Private ruling: Distribution of dividend and capital return
Date of advice: 6 October 2025
Published: 8 December 2025
Ruling period: Income tax year ended XX XXX XXXX
Date scheme commenced: XX XXX XXXX

Ruling: Q1: Will Company A be subject to withholding tax under subsection 128B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for the payment of the return of capital to non-resident shareholders? | A1: No. | Q2: Will Company A required to give a copy of the Commissioner's determination made under section 45A or 45B of the ITAA 1936 to affected shareholders under subsection 45D(1A) of the ITAA 1936? | A2: No. | Q3: Will Company Abe subject to withholding tax under subsection 128B(1) of the ITAA 1936 for the payment of the dividend to non-resident shareholders? | A3: No. | Q4: Will the Commissioner make a determination pursuant to section 204-30 Income Tax Assessment Act 1997 (ITAA 1997) or section 177EA ITAA 1936 in relation to the payment of the dividend? | A4: No.

Relevant facts and circumstances: The Company A Group The Company A Group was established by ABC Co for the purpose of acquiring Company X. Company A is the head company of a tax consolidated group which consists of Company A and all of its wholly owned resident subsidiaries. Acquisition of Company X On XX 20XX, Company A Group acquired Company X pursuant to a Scheme of Arrangement under Part 5.1 of the Corporations Act 2001 (Company X Acquisition). The Company X Acquisition was funded by way of; • Company A issuing ordinary share capital to its shareholder, ABC Co; and • The Company A Group drawing down external debt. ­ The Company A Group used a portion of the total funds obtained to acquire 100% of the shares in Company X from its shareholders. Company X and its wholly owned subsidiaries joined the Company A tax consolidated group on the implementation of the acquisition scheme. ­ The funds obtained for the purpose of acquiring Company X exceeded the actual cost of acquiring Company X. Management Equity Plan (MEP) Company A established an equity-settled MEP on XX 20XX. Under the MEP, fully paid 'A' class shares were issued by Company A which are funded in full by a limited recourse loan. Capital Structure As at XX XX 20XX, Company A had ordinary shares and Class A management shares (Class A Shares) on issue. The ordinary shareholders and the Class A Shareholders are collectively referred to as the 'Shareholders'. Capital Return and Dividend The Company A Group identified it had excess cash surplus to its current needs and objectives that does not serve a valid purpose of remaining within the business. The excess cash can be broadly separated into two categories: • Excess cash from share capital subscriptions; and • Excess cash from trading activities. The above categories are discussed below. Excess Cash from Share Capital Subscriptions As part of the Company X Acquisition, Company A issued ordinary share capital to ABC Co of $Xm. Of this amount, $Xm was used (along with funds obtained from external debt of $Xm) to acquire the shares from shareholders of Company X. The remaining funds obtained from the share capital issuance to ABC Co of $Xm was considered surplus to business needs. Further to the above and subsequent to the Company X Acquisition, Company A: • issued $Xm of ordinary share capital to various co-investors. The proceeds from this issuance of shares was not used for any purpose and was considered surplus to business needs. • implemented a loan funded MEP on XX 20XX that resulted in the issuance of share capital of $Xm. The return of capital of $Xm was sourced from the excess share capital identified above. Excess Cash from Trading Activities In addition to the above, it was estimated that within the business, cash of approximately $Xm was surplus to any current or proposed needs and objectives which is primarily attributed to the profits. The decision to pay a dividend is consistent with Company A's previous policy (prior to the Company A Acquisition) of paying dividends to shareholders to the extent there are legally distributable profits available. Accounting journal entries The accounting journal entries which were posted at the time of paying the Dividend and Capital Return by Company A are as follows: Dr Retained earnings $Xm Dr Share capital $Xm Cr Cash $Xm Other relevant matters The share capital account of Company A was not tainted (nor had it been tainted) for the purpose of Division 197. With the exception of a dividend and return of capital paid several months earlier, Company A has previously never paid a dividend or distributed a return of capital. As part of the Capital Return, there was no change to the number and proportionate percentage interest of ordinary shares and Class A shares held by the shareholders, and there will be no change or alteration to the winding up rights attached to the ordinary and Class A shares. The Capital Return was paid as a 'selective' share capital reduction pursuant to section 256B of the Corporations Act 2001 (Cth). This is on the basis that an 'equal' share capital reduction can only relate to ordinary shares. Given the Capital Return involved a payment to Class A Shareholders (as well as to ordinary shareholders), the return of capital was therefore a selective share capital reduction. No ordinary shares or Class A Shares were cancelled as part of the Capital Return. Subsequent to the Company A Acquisition, no additional external debt was issued by Company A. Following the above, the Dividend and Capital Return were funded entirely by cash within the Company A Group and were not funded by any external debt. As part of the MEP, the Company A Group provided eligible employees with a limited recourse loan which was then used to subscribe for Class A Shares in Company A. The Class A Shares have been recognised as 'share capital' for accounting purposes in the books of Company A.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 paragraph 6(1)(d) | Income Tax Assessment Act 1936 subsection 6(4) | Income Tax Assessment Act 1936 subsection 44(1)(a) | Income Tax Assessment Act 1936 section 45A | Income Tax Assessment Act 1936 subsection 45A(2) | Income Tax Assessment Act 1936 section 45B | Income Tax Assessment Act 1936 paragraph 45B(2)(a) | Income Tax Assessment Act 1936 paragraph 45B(2)(b) | Income Tax Assessment Act 1936 paragraph 45B(2)(c) | Income Tax Assessment Act 1936 paragraph 45B(3)(b) | Income Tax Assessment Act 1936 subsection 45B(8) | Income Tax Assessment Act 1936 subsection 45D(1A) | Income Tax Assessment Act 1936 subsection 128B(1) | Income Tax Assessment Act 1936 paragraph 128B(1)(b) | Income Tax Assessment Act 1936 paragraph 128B(3)(ga) | Income Tax Assessment Act 1936 subparagraph 128B(3)(ga)(i) | Income Tax Assessment Act 1936 section 177EA | Income Tax Assessment Act 1936 paragraph 177EA(3)(e) | Income Tax Assessment Act 1936 paragraph 177EA(5)(b) | Income Tax Assessment Act 1936 subsection 177EA(17) | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 section 202-40 | Income Tax Assessment Act 1997 subsection 202-40(1) | Income Tax Assessment Act 1997 section 202-45 | Income Tax Assessment Act 1997 paragraph 202-45(e) | Income Tax Assessment Act 1997 paragraph 202-45(ea) | Income Tax Assessment Act 1997 section 204-30 | Income Tax Assessment Act 1997 subsection 204-30(1) | Income Tax Assessment Act 1997 subsection 204-30(8) | Income Tax Assessment Act 1997 paragraph 204-30(3)(c) | Income Tax Assessment Act 1997 subsection 207-159(1) | Income Tax Assessment Act 1997 subparagraph 207-159(1)(a)(ii) | Income Tax Assessment Act 1997 paragraph 207-159(1)(b) | Income Tax Assessment Act 1997 paragraph 207-159(1)(c) | Income Tax Assessment Act 1997 subparagraph 207-159(1)(c)(i) | Income Tax Assessment Act 1997 subsection 207-159(4) | Income Tax Assessment Act 1997 section 703-50 | Corporations Act 2001 (Cth) section 254T | Corporations Act 2001 (Cth) section 256B | Corporations Act 2001 (Cth) Part 5.1

Reasons for decision: Summary: No part of the Capital Return will be a dividend as defined in subsection 6(1). Further, subsection 6(4) does not apply such that the Capital Return would otherwise be a dividend as defined in subsection 6(1). Therefore, no part of the Capital Return will be taken to be a dividend. As such, subsection 128B(1) will not be satisfied on the basis that paragraph 128(1)(b) is not satisfied in relation to the Capital Return. This means Company A will not have a liability to withholding tax in respect of any part of the Capital Return paid to non-resident shareholders. | Detailed Reasoning - Subsection 6(1): Dividend: The term 'dividend' is defined in subsection 6(1) to include any distribution made by a company to any of its shareholders, but excludes a distribution debited against an amount standing to the credit of its share capital account (paragraph 6(1)(d)). However, subsection 6(1) includes a note stating that subsection 6(4) sets out when paragraph 6(1)(d) of the definition does not apply. The Capital Return was wholly debited to Company A share capital account. As such, paragraph 6(1)(d) provides that the Capital Return is not a dividend under subsection 6(1) because the amount of the money paid was debited against an amount standing to the credit of a share capital account. However, this conclusion remains subject to subsection 6(4). | Detailed Reasoning - Subsection 6(4): Exception: Subsection 6(4) operates to 'reverse' the effect of the paragraph 6(1)(d) exclusion such that an amount which would be taken not to be a dividend will be treated as a dividend. It is reasonable to conclude that an arrangement does not exist for the purposes of subsection 6(4). The MEP, which came into effect in XX 20XX is independent of the initial capital raising and the Capital Return. It is reasonable to conclude that the Capital Return which occurred on XX 20XX, was unlikely to have been arranged, or even known to be occurring at the time shares were issued by Company A, upon implementation of the MEP. Therefore, an arrangement does not exist for the purposes of subsection 6(4). Therefore, the Capital Return is not a dividend as defined in subsection 6(1). | Detailed Reasoning - Subsection 128B(1): Subsection 128B(1) imposes withholding tax on income which consists of a dividend paid by an Australian company to a non-resident on or after 1 January 1968, subject to a number of exceptions. As explained in this question, the Capital Return is not a dividend as defined in subsection 6(1). Also as explained in Question 2 below, the Capital Return will not be taken to be a dividend as the Commissioner will not make a determination under subsection 45A(2) or paragraph 45B(3)(b) in relation to the whole, or any part, of the Capital Return. As the Capital Return is not a dividend, or taken to be a dividend, Company A will not be required to withhold tax in respect of any amount of the Capital Return paid to its non-resident shareholder ABC Co. | Detailed Reasoning - Question 2: Will Company A be required to give a copy of the Commissioner's determination made under section 45A or 45B to affected shareholders under subsection 45D(1A)? | Summary: The Commissioner will not make a determination under subsection 45A(2) or paragraph 45B(3)(b) in relation to the whole, or any part, of the Capital Return. Accordingly, Company A will not be provided with a copy of a notice under subsection 45D(1A). | Detailed Reasoning - Detailed reasoning: Subsection 45D(1A) states that a company must, in the case of a determination under section 45A or 45B, give a copy of the notice to the relevant shareholder or taxpayer respectively. | Detailed Reasoning - Section 45A: Section 45A generally applies when a company streams capital benefits to some shareholders (such as the distribution of share capital by way of the return of capital payment) and it is reasonable to assume that the other shareholders have received, or will receive, dividends. As the Capital Return and Dividend was paid to all shareholders of Company A on a proportionate basis, there was no streaming of capital benefits to some shareholders and dividends paid to other shareholders. | Detailed Reasoning - Section 45B: Section 45B generally applies where certain capital benefits are paid to shareholders in substitution for dividends. While the conditions of paragraphs 45B(2)(a) and (b) were met in respect of the Capital Return, the requisite purpose of enabling a person to obtain a tax benefit, by way of capital distribution, was not present (paragraph 45B(2)(c)). Having regard to the relevant circumstances (as set out in subsection 45B(8)), and in particular the referenced factors in s 177D(2), while the Commissioner considers that the Capital Return is attributable to unrealised profits referable to the post-Company A Acquisition increase in enterprise value (the paragraph 45B(8)(a) factor), it cannot be concluded that a person would have entered into or carried out the Capital Return for a more than incidental purpose of enabling a participating shareholder to obtain a tax benefit. | Detailed Reasoning - Question 3: Will Company Abe subject to withholding tax under subsection 128B(1) for the payment of the dividend to non-resident shareholders? | Summary: The Dividend will not be subject to withholding tax under subsection 128B(1) as the dividend satisfies the exception from withholding tax in paragraph 128B(3)(ga). | Detailed Reasoning - Subsection 6(1): 'Dividend': The term 'dividend' is defined in subsection 6(1) to include any distribution made by a company to any of its shareholders, but excludes a distribution debited against an amount standing to the credit of its share capital account. The Dividend of $Xm was a distribution made by Company A its shareholders and was sourced entirely from prior year and current year profits. The Dividend was not debited to Company A's share capital account but to its retained earnings account. Therefore, the Dividend is a 'dividend' as defined in subsection 6(1). | Detailed Reasoning - Section 202-40: As the Dividend paid by Company A is a dividend as defined in subsection 6(1), the Dividend is a distribution for the purposes of section 202-40. Subsection 202-40(1) states that a distribution is a frankable distribution to the extent that it is not unfrankable under section 202-45. Section 202-45 lists the circumstances under which an amount or distribution is taken to be unfrankable. Relevantly, this includes: • a distribution that is sourced, directly or indirectly, from a company's share capital account (paragraph 202-45(e)), and • a distribution or a part of a distribution to which subsection 207-159(1) applies (distributions funded by capital raising) (paragraph 202-45(ea)). | Detailed Reasoning - Paragraph 202-45(e): Paragraph 202-45(e) provides that a distribution that is sourced, directly or indirectly from a company's share capital account is an unfrankable distribution. The following factors demonstrate that the Dividend was not sourced, directly or indirectly from Company A's share capital account: • No part of the Dividend of $Xm was debited to the share capital account of Company A. • The Dividend was funded from profits compromising the prior year and current year profit. For completeness, Company A has a retained losses balance. However, Paragraph 3 of TR 2012/5: Income tax: section 254T of the Corporations Act 2001 and the assessment and franking of dividends paid from 28 June 2010 provides that: Paragraph 202-45(e) of the ITAA 1997 does not prevent a company from franking a dividend paid to its shareholders that is paid out of profits recognised in the company's accounts and available for distribution, and is paid in accordance with the company's constitution and without breaching section 254T or Part 2J.1 of the Corporations Act, merely because the company has unrecouped accounting losses accumulated in prior years or has lost part of its share capital. That dividend will be assessable income of its resident shareholders under paragraph 44(1)(a) of the ITAA 1936. • The Dividend was funded from existing cash balances and is not sourced from share capital or proceeds received from refundable accommodation deposits, and The Dividend was also paid in accordance with section 254T of the Corporations Act 2001 . | Detailed Reasoning - Paragraph 202-45(ea): There are 4 criteria that must all be satisfied for subsection 207-159(1) to apply to make a distribution, or part of a distribution, unfrankable. Subparagraph 207-159(1)(a)(ii) is satisfied as Company A does not have a history of paying dividends (noting that it was recently incorporated on XX 20XX). Paragraph 207-159(1)(b) is satisfied, as: • Company A issued ordinary share capital of approximately $Xm to its shareholders on XX 20XX to fund the Company X Acquisition. • Subsequent to the acquisition, Company A issued $Xm of ordinary share capital to various co-investors, and • Company A issued $Xm of shares through the MEP established on XX 20XX. Paragraph 207-159(1)(c) is not satisfied as neither subparagraph 207-159(1)(c)(i) or (ii) are satisfied in relation to the Capital Return. With regard to subparagraph 207-159(1)(c)(i), it is not reasonable to conclude, having regard to all the relevant matters in subsection 207-159(4), that the principal effect of the equity issued was to directly or indirectly fund a substantial part of the Capital Return. The principal effect of Company A issuing equity to shareholders was primarily to fund the Company X Acquisition and provide equity incentives to key management personnel (in respect of the ordinary shares issued to the Co-investors and the Class A Shares issued to the Class A shareholders under the MEP). Subparagraph 207-159(1)(c)(ii) is not satisfied as the relevant circumstances establish that the main purpose of the initial issuing of equity by Company A was to fund the Company X Acquisition and not the relevant distribution. Similarly, the equity issued under the MEP has the main purpose of providing equity incentives to key management personnel and eligible employees and not for funding the relevant distribution. Furthermore, parallels can be drawn with Example 5.3 of the Explanatory Memorandum to the Treasury Laws Amendment (2023 Measures No. 1) Bill 2023. In this example, a company raised funds for an acquisition that did not proceed. After 12 months, the company paid a special fully franked dividend to its shareholders. The example concluded: it is clear in all the circumstances that there is a genuine commercial purpose for the capital raising to make an acquisition and when this was unsuccessful, the surplus cash was returned to shareholders. Accordingly, there is an insufficient linkage between the capital raising and the special dividend for the purpose test to be satisfied in relation to this arrangement. The circumstances support that there were genuine commercial purposes for the Company A capital raisings. Additionally, excess capital from these raisings are being returned as capital and not dividends by Company A. While Company A is also paying a dividend, it is funded from profits earned since the acquisition. It is therefore concluded that the principal effect and purpose tests under paragraph 207-159(1)(c) are not satisfied. Therefore, as subsection 207-159(1) does not apply to the Dividend, subsection 202-45(ea) is not satisfied. | Detailed Reasoning - Conclusion: Subsection 128B(1)imposes withholding tax on income which consists of a dividend paid by an Australian company to a non-resident on or after 1 January 1968, subject to a number of exceptions. Relevantly, one exception is paragraph 128B(3)(ga) which is income that consists of the franked part of a dividend (subparagraph 128B(3)(ga)(i) other than a dividend in respect of which a determination is made under paragraph 204-30(3)(c) or a dividend or a part of a dividend in respect of which a determination is made under paragraph 177EA(5)(b). As the Dividend is fully franked and a determination will not be made under paragraph 204-30(3)(c) or paragraph 177EA(5)(b) (as explained in Question 4 below), paragraph 128B(3)(ga) applies such that Company A is not required to withhold an amount from the Dividend paid to non-resident shareholders. | Detailed Reasoning - Question 4: Will the Commissioner make a determination pursuant to section 204-30 or section 177EA in relation to the intended payment of the franked dividend? | Summary: The Commissioner will not make a determination pursuant to section 204-30 or section 177EA in relation to the intended payment of the Dividend. | Detailed Reasoning - Section 204-30: Section 204-30 applies where a corporate tax entity streams the payment of dividends to its members in such a way that members to whom distributions are streamed derive a greater benefit from franking credits than another member entity. The term 'derive a greater benefit from franking credits' is defined in subsection 204-30(8) by reference to the ability of the members to fully use imputation benefits. Company A had sufficient franking credits to fully frank the Dividend of $Xm. As at XX 20XX, Company A had a franking account balance of $Xm. The franking debit that arises from the Dividend is $Xm. The Dividend was paid equally to all Company A Shareholders (both ordinary shareholders and Class A Shareholders) who were registered as at the Record Date. Australian resident shareholders will receive the benefit of a tax offset under Division 207and ABC Co, as the only non-resident shareholder will receive the benefit of not being liable to pay withholding tax because of the operation of paragraph 128B(3)(ga). On this basis, all shareholders received an imputation benefit, and the Dividend was paid equally to all shareholders and was fully franked regardless of their tax profiles. Accordingly, it cannot be said that Company A selectively directed the flow of franked dividends to certain members. Therefore, as the first condition in subsection 204-30(1) is not satisfied, the Commissioner will not make a determination under section 204-30 to deny the whole, or any part, of the imputation benefit received by a Company A shareholder in relation to the Dividend. | Detailed Reasoning - Section 177EA: Section 177EA is a general anti-avoidance provision that applies if one of the purposes (other than an incidental purpose) of a particular scheme is to enable a taxpayer to obtain an imputation benefit (paragraph 177EA(3)(e)). It is considered that the conditions for applying section 177EA are not satisfied in relation to the payment of the Dividend. In particular, having regard to the relevant circumstances of the scheme (as prescribed by subsection 177EA(17)), it cannot be concluded that the scheme was entered into or carried out for a more than incidental purpose of enabling Company A shareholders to obtain an imputation benefit. Therefore, the Commissioner will not make a determination under paragraph 177EA(5)(b) to deny the whole, or any part of, the imputation benefits received by shareholders in relation to the Dividend.

Does Part IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar. | Reasons for decision: All legislative references are to the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997 as applicable , unless otherwise stated. | Question 1: Will Company A be subject to withholding tax under subsection 128B(1) for the payment of the return of capital to non-resident shareholders?