Private ruling: Share capital reduction
Date of advice: 11 May 2021
Published: August 2021

Ruling: Q1: Will all (or any portion) of the Share Capital Reduction (SCR) consideration received by Purchaser Company from the Target Company upon completion of the SCR be characterised as a dividend for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: Will the Commissioner make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to all (or any portion) of the SCR consideration received by Purchaser Company, such that the amount is treated as an unfranked dividend? | A2: No. | Q3: Will the Commissioner make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to all (or any portion) of the SCR consideration received by Purchaser Company, such that the amount is treated as an unfranked dividend? | A3: No. | Q4: Will the Capital Gains Tax (CGT) Event C2 happen upon then Target Entity cancelling shares held by Purchaser Company? | A4: Yes.

Relevant facts and circumstances: A listed company (Purchaser Company) purchased a number of shares from a group of shareholders (Vendor Shareholders) who held a majority of shares in a private company (Target Company). As part of the transaction, the Purchaser Company could never hold more than X% (or more) in the Target Company. The Purchaser Company purchased less than X% of Target Company's shares from the Vendor Shareholders, and then in accordance with the Corporations Act 2001 (Cth), Target Company cancelled an inconsequential percentage of the Purchaser Company's shareholding in it (the Target Company) off-market. The Purchaser Company then acquired the balance of the Vendor Shareholders shares which they held in the Target Company. As a result of the transaction the Purchaser Company now holds less than a X% interest in the Target Company. The Target Company debited the entire consideration proceeds paid to the Purchaser Company from its share capital account.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 45C(3) | Income Tax Assessment Act 1936 Paragraph 177EA(5)(a) | Income Tax Assessment Act 1997 Section 6-5 | 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) | Income Tax Assessment Act 1936 Section 45A | Income Tax Assessment Act 1936 Subsection 45A(2) | Income Tax Assessment Act 1936 Subsection 45A(3)(b) | Income Tax Assessment Act 1936 Section 45B | 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 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)(i) | 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 Section 177D | Income Tax Assessment Act 1936 Subsection 177D(2) | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Subsection 104-25(2) | Income Tax Assessment Act 1997 Section 204-30 | Income Tax Assessment Act 1997 Section 701-1 | Income Tax Assessment Act 1997 Division 855 | Income Tax Assessment Act 1997 Section 975-300 | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: No portion of the SCR consideration received by Purchaser Company from the Target Company upon completion of the SCR will be characterised as a dividend for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to all (or any portion) of the SCR consideration received by Purchaser Company, such that the amount is treated as an unfranked dividend. The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to all (or any portion) of the SCR consideration received by Purchaser Company, such that the amount is treated as an unfranked dividend. CGT Event C2 will happen upon then Target Entity cancelling shares held by Purchaser Company.