Private ruling: Return of capital
Date of advice: 27 March 2026
Published: 29 June 2026
Ruling period: 2026 income tax year
Date scheme commenced: XX XXXXXX 2026

Ruling: Q1: Will any part of the Capital Return by Aus Co 2 to Foreign Head Co (that is debited against the amount standing to the credit of the share capital account of Aus Co 2) be treated as a dividend within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 ("ITAA 1936")? | A1: No | Q2: Will the Commissioner seek to make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole, or a part of, the Capital Return by AusS Co 2 to Foreign Head Co? | A2: No

Relevant facts and circumstances: Background (1) Foreign Head Co is the parent company incorporated in Foreign Country 1 and is listed on the Foreign Country 1's Stock Exchange. (2) Aus Co 1 is an Australian resident company wholly-owned by Foreign Head Co. (3) Aus Co 1 is the provisional head company of the Aus Co 1 multiple entry consolidated group (Aus Co 1 MEC Group) and Aus Co 2 is an eligible tier 1 company of the Aus Co 1 MEC Group. (4) Aus Co 2 is directly wholly-owned by Foreign Head Co. (5) As at xx xx xx Aus Co 2 has on issue xx fully paid ordinary shares and the total paid up capital was $XX. (6) Foreign Co 2 is an entity incorporated in Foreign Country 2 and is a tax resident of Foreign Country 2. (7) Prior to the restructure detailed below, Foreign Co 2 was wholly-owned by Aus Co 2. (8) At xx xx xx, the draft standalone financials provided to the Commissioner state that Aus Co 2's investment in Foreign Co 2 was $XX. (9) An independent fair market valuation of Foreign Co 2 was conducted and the independent market valuation report provided a fair market value range of $XX to $XX, with a midpoint of $XX. (10) Foreign Co 2 does not carry on business in Australia through an Australian permanent establishment. (11) Aus Co 2 is not land-rich and less than 50% of its value is comprised of direct or indirect Australian real property interests. (12) Foreign Head Co's ordinary share capital history in Aus Co 2 was provided to the Commissioner. (13) There have been no transfers of amounts to the share capital account of Aus Co 2 and, as such, the share capital account of Aus Co 2 is not a tainted share capital account (14) Aus Co 2 has not made any previous dividend distributions, nor any capital returns to its shareholder Foreign Head Co since its incorporation. Aus Co 2 does not have a formal dividend policy. No intragroup dividend policies of Aus Co 1 applicable to Aus Co 2 exist. Its purpose and function have been limited to the ownership of Foreign Co 2. (15) As at xx xx xx, the franking account balance of the Aus Co 1 MEC Group was $XX. (16) As at xx xx xx, Aus Co 2 had prior year retained losses of $XX and of approximately $XX at xx xx xx. Restructure, Capital Reduction and Dividend (17) Foreign Head Co has made a strategic decision to take over management of Foreign Country 2's business from Aus Co 1. This decision is part of a wider reorganisation. (18) Aus Co 2 proposed to enter into a Share Sale and Purchase Agreement (SPA) under which it would sell 100% of the issued capital in Foreign Co 2 to Foreign Head Co to Foreign Co 3 for a Purchase Price of $XX, subject to the approval of Foreign Head Co, as sole shareholder in Aus Co 2. (19) The Purchase Price is approximately equal to the midpoint of the fair market valuation range of Foreign Co 2 as per the independent market valuation. (20) Subject to and following completion of the SPA, Aus Co 2 would conduct a Capital Reduction of approximately $XX and pay a Dividend of approximately $XX to Foreign Head Co, which would result in the retained earnings of Aus Co 2 being reduced by the amount of the Dividend. Transaction steps (21) On xx xx xx the SPA was completed. The following steps were enacted: (a) Step 1: Aus Co 2 disposed of the shares in Foreign Co 2 to Foreign Co 3 under the SPA in exchange for the issue of a promissory note (b) Step 2: Aus Co 2 declared a Dividend and made a Capital Return to Foreign Head Co (for a combined amount equal to the value of the promissory note).Aus Co 2 transferred the promissory note to Foreign Head Co in satisfaction of the Dividend/Capital Return amounts. (i) The Dividend equalled the current year gross profits available (wholly comprised of the accounting gain on the disposal of Foreign Co 2) in Aus Co 2. The final amount of the Dividend was $XX and was paid as an unfranked Dividend. (ii) The balance, $XX constituted the Capital Return. (22) The total amount of the capital return was accounted for by Aus Co 2 as a debit against the amount standing to the credit of the share capital account of Aus Co 2.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6(1) | Income Tax Assessment Act 1936 subsection 6(1)(d) | Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1936 section 45B | Income Tax Assessment Act 1936 paragraph 45B(1)(a) | Income Tax Assessment Act 1936 paragraph 45B(1)(b) | Income Tax Assessment Act 1936 subsection 45B(2) | 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 subsection 45B(3) | Income Tax Assessment Act 1936 paragraph 45B(3)(b | 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)(h) | Income Tax Assessment Act 1936 paragraph 45B(8)(k) | Income Tax Assessment Act 1936 subsection 45B(9) | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1936 subsection 128B(4) | Income Tax Assessment Act 1936 section 318 | Income Tax Assessment Act 1936 subsection 177(D)(b) | Income Tax Assessment Act 1997 section 104-135 | Income Tax Assessment Act 1997 Division 197 | Income Tax Assessment Act 1997 section 197-50 | Income Tax Assessment Act 1997 Division 855 | Income Tax Assessment Act 1997 section 855-15 | Income Tax Assessment Act 1997 section 975-300 | Income Tax Assessment Act 1997 subsection 975-300(3) | Income Tax Assessment Act 1997 subsection 995-1(1) | International Tax Agreements Act (1953) subsection 4(2)

Reasons for decision: Detailed Reasoning - Issue 1: Return of Capital | Detailed Reasoning - Question 1: Will any part of the Capital Return by Aus Co 2 to Foreign Head Co (that is debited against the amount standing to the credit of the share capital account of Aus Co 2) be treated as a dividend within the meaning of subsection 6(1) of the ITAA 1936? | Summary: The distribution made by Aus Co 2 to Foreign Head Co that is debited against Aus Co 2's share capital account will not be treated as a dividend within the meaning of subsection 6(1) of the ITAA 1936. | Detailed Reasoning - All legislative references in this Ruling are to provisions of the ITAA 1936, unless otherwise indicated.: Relevant legislation For taxation law purposes, the term 'dividend' is defined in subsection 6(1) of the ITAA 1936 to include: (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; (c) (Repealed by No 63 of 1998) a. But does not include: (d) 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 (e) 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 (f) a reversionary bonus on a life assurance policy. The term 'share capital account' is defined in subsection 975-300(1) of the ITAA 1997 as: (a) an account that the company keeps of its share capital; or (b) any other account (whether or not called a share capital account) that satisfies the following conditions: (i) the account was created on or after 1 July 1998; (ii) the first amount credited to the account was an amount of share capital. Subsection 975-300(3) of the ITAA 1997 provides that a share capital account is not treated as such where it is tainted other than for the following provisions: (a) subsection 118-20(6); and (b) Division 197; and (ba) paragraph 202-45(e); and (c) the definition of paid-up share capital in subsection 6(1) of the Income Tax Assessment Act 1936 ; and (d) subsection 44(1B) of the Income Tax Assessment Act 1936 ; and (e) subsection 159GZZZQ(5) of the Income Tax Assessment Act 1936 . Where a share capital account is not already tainted, subsection 197-50(1) of the ITAA 1997 states that: A company's *share capital account becomes tainted when an amount to which this Division applies is transferred to the account ... Section 6(4) of the ITAA 1936 states the following: Paragraph (d) of the definition of dividend in subsection (1) does not apply if, under an arrangement: (a) a person pays or credits any money or gives property to the company and the company credits its share capital account with the amount of the money or the value of the property; and (b) the company pays or credits any money, or distributes property to another person, and debits its share capital account with the amount of the money or the value of the property so paid, credited or distributed. Section 6(4) of the ITAA 1936 reverses the exclusion in paragraph 6(1)(d) of the ITAA 1936 if the distribution involves an arrangement under which a company raises share capital from certain shareholders and then makes a tax-preferred capital distribution from the share capital account to other shareholders. Section 6(4) is an anti-avoidance provision aimed at arrangements to increase share capital to take advantage of the para (d) exclusion. Application to the relevant facts and circumstances of AUS CO 2 In Aus Co 2's case, the entire amount of the Capital Return, being $XX, was recorded as a debit to Aus Co 2's share capital account. As the share capital account is not a tainted share capital account within the meaning of Division 197 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) will apply such that the amount debited to Aus Co 2's share capital account will not be a dividend for the purposes of subsection 6(1). Further, the circumstances set out in subsection 6(4) are not present in this arrangement. Accordingly, the Capital Return will not constitute a 'dividend' under subsection 6(1) of the ITAA 1936, as it is a distribution to the shareholders from an untainted share capital account and does not fall within the scope of the exclusion in subsection 6(4). | Detailed Reasoning - Question 2: Will the Commissioner seek to make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole, or a part of, the Capital Return by Aus Co 2 to Foreign Head Co? | Summary: The Commissioner will not make a determination under paragraph 45B(3)(b) that section 45C applies to deem any part of the return of the Capital Return by Aus Co 2 to Foreign Head Co as a dividend paid out of profits. | Detailed Reasoning - Detailed reasoning: Section 45B applies where certain capital payments, including a capital distribution, are paid to shareholders in substitution for dividends. Specifically, the provision applies where: • There is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a)); • 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 (paragraph 45B(2)(b)); and • Having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose of enabling the relevant taxpayer to obtain a tax benefit (paragraph 45B(2)(c)). The Capital Return would constitute a 'scheme' given the broad definition of the term in subsection 995-1(1) of the ITAA 1997. The distribution of the Capital Return is a provision of capital benefit in accordance with paragraph 45B(5)(b). Hence, paragraph 45B(2)(a) is satisfied. Subsection 45B(9) provides that a taxpayer obtains a tax benefit if an amount of tax payable would be less than the amount of tax that would otherwise be payable (or payable at a later time) if the capital benefit is instead a dividend. Having regard to the present facts and circumstances, it is reasonable to conclude that Aus Co 2 will derive a tax benefit in relation to the Capital Return. Hence, paragraph 45B(2)(b) is satisfied. However, having considered each of the relevant circumstances in subsection 45B(8), it cannot be concluded that Aus Co 2 and Foreign Head Co entered into or carried out the Capital Return for a more than incidental purpose of enabling Aus Co 2 to obtain a tax benefit. As such, section 45B will not apply and the Commissioner will not seek to make a determination under subsection 45B(3) that section 45C applies to the whole or any part of the Capital Return.

Does 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: These reasons for decision accompany the Notice of private ruling for Aus Co 1.