F makes a capital return to Company A in the amount of $Y. Step 7: Company A makes a capital return to Company B in the amount of $X+Y. This amount will be debited against the amount standing to the credit of Company A’s untainted share capital account. Step 8: Company B makes a capital return to Company C in the amount of $X +Y. Other relevant factors ● The return of capital will be attributable to the disposal of significant assets in Company A and its subsidiaries. ● Any accounting gain will be offset by carried forward losses from previous years. ● Company A and its subsidiaries intend to reduce their presence in Australia as evidenced by the disposal of significant assets and deregistration of a number of subsidiaries in the Australia. Therefore, any excess capital will not be needed.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6(1) | Income Tax Assessment Act 1936 section 45B | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1997 section 855-25

Reasons for decision: Summary: No. The return of capital by Company A will not constitute a dividend as defined in subsection 6(1) of the ITAA because of the exclusion in paragraph (d) of the definition. | Detailed Reasoning - Reasoning: The term ‘dividend’ is defined in subsection 6(1) of the ITAA 1936 as follows: (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; But does not include: (a) 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; or (b) Moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if: (i) The company gives the holder of the share a notice when it redeems or cancels the share; and (ii) The notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and (iii) The amount is debited to the company’s share capital account; except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or (c) A reversionary bonus on a life assurance policy. In this case, paragraph (d) will be satisfied when the return of $X+Y is debited against the amount standing to the credit of the share capital account of Company A. Accordingly, the proposed return of capital will not constitute a dividend as defined in subsection 6(1). | Detailed Reasoning - Question 2: Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the proposed return of capital by Company A? | Summary: No. The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies as paragraph 45B(2)(c) is not satisfied. | Detailed Reasoning - Reasoning: Section 45B of the ITAA 1936 applies where certain capital payments are made to shareholders in substitution for dividends. The purpose of section 45B of the ITAA 1936 is to ensure that relevant amounts are treated as dividends for taxation purposes if certain payments, allocations and distributions are made in substitution for dividends (section 45B(1)(b)). Subsection 45B(2) of the ITAA 1936 provides that section 45B will apply where: (a) there is a scheme under which a person is provided with a capital benefit by a company; and (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; 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 a taxpayer (the relevant taxpayer ) to obtain a tax benefit. The arrangement involving the return of capital will constitute a scheme for the purposes of section 45B of the ITAA 1936. The return of capital will be debited to Company A’s contributed share capital account and Company B will receive a distribution of share capital of $X+Y. Therefore, Company B will be provided with a capital benefit (paragraph 45B(5)(b) of the ITAA 1936). Under subsection 45B(9) of the ITAA 1936, a taxpayer “obtains a tax benefit” where the amount of tax payable from the return of capital under the CGT provisions would, apart from the operation of 45B of the ITAA 1936, be less than the amount that would be payable if the distribution had instead been a dividend. A dividend distribution would be taxable in the hands of Company B whereas any capital gain from the proposed return of capital will be disregarded as Company B is a foreign resident and the shares are not “indirect Australian real property interests” as defined in section 855-25 of the ITAA 1997. Accordingly, Company B will obtain a tax benefit. Paragraph 45B(2)(c) of the ITAA 1936 sets out an objective purpose test for the Commissioner to consider having regard to the “relevant circumstances” of the scheme as set out in subsection 45B(8) of the ITAA 1936. In this case, the Commissioner accepts that the proposed return of capital arises from the sale of the abovementioned assets and will be debited to the contributed share capital account of Company A. As a result of Company A group’s strategic view to reduce its presence in Australia, there will be no investment opportunities requiring the use of the proceeds from the disposals; and any accounting profits of Company A and its subsidiaries will be offset against carried forward losses in the relevant years. Having regard to the relevant circumstances, it cannot be concluded that the taxpayer will enter into or carry out the scheme for a more than incidental purpose of enabling Company B to obtain a tax benefit. | Detailed Reasoning - Question 3: Will the Commissioner make a further determination under subsection 45C(3) of the ITAA 1936 that the whole or part of the return of capital by Company A was paid under a scheme for a purpose of avoiding franking debits arising in relation to the distribution from the company? | Summary: No. The Commissioner will not make a further determination under subsection 45C(3) of the ITAA 1936 that the whole or part of the return of capital by Company A was paid under a scheme for a purpose of avoiding franking debits arising in relation to the distribution from the company. | Detailed Reasoning - Detailed reasoning: Given that section 45B of the ITAA 1936 is not satisfied, the Commissioner will not make a further determination under subsection 45C(3) of the ITAA 1936 that the whole or part of the return of capital by Company A was paid under a scheme for a purpose of avoiding franking debits arising in relation to the distribution from the company.

Question 1: Will the proposed return of capital by Company A constitute a dividend as defined in subsection 6(1) of the ITAA 1936 for income tax purposes?