Private ruling: Income tax: Distribution of share capital

Ruling: Facts | A non-resident company ("the taxpayer") operates in Australia. For Australian income tax purposes the taxpayer is considered to be a resident of Australia. | The taxpayer's sole shareholder is also a non-resident. | The taxpayer is in the business of acquiring and operating parcels of real estate investments. | The taxpayer acquired a property in 2004. To finance the acquisition, the taxpayer obtained debt funding of $120 million from a third-party lender. | The taxpayer's sole shareholder provided an interest free loan which was used to repay a portion of the third-party debt of $120 million. | In 2006, the interest free loan was converted into equity. The taxpayer's sole shareholder subscribed for additional equity. | In 2010, the taxpayer entered into a contract to dispose of the property. Settlement occurred in November 2010. | As a result of the sale, the taxpayer currently has surplus capital together with cash on hand, which it wishes to remit to its sole shareholder. | The Board of Directors of the taxpayer has resolved that there will be no acquisitions within the next three years and that the capital is therefore surplus to the taxpayer's needs. | The taxpayer wishes to remit the funds to its sole shareholder by way of dividend and return of capital. | The capital returned is proposed to be undertaken by way of a proportionate capital reduction in respect of the shares held by the sole shareholder. | Detailed reasoning | Subsection 45B(1) of the ITAA 1936 states the purpose of section 45B of the ITAA 1936. Relevantly, 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. | Subsection 45B(2) of the ITAA 1936 states: | This section applies if: | (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); and | (b) a taxpayer (the relevant taxpayer), who may or may not be the person provided with the capital benefit, obtains a tax benefit under the scheme (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 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. | Under the proposed scheme put forward, there is a scheme under which the taxpayer would provide a capital benefit to its sole shareholder. The sole shareholder, as the relevant taxpayer, would obtain a tax benefit under the scheme. As such, paragraphs 45B(2)(a) and (b) of the ITAA 1936 are satisfied. | On the basis of the information provided, the relevant circumstances do not point to the proposed return of capital being made in substitution of a dividend. Paragraph 45B(2)(c) of the ITAA 1936 is not satisfied. | The Commissioner concludes that section 45B of the ITAA 1936 does not apply to the proposed scheme. As such, the Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies.




Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.