Private ruling: Return of share capital
Date of advice: 27 June 2025
Published: 18 August 2025
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Will any part of the proposed capital return (Proposed Capital Distribution) by xxxxxx (xx Holdco) to its shareholders (that is debited against the amount standing to the credit of the share capital account of Holdco) be treated as a dividend within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and thereby be assessable under section 44 of the ITAA 1936 and liable to dividend withholding tax to the extent paid to non-resident shareholders of the Holdco? | A1: No. | Q2: Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 will apply in relation to the whole, or a part of, the Proposed Capital Distribution by Holdco? | A2: No. The Commissioner will not make a determination under section 45B of the ITAA 1936 that section 45C of the ITAA 1936 will apply to the whole, or a part of, the Proposed Capital Distribution by Holdco.

Relevant facts and circumstances: 1. Holdco is a private company that was incorporated in Australia on xx xx xx. It is the head of an Australian tax consolidated group with xx entities. Holdco and its wholly owned subsidiaries (collectively, Group) is headquartered in xx, Australia and operates solely within Australia. 2. Prior to its acquisition by the Group, entities within the Z tax consolidated group (Z TCG) held 100% of the ownership interests in the operating entities comprising the xxx (Business). 3. On xx xx xx, the Group entered into the Share and Unit Purchase Agreement (SUPA) with the Z TCG for the acquisition of Business for total cash consideration of $xxx. Economic completion of the acquisition occurred on xx xx xx and legal completion occurred on xx xx xx (Investment Date). 4. The acquisition of Business was funded via a combination of equity and external third-party debt, as follows: a) Subscription for $xx of additional ordinary shares in Holdco. Holdco equity capitalised the purchasing entity in the Group via the interposed entities. b) Using a syndicated loan facility (the Current Facility), external debt of $xx of which XX. $xx was on-lent to the purchasing entity in order to fund the purchase consideration. c) The remaining amounts from the Current Facility were used to pay transaction costs, adjust for net working capital position, and XX. $xx was left as additional cash on the balance sheet. 5. Between the Investment Date to the date of this Application (Investment Period), a number of further acquisitions were undertaken by the Group. Shareholding structure 6. The shares on issue in Holdco are per the table below. Table 1: Share Capital Account of Holdco Share Class Shares on issue Paid on shares issued ($) Amounts per 30 June 20YY financials ($'000) Ordinary xxx xxx xxx A class xxx xxx xxx 7. \ All shares in Holdco: a. carry equal rights to participate in dividends and returns of capital, b. are not taxable Australian property under Division 855 of the ITAA 1997, c. are post-CGT shares, and d. are held on capital account. 8. Approximately X% of Holdco is ultimately owned by non-residents, while the remaining X% is ultimately owned by Australian residents. 9. A Class shareholders who received their equity interests via loans from the Group Finance Entity will apply their share of the Proposed Capital Distribution to paying down their outstanding loan balance. Current Facility 10. As at 30 June XXXX, the Group has third-party debt facilities: Table 2: Summary of the Current Facility Bank Facility Facility Limit ($'000) Interest rate (%) Date of maturity Outstanding amount as at 30 June 20YY ($'000) 3 Projected outstanding amount as at March 20YY ($'000) A - xx (xx) xx xx xx xx xx B - xx (xx) xx xx xx xx xx C - xx xx xx xx xx xx D - xx xx xx xx xx xxx 11. The lenders under the Current Facility comprise a syndicate of X Australian and international banks. 12. The acquisition of the Business entities occurred during COVID-19 where the liquidity in debt capital markets, and associated uncertainties, meant that conventional debt financing was not readily available. Whilst external debt was raised to fund the acquisition, broader market conditions were still highly volatile at the time due to the fact that Australia had just entered COVID lockdown. 13. Banks and capital markets were more cautious, tightening their lending standards to mitigate increased credit risk. Consequently, the terms and initial amount of leverage attainable at the time was impacted. The New Facility 14. The Current Facility is approaching expiration and there is a commercial need to negotiate a refinancing of the debt facilities. 15. The key terms of the new facilities are: a. The borrower is to be the finance entity of the Group. b. The lenders are to be a combination of Australian and international institutions. c. The amount is to be up to AUD $X million with various facilities (collectively, the New Facility). d. The New Facility is to be Senior Secured. e. The obligor group will comprise the holding company of the Group Finance Entity and its wholly owned subsidiaries. Each obligor is to provide an all-asset general security deed. No assets are excluded from security. f. New Facility will be used as follows: I. X facility will be used to: 1. Repay existing senior indebtedness, 2. Return capital to shareholders, and 3. Pay transaction fees and expenses. II. X facility will be applied to capital expenditure of the Group. III. X facility will be used for working capital and the general corporate purposes of the Group. g. Financial covenants: a) Net Leverage Ratio: Year X stepping down to X Year X, and b) Interest Cover Ratio: X for X months, and X thereafter. Proposed Capital Distribution 16. The purpose of the proposed capital return is to return excess cash arising from a refinancing of the Group's Current Facility. The switch to increased debt financing is a capital structuring decision aimed at reducing the Group's weighted average cost of capital. The rebalancing of the Group's financing sources has been made possible due to improved debt capital market conditions and confidence in the Group's growth strategy. 17. The proposed capital distribution was considered by the directors of the Group. Holdco proposes to undertake a return of capital to its shareholders on a proportionate basis of approximately $xx.xx by utilising a portion of the proceeds from the New Facility. A Class shareholders that have loans will apply proceeds from their share of the Proposed Capital Distribution to repay a portion of their outstanding loan balance. 18. Each of the relevant companies will debit their share capital account to reflect the respective returns of capital. 19. The share capital account of Holdco is not tainted (nor has been tainted) for the purposes of Division 197 of the ITAA 1997. 20. There is no arrangement to which subsection 6(4) of the ITAA 1936 applies. 21. The proposed Capital Distribution is undertaken in accordance and pursuant to Holdco's Constitution. 22. There are no other steps associated with the Proposed Capital Distribution other than those listed in this Notice of Decision. 23. Holdco nor any of its subsidiaries or business assets will be sold as part of or in relation to the Proposed Capital Distribution during the period covered by this ruling (being the years ended 30 June 20YY and 30 June 20YY) Financial Position of Holdco Losses 24. Based on the budgeted revenue / net profit after tax position for the Group, the group will continue to be in a retained loss position at the time of the Proposed Capital Distribution. Dividends 25. No dividends have been paid by Holdco since the Investment Date. 26. Currently Holdco has a nil franking account balance. 27. There are no unrealised gains in the Group. 28. The share capital account of Holdco is not tainted (nor has been tainted) for the purposes of Division 197 of the ITAA 1997. 29. Holdco's franking and conduit foreign income balance was nil as at xx xx xx. 30. There are no plans to sell the company or any of its business assets. There are no other steps associated with this capital return.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 197 | Income Tax Assessment Act 1997 Division 701 | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 subsection 701-1(1) | Income Tax Assessment Act 1997 Division 855 | Income Tax Assessment Act 1997 section 197-5 | Income Tax Assessment Act 1997 subsection 197-50(1) | Income Tax Assessment Act 1997 section 975-300 | Income Tax Assessment Act 1997 subsection 975-300(1) | Income Tax Assessment Act 1997 subsection 975-300(2) | Income Tax Assessment Act 1997 subsection 975-300(3) | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 subsection 995-1(1) | 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 section 44 | Income Tax Assessment Act 1936 subparagraph 44(1)(a)(i) | Income Tax Assessment Act 1936 subparagraph 44(1)(b)(i) | 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 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 subsection 45B(10) | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1936 subsection 45D(1A) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 paragraph 177D(2)(a) | Income Tax Assessment Act 1936 paragraph 177D(2)(b) | Income Tax Assessment Act 1936 paragraph 177D(2)(c) | Income Tax Assessment Act 1936 paragraph 177D(2)(d) | Income Tax Assessment Act 1936 paragraph 177D(2)(e) | Income Tax Assessment Act 1936 paragraph 177D(2)(f) | Income Tax Assessment Act 1936 paragraph 177D(2)(g) | Income Tax Assessment Act 1936 paragraph 177D(2)(h) | Income Tax Assessment Act 1936 section 318 | Income Tax Assessment Act 1936 section 855-10

Reasons for decision: Summary: Question 1 The Proposed Capital Distribution to be made by Holdco to its shareholders (will not be a dividend within the meaning of subsection 6(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 6(1) relevantly defines a 'dividend' as including: (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) 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 the amount is debited to the company ' s share capital account; (iv) 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. Pursuant to paragraph 6(1)(d) of the ITAA 1936 above, a dividend does not include 'moneys paid or credited by a company to a shareholder...' 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.' Subsection 975-300(1) of the ITAA 1997 defines a share capital account as a. an account that the company keeps of its share capital, or b. any other account that satisfies the following conditions: i. The accounted was created on or after 1 July 1998, and ii. The first amount credited to the account was an amount of share capital. Subsection 975-300(2) of the ITAA 1997 states that if a company has more than one account covered by subsection 975-300(1) of the ITAA 1997, the accounts are taken, for the purposes of this Act, to be a single account. Subsection 975-300(3) of the ITAA 1997 states that an account is not a share capital account if it is tainted. A company's share capital account becomes tainted pursuant to section 197-5 and subsection 197-50(1) of the ITAA 1997 if: • there is a transfer of an amount to the share capital account that is not an excluded amount; and • the company is an Australian resident immediately before the transfer took place. The note to the definition provides a signpost to subsection 6(4) of the ITAA 1936. It states that 'Subsection (4) sets out when paragraph (d) of this definition does not apply'. | Detailed Reasoning - Subsection 6(4) of the ITAA 1936: Subsection 6(4) of the ITAA 1936 states that the paragraph (d) 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. The Proposed Capital Distribution will satisfy subsection (a) of the definition of dividend in subsection 6(1) of the ITAA 1936. However, the return of capital will not be a 'dividend' as subsection (d) of the definition of dividend in subsection 6(1) of the ITAA 1936 applies. The Proposed Capital Distribution by Holdco will be accounted for by debiting the amount against the amount standing to the credit of Holdco's 'share capital account'. There is no arrangement within the meaning of subsection 6(4) of the ITAA 1936 for the crediting of the share capital account and a distribution from that account as part of the Proposed Capital Distribution, such that the exclusion in subsection (d) should apply to the proposed return of capital debited against the amount standing to the credit of the share capital account of Holdco. | Detailed Reasoning - Subsection 975-300 - Share capital account: The Proposed Capital Distribution will be debited in full against Holdco's share capital account. Holdco's share capital account is not tainted (as defined in section 975-300 of the ITAA 1997); within the meaning of Division 197 of the ITAA 1997. Therefore, the entire amount of the return of capital payment proposed to be made to shareholders will not be a 'dividend' as defined in subsection 6(1) of the ITAA 1936. Having regard to the relevant facts and circumstances, subsection 6(4) of the ITAA 1936 does not apply. Accordingly, the Proposed Capital Distribution 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 - Subparagraph 44(1)(a)(i) of the ITAA 1936: For completeness, as per subparagraph 44(1)(a)(i) of the ITAA 1936, the assessable income of a resident shareholder includes dividends paid out of profits derived by the company from any source. Subparagraph 44(1)(b)(i) includes in the assessable income of a non-resident shareholder a dividend paid out of profits derived by the company from sources in Australia. As the Proposed Capital Distribution is not a dividend, subparagraphs 44(1)(a)(i) and 44(1)(b)(i) will not apply. Question 2 | Summary: 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 Proposed Capital Distribution that Holdco distributes to its shareholders. Accordingly, Holdco will not be required to provide a copy of a notice under subsection 45D(1A) of the ITAA 1936 as a determination under subsection 45B(3) will not be made. | Detailed Reasoning - Single entity rule - Division 701 of the ITAA 1997: Subsection 701-1(1) of the ITAA 1997 states the single entity rule (SER): If an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the head company of the group, rather than separate entities, during that period. Holdco elected to be a tax consolidated group (TCG) under section 701-1 of the ITAA 1997, it is taken to be the head company for tax purposes. The application of the SER is stated in paragraph 8 of Taxation Ruling TR 2004/11 (TR 2004/11): 8. As a consequence, the SER has the effect that: (a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company; (b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group; (c) assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11 and paragraphs 26-28); and (d) dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company. The payment from one company in the group to another is from one part of the tax consolidated group to another. Therefore, pursuant to the SER defined in section 701-1 of the ITAA 1997 the internal payments are ignored. Therefore, as Holdco elected to form an income tax consolidated group the return of capital by payments from one company within the group to another are treated as intra-group dealings and section 701-1 of the ITAA 1997 will apply such that the transactions are ignored. | Detailed Reasoning - Section 45B of the ITAA 1997: Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends. Relevantly, in broad terms, section 45B of the ITAA 1936 applies where: • 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) • 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) of the ITAA 1936), 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 (paragraph 45B(2)(a) of the ITAA 1936). | Detailed Reasoning - Paragraph 45B(2)(a) of the ITAA 1936: A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as provided by section 995-1 of the ITAA 1997 (subsection 45B(10) of the ITAA 1936). Broadly, in this context, the term scheme takes the same meaning as provided in Part IVA of the ITAA 1936. That definition is widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan, or proposal. In particular, a scheme is anything that satisfies any of the terms in the statutory definition. The phrase 'provided with a capital benefit' is defined in subsection 45B(5) of the ITAA 1936. It states that a reference to a person being provided with a capital benefit is a reference to any of the following: (a) the provision of ownership interests in a company to the person; (b) the distribution to the person of share capital or share premium; or (c) something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person. Application to the Proposed Capital Distribution The Proposed Capital Distribution constitutes a 'scheme' within the meaning given by subsection 995-1(1) of the ITAA 1997. There is a provision of a capital benefit as defined by subsection 45B(5) of the ITAA 1936 as the relevant taxpayers, will be 'provided with a capital benefit' under the Proposed Capital Distribution as the distribution will be debited against XX Holdco's share capital account. Therefore, paragraph 45B(2)(a) of the ITAA 1936 will be satisfied. | Detailed Reasoning - Paragraph 45B(2)(b) of the ITAA 1936: Relevantly, subsection 45B(9) of the ITAA 1936 provides that a relevant taxpayer 'obtains a tax benefit' if an amount of tax payable by that taxpayer would, apart from the operation of section 45B of the ITAA 1936, be less than the amount that would have been payable if the capital benefit had been a dividend. Application to the Proposed Capital Distribution As a result of the Proposed Capital Distribution, the tax payable by the relevant taxpayer would be lower than if the payment was an assessable dividend. Accordingly, the relevant taxpayer would obtain a tax benefit for the purposes of subsection 45B of the ITAA 1936. Therefore, paragraph 45B(2)(b) of the ITAA 1936 will be satisfied. | Detailed Reasoning - Paragraph 45B(2)(c) of the ITAA 1936: For the purposes of paragraph 45B(2)(c) of the ITAA 1936, the Commissioner is required to consider the 'relevant circumstances' of the scheme to determine whether any part of the scheme was entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit. The relevant circumstances to be considered include the non-exhaustive factors set out in subsection 45B(8) of the ITAA 1936 and include any of the matters listed in subsection 177D(2) of the ITAA 1936. PS LA 2008/10 Application of section 45B of the Income Tax Assessment Act 1936 to share capital reductions (PS LA 2008/10) explains that although section 45B of the ITAA 1936 does not apply on a profits first basis, by implication it does presuppose some objective non-tax basis for distributing capital rather than profits, where both are available. It summarises the differences between profits and share capital in the following terms. Essentially, profits are a gain to the company which, when surplus to the company's needs, are meant to be divided amongst the shareholders; hence the word 'dividend'. Share capital, on the other hand, is the money contributed by the company's members for carrying out its objects until some event or circumstance renders its retention unnecessary, whereupon it may be returned. In broad terms, if a company can choose to distribute either capital or profits, for the purposes of section 45B of the ITAA 1936, there should be compelling, objective and commercial reasons why a company would choose the difficulty of distributing share capital over the relative simplicity of distributing profits, other than the tax preference of shareholders. PSLA 2008/10 sets out the relevant considerations regarding the return of share capital and explains that where there are retained earnings, the choice to distribute share capital over retained earnings makes it difficult for the taxpayer to refute that the requisite degree of purpose of enabling a shareholder to obtain a tax benefit exists: 63. A capital distribution that is attributable to share capital should reflect circumstances which show that the share capital distributed is genuinely surplus to the company's need of it and that it is not merely a cash distribution debited against share capital on the basis of shareholder tax preference. For instance, the capital distribution may coincide with the disposal of a significant part of the business structure which can be identified as releasing share capital. However, if the disposal also realises a profit the ensuing distribution should, subject to all the other relevant circumstances, be considered in terms of its attribution to both share capital and the profit from the disposal. 64. Broadly, the capital of a company is the money contributed, or agreed to be contributed by its members for carrying out its objects. Generally, the money so contributed is to be retained as a permanent fund while the company pursues its objects. Company law requires, in the case of a company limited by shares, that the capital subscribed by the shareholder be maintained as a fund for the protection of creditors (the doctrine of maintenance of capital). One consequence of this doctrine is that a company may not pay a dividend except out of distributable profits. Another consequence is that a company must not distribute its issued capital to members prior to winding up. As discussed however, the Corporations Act contains a number of exceptions to the doctrine of maintenance of capital, including the case of an authorised share capital reduction. The exceptions generally contemplate some special event or circumstance affecting the enterprise of the company which renders the retention of capital unnecessary. 65. Whatever the circumstances may be, they would not ordinarily include generating more money than required for the purposes of the business. The generation of surplus funds from carrying on the business of the company in the ordinary way is the occasion for the distribution of a dividend, not a return of capital. 66. The doctrine of maintenance of capital continues to be an important part of company law. Share capital maintains its character as the shareholders' proportionate contribution to, and their measurement of, ownership of the corporate business. It is also the fixed sum by reference to which the growth of the business is measured and identified as distributable profits. Under the corporate paradigm, contributed capital is meant to be invested in the objects of the business and, generally, to provide lasting support to the business. Profits which are excess to the requirements of the business are meant to be distributed to the shareholders. 67. As mentioned previously in paragraphs 35 to 37 of this practice statement, a distribution of profits to the members is a discretionary matter for the company's board of directors, whose responsibility it is to supervise the management of the corporation's business on behalf of the members. In contrast, a distribution of share capital to the members, though recommended by the board of directors, must be approved by a majority of the members as it is a matter which goes to the essential structure of the business. 68. Therefore, a distribution of profit would normally be expected to be a relatively ordinary corporate event and a distribution of capital a relatively extraordinary one. A decision to reduce capital would generally be expected to coincide with and be influenced by some other commercial circumstance. For example, a release of the capital from a disposal of part of the business structure, some other business structural change, or in some circumstances its replacement with debt capital where it is shown to be more profitable for shareholders. It should be noted, however, that the fact that the capital distribution has been funded from debt does not preclude it from being attributable to profits. 69. The profit to be taken into account under paragraph 45B(8)(a) includes profits, whether realised or unrealised, of the company making the distribution, or of an associate of the company. This means, for instance, that profits of subsidiaries may be taken into account for the purposes of determining whether the capital distribution is attributable to profits. 70. The term 'profits' is not defined in the income tax law and takes its ordinary meaning. It has a wide scope and is not limited to the Corporations Act's conception of the term. [40] The word profits, as it is generally understood, implies a gain made by a business and disclosed by a comparison between the state of that business at one point in time and its state at another. [41] Thus, in strict legal terms, an unrealised gain, whether or not it is of a 'permanent character' and whether or not it meets the technical requirements for distribution of the Corporations Act, constitutes profits for the purposes of paragraph 45B(8)(a). [42] It should also be noted that a company can pay dividends out of current year profits despite having accumulated losses. [42] The discussion in Taxation Ruling TR 2003/8 Income tax: distribution of property by companies to shareholders - amounts to be included as an assessable dividend, of the meaning of 'profits derived' in the context of subsection 44(1) is also relevant in determining whether there are profits or not. 71. Therefore, the notion of 'profits' in paragraph 45B(8)(a) may be wider than that under the Corporations Act. The attribution inquiry extends beyond profits legally distributable by the company to profits which, as a practical matter of fact, are available to be harvested by the company for distribution at that time or at a future time. 72. Nevertheless, tax officers should also take account of the nature and circumstances of the particular company, its distribution culture and whether there are commercial concerns with distributing the profits, including distributing any unrealised profits if relevant, in determining whether section 45B applies. For example, a corporate group could have some unrealised profit that may be so ephemeral as to render its distribution imprudent. Aspects of corporate distributions are discussed further with respect to the relevant circumstances identified in paragraphs 45B(8)(b) and 45B(8)(k). The mere existence of profits will not automatically trigger the application of section 45B; rather, the availability of profits is but one matter to be considered in the attribution inquiry posed by paragraph 45B(8)(a). 73. As discussed at paragraph 57 in PS LA 2005/21, if the capital distribution is attributable to the disposal of assets of the business, a reasonable approach should be taken in determining the extent to which share capital was invested in the disposed assets and is available to be distributed to shareholders. In some instances the capital may be traced directly to the asset and in others it may be a matter of inferring its allocation on a reasonable basis. For example, it may be appropriate to allocate capital across the enterprise as a whole, based on valuing assets according to their market value. This is sometimes referred to as the 'slice approach' to the compilation of assets as between capital and profit. 74. Similarly, if the occasion for the share capital reduction is to increase the company's gearing ratio (the debt to equity ratio) it should be borne in mind that equity includes both retained profits and share capital and that this is an occasion that affects both. This means that an increase in the gearing ratio can be achieved just as effectively by returning profits as reducing share capital, including by way of dividend. Generally, in the absence of other relevant factors which indicate otherwise, tax officers should regard the capital distribution as being attributable to the share capital and retained earnings on a proportionate basis. The test of purpose is an objective one. The question is whether it would be concluded that a person who entered into or carried out the scheme, or any part of the scheme, did so for a purpose of enabling a taxpayer to obtain a tax benefit. The requisite purpose does not have to be the dominant purpose, but it must be more than an incidental purpose. Application to the Proposed Capital Distribution The circumstances covered by paragraphs 45B(8)(i) and (j) of the ITAA 1936 pertaining to the provision of ownership interests and demerger are not relevant here. So, in this case, the relevant matters are those covered by the circumstances described in paragraphs 45B(8)(a) to (h) and(k). | Detailed Reasoning - Paragraph 45B(8)(a) - extent capital benefit attributable to capital or profits: Paragraph 45B(8)(a) of the ITAA 1936 refers to the extent to which a capital benefit is attributable to capital or to the realised and unrealised profits of the company or its associates. The source of the funds for the Proposed Capital Distribution is an increase in debt. The consolidated group has no undistributed profits at the time of the return of capital as it has been in a loss situation since its purchase because of unusual economic circumstances at the time of the groups acquisition. Accordingly, the return of capital will be attributable to capital and not to profits, realised or unrealised. | Detailed Reasoning - Paragraph 45B(8)(b) pattern of distributions: Paragraph 45B(8)(b) of the ITAA 1936 refers to the pattern of distribution of dividends, bonus shares and returns of paid-up capital of the company or its associates. In this case the consolidated group does not have a history of dividend distributions as the businesses has been recovering from the unusual economic conditions at the time of the groups acquisition. Accordingly, the consolidated groups pattern of distribution does not suggest that the proposed return of capital will be made in substitution for a dividend. | Detailed Reasoning - Paragraph 45B(8)(c) - whether the relevant taxpayer has capital losses to apply to the capital benefits.: Paragraph 45B(8)(c) of the ITAA 1936 relates to whether a taxpayer has capital losses that, apart from the scheme, would be carried forward to a later year of income. It concerns the availability of capital losses to offset any potential gain. Since only a portion of the shareholder's capital will be returned, it is not anticipated any of the shareholders would realise a capital gain as a result of the capital return that could be offset against any unutilised capital losses they may have. | Detailed Reasoning - Paragraph 45B(8)(d): ownership interests acquired before 20 September 1985: Paragraph 45B(8)(d) of the ITAA 1936 requires an inquiry as to whether some or all of the ownership interests in the company or in an associate (within the meaning of section 318 of the ITAA 1936) of the company held by the relevant taxpayer were acquired, or taken to be acquired, before 20 September 1985, thus exempting any capital gain. All shares in XX Holdco were issued after 20 September 19YY. | Detailed Reasoning - Paragraph 45B(8)(e): non-resident shareholders: Paragraph 45B(8)(e) of the ITAA 1936 requires an inquiry as to whether the relevant taxpayer is a non-resident. When compared to an unfranked dividend, a foreign resident shareholder benefits from a capital distribution. This is mainly due to the provisions of section 855-10 of the ITAA 1936 which operates to disregard capital gains derived by a foreign resident from the disposal of shares held by it in an Australian resident company where the majority underlying assets of the Australian resident company are not real property. On balance, this relevant circumstance does point toward the requisite purpose in paragraph 45B(2)(c) of the ITAA 1936. | Detailed Reasoning - Paragraph 45B(8)(f): cost base of shares: Paragraph 45B(8)(f) of the ITAA 1936 relates to whether the cost of the relevant ownership interest is not substantially less than the value of the applicable capital benefit. The opportunity to defer the CGT taxing point may incline towards a conclusion that the purpose of the return of capital is to access the tax concession as an end in itself, rather than to increase business efficiency. A majority of direct or indirect shareholders being non-residents (81%), the issue of cost base for them is not relevant as their interest in Holdco should not constitute an indirect Australian real property interest. Accordingly, this factor does not of itself indicate the requisite purpose of the proposed return of capital. Accordingly, this circumstance does not incline towards a conclusion of requisite purpose. | Detailed Reasoning - Paragraph 45B(8)(h): nature of interest after the return of capital: Paragraph 45B(8)(h) of the ITAA 1936 requires a comparison of the respective interests held by shareholders after the distribution. An equal share capital reduction under which no shares are cancelled does not affect a shareholder's substantive interests, either individually or inter se and thus the interests remain the same as if a dividend had been paid instead. From a shareholder's perspective a reduction of capital without a cancellation of shares is not dissimilar economically to a special dividend, in that cash is distributed to them while they retain the share with all of its rights intact (Paragraph 91 of PS LA 2008/10). As the proposed capital return is to be proportional and will not result in the cancellation of any shares, the shareholder's substantive interests will remain the same as if a dividend was paid instead. Accordingly, this factor should not be determinative that the requisite purpose exists to obtain the relevant tax benefit. | Detailed Reasoning - Paragraph 45B(8)(k): the Part IVA matters: Paragraph 45B(8)(k) of the ITAA 1936 refers to the matters in subsection 177D(2) of the ITAA 1936. These are matters by reference to which a scheme is examined from a practical perspective to compare its tax and non-tax objectives. These matters include, among other things, the form and substance of the scheme and its financial implications for the parties to it. The paragraph 177D(2)(a) to (h) of the ITAA 1936 matters operate together to direct attention to the means by which the tax benefit has been obtained. Having regard to the matters raised in paragraphs 177D(2)(a) to 177D(2)(h) of the ITAA 1936 does not lead to a conclusion that a purpose, other than an incidental purpose, of obtaining a tax benefit exists in relation to the entering of the scheme. In considering the scheme, the return of capital by Holdco to the Holdco shareholders is consistent with it being, in form and substance, a return of capital. The scheme did not lead to the conclusion that the requisite purpose existed and that the scheme was carried out for the purpose of enabling the relevant taxpayer to obtain a tax benefit. Conclusion While the matter is not free from doubt, on balance it cannot be said that the proposed capital return is attributable to the profits of Holdco. The pattern of distributions does not indicate that the proposed capital return will be made in substitution for dividends. Similarly, the manner in which the proposed scheme will be carried out, and the form and substance of the proposed scheme, do not indicate that the proposed capital return will be made in substitution for dividends. Consequently, the Commissioner would not make a determination pursuant to subsection 45B(3) that 45C applies. | Detailed Reasoning - Section 45C of the ITAA 1936 - effect of determinations under section 45B for capital benefits: Section 45C of the ITAA 1936 broadly provides that if the Commissioner makes a determination under subsection 45B(3) of the ITAA 1936, the amount of the capital benefits is taken to be paid out of company profits and to be an unfranked dividend that is paid by the company to the shareholder or relevant taxpayer at the time the capital benefit is provided. As the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 in relation to the proposed capital benefit, section 45C of the ITAA 1936 will not deem the return of capital to be an unfranked dividend for the purposes of the ITAA 1936.