Private ruling: Return of capital - dividend
Date of advice: 20 December 2024
Published: 17 February 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: X/XX/XXXX

Ruling: Q1: Will the return of paid-up capital by XP constitute a 'dividend' within the definition of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for the purposes of section 44 and section 128B of the ITAA 1936? | A1: No | Q2: Will the Commissioner make a determination in relation to the proposed return of capital under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies? | A2: No

Relevant facts and circumstances: 1. The taxpayer is a limited partner in XP. 2. XP is a corporate limited partnership and is an Australian tax resident. XP has a substituted accounting period, with a year ending 31 December. 3. The limited partners of XP, including the taxpayer, are foreign investors and are not Australian residents for tax purposes. Interests in XP are held as post-CGT assets. 4. Following its formation, XP acquired and operate several properties in Australia. 5. In 20XX, XP acquired X% of Y Co and formed a tax consolidated group. 6. Assets of Y Co include land and other land entitlements. 7. In 20XX, XP disposed of the property held in Y Co and another property it directly owned. 8. XP declared and paid a partly franked dividend to its limited partners in XX 20XX which exhausted the profits from sale of the properties. 9. As a result of the sales of the properties XP now has surplus funds. The limited partners have indicated they do not intend to reinvest the surplus funds via XP acquiring further assets. As a result, XP now proposes to pay the surplus funds ($XM) as a capital return payment to its limited partners. 10. Under the proposed capital return, each limited partner will receive a capital payment proportional to their interest held in XP. The payment will represent a partial return of the capital invested in XP by each limited partner. 11. The proposed journal entries in the accounts of XP effecting the capital return payment will be: Table 1: Capital return payment Account Debit Credit Partners' contributions $XM Cash $XM 12. XP continues to hold the remaining properties which it uses to carry on its business in Australia. Based on a recent valuation of XP's assets, the asset value in XP's financial statements would be understated by potentially $XX million, representing an unbooked unrealised gain of the same amount. 13. The directors of XP undertake to determine the realised profit and distribute any profit as dividend to the limited partners to fully clear the retained earnings before paying the surplus funds as a return of capital under the scheme.

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 section 44 | Income Tax Assessment Act 1936 section 44(1A) | 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 subsection 45B(3) | Income Tax Assessment Act 1936 paragraph 45B(3)(a) | Income Tax Assessment Act 1936 paragraph 45B(5) | Income Tax Assessment Act 1936 paragraph 45B(5)(b) | 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 subsection 45B(9) | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1936 Division 5A | Income Tax Assessment Act 1936 section 94J | Income Tax Assessment Act 1936 section 94L | Income Tax Assessment Act 1936 section 94M | Income Tax Assessment Act 1936 section 94P | Income Tax Assessment Act 1936 section 94Q | Income Tax Assessment Act 1936 section 128B | 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 1997 section 104-135 | Income Tax Assessment Act 1997 Division 855 | Income Tax Assessment Act 1997 Paragraph 855-10(1)(b) | Income Tax Assessment Act 1997 section 855-15 | Income Tax Assessment Act 1997 section 855-25 | Income Tax Assessment Act 1997 section 975-300

Reasons for decision: Summary: The return of paid-up capital by XP to you will not constitute a dividend for the purposes of section 44 and section 128B. | Detailed Reasoning - Detailed reasoning: 1. Where a partnership is a corporate limited partnership, Division 5A provides for several modifications that are to be made in applying the income tax law so as to treat corporate limited partnerships as companies. Relevantly, section 94J states: A reference in the income tax law (other than the definitions of dividend , and resident or resident of Australia , in section 6 of this Act and other than Division 355 of the Income Tax Assessment Act 1997 ) to a company or to a body corporate includes a reference to the partnership. 2. Section 94L is headed 'Dividend includes distribution of corporate limited partnership' and states: A reference in the income tax law (other than subsection 44(1A) of this Act) to a dividend or to a dividend within the meaning of section 6: (a) includes a reference to a distribution made by the partnership, whether in money or in other property, to a partner in the partnership; and (b) does not include a reference to a distribution to the extent to which the distribution is attributable to profits or gains arising during a year of income in relation to which the partnership was not a corporate limited partnership. 3. Subsection 94M(1) states: If the partnership pays or credits an amount to a partner in the partnership: (a) against the profits or anticipated profits of the partnership; or (b) otherwise in anticipation of the profits of the partnership; (whether or not the amount of the profits or anticipated profits is ascertainable), the amount paid or credited is taken, for the purposes of the income tax law, to be a dividend paid by the partnership to the partner out of profits derived by the partnership. 4. Subsection 6(1) 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 (iii) 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. 5. Pursuant to paragraph 6(1)(d) 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.' 6. The term 'share capital account' is defined in section 975-300 of the Income Tax Assessment Act 1997 (ITAA 1997) as an account which the company keeps of its share capital, or any other account created on or after 1 July 1998 where the first amount credited to the account was an amount of share capital. 7. Section 94P states a reference to a share in income tax law includes a reference to an interest in a corporate limited partnership. 8. Section 94Q states a reference to a shareholder includes a reference to a partner in a corporate limited partnership. 9. Accordingly, where a distribution is made to the limited partners of a corporate limited partnership, the distribution is treated as being made by a company for Australian income tax purposes and is debited against the partners' capital, with: (a) the partners treated as being shareholders for income tax purposes, and (b) the distribution treated as being debited against a share capital account. 10. As XP is a corporate limited partnership, it is treated as a company for Australian income tax law purposes in accordance with Division 5A. 11. The proposed $XM capital return payment will be debited against the limited partners' capital account, which is treated as a share capital account for income tax purposes. Therefore, this distribution will be excluded from being a dividend pursuant to the exception set out in paragraph 6(1)(d) of the definition of a 'dividend'. | Detailed Reasoning - Question 2: Will the Commissioner make a determination in relation to the proposed return of capital under subsection 45B(3) that section 45C applies? | Summary: The Commissioner will not make a determination under subsection 45B(3) that section 45C applies to the proposed return of capital. | Detailed Reasoning - Detailed reasoning: 12. Section 45B applies where certain capital benefits are paid to shareholders in substitution for dividends. 13. Subsection 45B(2) sets out the conditions under which the Commissioner will make a determination under subsection 45B(3) that section 45C applies. These conditions are that: (a) there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a)); (b) 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 (c) 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)(c)). | Detailed Reasoning - Scheme: 14. A 'scheme' for the purposes of section 45B is taken to have the same meaning as provided in subsection 177A(1) of Part IVA. That definition is wide and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan, or proposal. 15. The proposed return of capital by XP to the limited partners constitutes a 'scheme' for the purposes of paragraph 45B(2)(a). | Detailed Reasoning - Capital benefits: 16. The phrase 'provided with a capital benefit' is defined in subsection 45B(5). It includes a distribution to a person of share capital. As XP proposes to debit the proposed return of capital against its share capital account, its limited partners will be provided with a capital benefit under paragraph 45B(5)(b). | Detailed Reasoning - Tax benefit: 17. Subsection 45B(9) provides that a taxpayer 'obtains a tax benefit' if the amount of tax payable by the relevant taxpayer (not necessarily the same person receiving the capital benefit (refer paragraph 45B(2)(b)) would, apart from section 45B, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the capital benefit had been a dividend. 18. The approach under subsection 45B(9) involves determining (on a stand-alone basis) whether there is a tax benefit compared to the tax consequences that would arise if the capital benefit were a dividend. 19. A return of capital would ordinarily be subject to the capital gains tax (CGT) provisions. However, unless the amount of the distribution exceeds the cost base of the shares, there will only be a cost base reduction under CGT event G1. [1] It is only to the extent (if any) that the distribution exceeds the cost base of the shares that a capital gain arises. 20. By contrast a dividend would generally be included in the assessable income of a resident shareholder, or in the case of a non-resident, be subject to dividend withholding tax. 21. As XP is proposing to return only part of the limited partners' capital, it is not anticipated any of the limited partners would realise a capital gain on the proposed capital return. On this basis, the limited partners will obtain a tax benefit from the capital return for the purposes of subsection 45B(9). | Detailed Reasoning - Relevant circumstances: 22. Given the proposed capital return is a scheme that provides a tax benefit to the limited partners, the operation of section 45B turns on the objective purpose test in paragraph 45B(2)(c). It requires the Commissioner to consider the 'relevant circumstances' of the scheme as set out in subsection 45B(8) in determining whether the requisite purpose exists. 23. Section 45B only applies if, 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 a taxpayer to obtain a tax benefit. 24. It should be noted that in considering the relevant circumstances in paragraph 45B(2)(c), PS LA 2008/10 Application of section 45B of the Income Tax Assessment Act 1936 to share capital reductions (PS LA 2008/10) provides specific guidance regarding the application of this subsection. A consideration of these circumstances determines whether any part of the scheme will be entered into for a purpose, other than an incidental purpose, of enabling the relevant taxpayer to obtain a tax benefit. Each of the circumstances must be considered in order to determine whether or not, individually or collectively, they reveal the existence of the requisite purpose. | Detailed Reasoning - Paragraph 45B(8)(a) - extent capital benefit attributable to capital or profits: 25. Paragraph 45B(8)(a) concerns the extent to which the capital benefit is attributable to capital and profits of the company or an associate of the company. Under the proposed scheme, the capital benefit is the capital return payment of $X to XP's limited partners. 26. In relation to the attribution factor, paragraphs 60 to 61 of PSLA 2008/10 states: 60. If the provision of share capital is attributable to profits, this would ordinarily lead to the conclusion that the persons, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling a taxpayer to obtain a tax benefit. This is because a distribution of share capital attributable to profits is, in effect, distributing profits. It is thus being made in substitution for a dividend and secures the associated tax deferral advantages for the shareholder. The result for the company is that share capital is distributed and functions as distributable profits and profits are changed into capital de fact without converting them into capital de jure . 61. The inquiry contemplated by the words 'attributable to' is essentially a practical one concerned with determining whether there is a discernible connection between the amount distributed as share capital and the share capital and profits that are realistically available for distribution, including the profits of an associate of the company. The connection need not be that of a sole, dominant, direct or proximate cause and effect; a contributory causal connection is sufficient. 27. In determining the attribution factor, paragraph 62 of PSLA 2008/10 states: Tax officers should also have regard to the occasion for the share capital reduction, that is, the circumstances surrounding the making of the capital distribution. 28. In relation to the proposed scheme, a key circumstance for making the proposed capital return is that there had been a sell down of assets within the group. 29. As a result of the property sales, XP has surplus funds that it wishes to return to the limited partners so they may pursue other investment opportunities. The limited partners have stated that they do not wish to reinvest the surplus funds via XP acquiring further assets. 30. Paragraph 68 of PSLA 2008/10 acknowledges the sale of significant assets of a company would normally be a reason for a capital return, and states: ...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 [emphasis added]. 31. Accordingly, the Commissioner must determine whether any part of the proposed capital payment should be attributable to profits of XP or sourced from the sale of the group's assets. 32. Paragraph 69 of PSLA 2008/10 makes clear that the term 'profits' can also include not just realised profits/gains but also unrealised gains. 33. In relation to a capital distribution caused by the disposal of assets, paragraph 73 of PSLA 2008/10 states: 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. 34. The taxpayer stated paragraph 73 of PLSA 2008/10 only requires a 'reasonable approach' be taken in determining the extent share capital was invested in the disposed assets and the 'slice approach' is but one method that may be appropriate (i.e., based on the proportion share capital and profits make up the total equity of the company) to determine whether the proposed capital payment is attributable to share capital or profits. 35. Based on XP's 20XX financial statements, it paid 'all recorded profits' to its limited partners. With all recorded profits paid out, the taxpayer asserted that the proposed capital payment to its limited partners can be linked directly to the contributed capital to acquire the disposed properties and should be deemed just a share capital payment. 36. While XP has paid out all recorded profit for the 20XX financial year, any profit arising in the following financial year (in the year the capital payment is made) would need to be factored under a slice approach where it is significant. In this regard, the directors of XP will undertake to return any realised profits as dividends prior to returning the proposed capital amount. | Detailed Reasoning - Unrealised gains: 37. Following the sale of properties, the remaining key assets of XP include other land and water licences. These assets are recorded at cost less accumulation. 38. XP will continue operating the remaining properties after the proposed distribution of surplus funds. 39. In relation to unrealised gains that may exist in XP, the taxpayer advised that based on the market value of the assets in XP's 20XX financial statements the net assets would be understated by potentially $XX million representing an unbooked unrealised gain of the same amount. 40. An updated valuation recently obtained advised the market value of the land and water licences owned by XP remained at or above the value previously determined, although not expected to be materially different. 41. While paragraph 69 of PSLA 2008/10 makes it clear 'profits' can include unrealised gains, there still needs to be a nexus between the proposed payment and these unrealised gains. Where there is insufficient nexus, it may not be appropriate to apply section 45B. Despite the potential unrealised gains in XP remaining assets, the circumstances relating to the scheme indicates that there is insufficient nexus between the proposed capital payment and the unrealised gains. 42. Based on the above analysis, it is unlikely the attribution factor in paragraph 45B(8)(a) would support the requisite purpose requirement to apply section 45B. | Detailed Reasoning - Paragraph 45B(8)(b) pattern of distributions: 43. Paragraph 45B(8)(b) refers to the pattern of distribution of dividends, bonus shares and returns of capital or share premium. 44. As the dividend declared and paid in the 20XX financial year was the first distribution paid to the limited partners since XP was established, there is no prior pattern to the payment of distributions or returns of capital. As such, this factor does not support the requisite purpose outlined in paragraph 45B(2)(b). | Detailed Reasoning - Tax characteristics of target entity's shareholders: 45. The circumstances specified in paragraphs 45B(8)(c) to (f) address the tax characteristics of the relevant taxpayer (i.e. the limited partners) to ascertain the tax result of the scheme. As noted in paragraph 81 of PS LA 2008/10, if the tax characteristics of the relevant taxpayers 'are such as to indicate there is a tax preference for one form of distribution over another, this may be suggestive of a more than incidental purpose of delivering a tax benefit, particularly if the composition of the distribution does not follow the substance of what was provided'. 46. The relevant circumstances and their application to each of the limited partners, in the context of the scheme are noted below. | Detailed Reasoning - Paragraph 45B(8)(c) - whether the relevant taxpayer has capital losses to apply to the capital benefits.: 47. Since only a portion of the limited partners' capital will be returned, it is not anticipated any of the limited partners would realise a capital gain as a result of the capital return that could be offset against any unutilised capital losses they may have. 48. Although some limited partners might have capital losses that could offset potential capital gains from the proposed capital return, this factor alone does not weigh in favour of applying section 45B to the proposed capital return payment. 49. This relevant circumstance will not contribute to a finding the purpose of the scheme was to enable any taxpayer to obtain a tax benefit. | Detailed Reasoning - Paragraph 45B(8)(d) - whether any of the shares are pre-CGT assets.: 50. The limited partners' interests in XP are not pre-CGT assets. Therefore, this relevant circumstance does not point toward the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Paragraph 45B(8)(e) - whether the relevant taxpayer is a non-resident.: 51. Most of the limited partners of XP are non-residents of Australia. 52. As noted above, a return of capital would ordinarily be subject to the CGT provisions for Australian tax residents and withholding tax for non-residents of Australia. Additionally, if any limited partner, either themselves or together with their associates, hold more than 10% interest in XP [2] at the time a capital return is made, Division 855 of the ITAA 1997 will not apply to disregard any capital gain made as the interest is considered to be taxable Australian property. [3] This is because the properties held by XP and its subsidiaries are taxable Australian properties. 53. However, given that only a portion of the limited partners' capital will be returned, it is not expected that any capital gain would be realised as a result of the capital payment. 54. On balance, this relevant circumstance does not point toward the requisite purpose in paragraph 45B(2)(c). Paragraph 45B(8)(f) - whether the capital benefit is provided in respect of shares for which the cost base is not substantially less than the capital benefit. 55. The cost base of the limited partners' interest in XP is not substantially less than the payment they will receive under the proposed scheme as only a portion of the contributed capital will be returned. However, it should be noted the capital return will trigger CGT event G1 resulting in a cost base reduction by the amount received. The limited partners will be assessed on the capital gain when they eventually dispose of their interests in XP subject to Division 855 of the ITAA 1997 applying to the disposal in respect to the non-resident limited partners. 56. This relevant circumstance does not point toward the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Paragraph 45B(8)(h) - nature of interest after the return of capital.: 57. This paragraph concerns with whether the interest held by the relevant taxpayer after the share capital reduction is the same as the interest would have been if an equivalent dividend had been paid. Paragraph 90 of PS LA 2008/10 states: This relevant circumstance proceeds from the premise that when a dividend is paid the shareholder's interest remains unchanged, and that a distribution of capital made in similar circumstances may be performing the same function as a dividend and be made in substitution for it. It has regard not only to whether there has been a cancellation or variation in the shareholder's interest, but also to whether the shareholder's interest has remained the same comparative with other shareholders. 58. Under the scheme, each of the limited partners will receive capital payment in proportion to their interest in XP. On this basis, the limited partners' interest will remain the same as prior to the capital return. 59. This relevant circumstance does not point toward the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Paragraph 45B(8)(i) and (j): 60. The circumstances covered by paragraphs 45B(8)(i) and (j) are pertaining to the provision of ownership interests and demergers respectively. They are not applicable in this case as there is no provision of ownership interest under the scheme and the scheme is not a demerger. | Detailed Reasoning - Paragraph 45B(8)(k) Part IVA matters: 61. Paragraph 45B(8)(k) requires consideration of the matters listed in subsection 177D(2) which are referenced for the 'dominant purpose' test in Part IVA. However, in the context of section 45B they facilitate the 'more than incidental purpose test' and do not introduce a different purpose test. [4] These matters include, among other things, the form and substance of the scheme and its financial implications for the parties involved. | Detailed Reasoning - Paragraph 177D(2)(a): 62. This matter refers to the manner in which the scheme was entered into and carried out. 63. Under the scheme, XP is proposing to pay a return of capital to the limited partners following the sale of the properties. All profits from the disposal of the properties were distributed to the limited partners as part of a dividend declared and paid by XP. The capital payment is, therefore, referrable to the sale of the properties and can be attributed to the capital invested by the limited partners to acquire those assets. 64. The directors of XP propose to only return part of the limited partners' capital contribution. The directors undertake to distribute any realised profit as dividends to the limited partners to fully clear the retained earnings before paying the excess funds as a return of capital under the scheme. 65. On balance, this matter does not point toward the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Paragraph 177D(2)(b): 66. This matter looks to the form and substance of the scheme. 67. The legal form of the scheme is to return a portion of contributed capital to the limited partners. As noted above, XP had paid all profits in the prior 20XX financial year which included the profit from the sale of the properties. The dividend fully cleared XP's retained profits for that financial year. Therefore, the capital payment is referrable to the sale of the properties. As realised profits have all been distributed, any unrealised profits in XP are related to assets that the partnership continues to hold and operate. 68. Since the formation of XP, the dividend payment in the prior 20XX financial year had been the only distribution to the limited partners. The limited partners have indicated a desire to have the surplus funds be returned. Therefore, the commercial driver behind the proposed return of capital is to allow for surplus funds from the disposal of properties to be returned as the partners do not intend to reinvest these funds in the partnership to acquire further assets. 69. As only part of the limited partners' contributed capital is to be returned, CGT event G1 will be triggered for the limited partners that will result in a reduction in the cost base of their investments. It is therefore, not expected the limited partners would realise any capital gains on the return of their capital under the scheme (assuming Division 855 of the ITAA 1997 would not operate to disregard the capital gain). 70. On balance, this matter does not point toward the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Paragraph 177D(2)(c): 71. This matter refers to the time at which the scheme was entered into and the length of the period during which the scheme was carried out. 72. XP plans to implement the scheme after obtaining a favourable private ruling. 73. In terms of making the proposed capital payment, the directors undertake to determine the realised profit and distribute as dividend to the limited partners to fully clear the retained earnings before paying the surplus funds as a return of capital under the scheme. 74. On balance, this matter does not point toward the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Paragraph 177D(2)(d): 75. This matter refers to the result the scheme would achieve under this Act, but for this Part. 76. As noted above, the return of capital under the scheme will give rise to CGT event G1 to happen for the limited partners that will result in a reduction in the cost base of their investments. It is therefore not expected a limited partner would realise a capital gain on the return of their capital under the scheme. A limited partner will be assessed on the capital gain or loss when they eventually dispose of their interests in XP. 77. This matter does not point toward the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Paragraph 177D(2)(e) and (f): 78. These 2 matters refer to the change in the financial position the relevant taxpayer or of any person connected with the relevant taxpayer. 79. The capital payments will result in a reduction in cash held by XP and an equivalent reduction in limited partners' capital account. The limited partners will receive a cash distribution from XP, equivalent to the reduction in the equity they held in the partnership. Accordingly, the payments will not result in a change to the limited partners' financial position or the financial position of the partnership. 80. These matters are regarded as neutral in terms of indicating the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Paragraph 177D(2)(g): 81. This matter considers any other consequences of the scheme for the relevant taxpayer, or any person connected with the relevant taxpayer. 82. There will be no other consequence for the limited partners or XP if the surplus funds are paid as a return of capital. 83. This matter does not point toward the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Paragraph 177D(2)(h): 84. This matter looks to the nature of any connection between the relevant taxpayer and any other person connected with the relevant taxpayer. 85. The connection between the relevant parties is the relationship of a shareholder and the company. Under Division 5A, the limited partners are treated as a shareholder and the partnership is treated as a company for the purpose of applying the Income Tax Assessment Acts. Each limited partner is a shareholder of XP. 86. This matter is regarded as neutral in terms of indicating the requisite purpose in paragraph 45B(2)(c). | Detailed Reasoning - Conclusion: 87. The key purpose for the scheme is to distribute the surplus capital to the limited partners as they do not wish to reinvest the surplus funds from the sale of the properties. Furthermore, the directors undertake to issue a dividend to payout any retained earnings balance of XP prior to the proposed payment of capital under the scheme. 88. Having regard to the relevant circumstances of the scheme in subsection 45B(8), it would not result in concluding that any of the parties to the scheme entered into or carried out the scheme for more than an incidental purpose of obtaining a tax benefit in the form of a capital benefit. 89. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(a) that section 45BA applies to the 'capital benefit' provided under the proposed scheme. [1] Section 104-135 of the ITAA 1997 [2] Section 855-25 of the ITAA 1997 (definition of Indirect Australian real property) and section 960-195 of the ITAA 1997 (about non-portfolio interest test). [3] Paragraph 855-10(1)(b) of the ITAA 1997 and Item 2 of the table in section 855-15 of the ITAA 1997 [4] Paragraph 98 of PS LA 2008/10

Reasons for decision: All legislative references are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated. | Question 1: Will the return of paid-up partners' capital by XP constitute a 'dividend' within the definition of subsection 6(1) for the purposes of section 44 and section 128B?