Private ruling: Section 45B of the ITAA 1936
Date of advice: 9 December 2020
Published: February 2021
Ruling period: 1 July 20XX to 30 June 20YY

Ruling: Q1: Does section 45B of the Income Tax Assessment Act 1936 ('ITAA 1936') apply, such that the Commissioner is able to make a determination under subsection 45B(3) of the ITAA 1936, that section 45C of the ITAA1936 applies to treat any part of the amount of return of capital as an unfranked dividend paid out of the profits of Company A to their majority shareholder? | A1: No

Relevant facts and circumstances: Incorporation of Company A 1. Company A is an Australian based proprietary company, incorporated in XYZ on x XX 20XX. 2. Company A's director is Taxpayer A. Shareholdings of Company A 3. At the time of incorporation, Company A issued x $x.yz fully paid ordinary shares (paid up to $x.yz each) for a total paid up capital amount of $xyz to x individual shareholders - the subscription details for the ordinary shares are as follows: Shareholder Ordinary Shares Capital amount Percentage Taxpayer A x $x.yz x % Taxpayer B y $y.xz y % Taxpayer C z $z.zy z % Total xyz $xyz 100 % 4. Taxpayer A is the majority shareholder, with x% of the shareholdings of Company A. 5. Company A's shareholders, Taxpayer A, Taxpayer B and Taxpayer C are Australian residents for taxation purposes, and together, they are hereinafter referred to as 'the Taxpayers'. Share purchase transaction 6. Company A was incorporated to buy all the issued shares in Company B and its wholly owned subsidiary, Company C). 7. Company B and Company C operate similar businesses which until then, were wholly owned by Company E. 8. All the share capital of Company A in the amount of $xyz was utilised to complete the share purchase transaction (the acquisition of all the issued shares of Company B and Company C) and was finalised on x XX 20YY. 9. As of x XX 20YY, an Income Tax Consolidated Group was formed, containing Company A, Company B and Company C and known as the ABC Group. Loan agreement of the Taxpayers 10. To fund their Ordinary share purchases in Company A, the Taxpayers borrowed a total of $xyz from a third party, Company F through a finance agreement with Company G. Other agreements were entered into between the parties that meant they would have an ongoing business relationship beyond the finance. Dispute between the parties and legal action 11. A dispute between the Taxpayers and Company F arose and was resolved through an unwinding of the business relationship, which required refinancing of the Taxpayers' loan. Proposed return of capital 12. It has been proposed that a return of capital ('return of capital') take place during the period that this ruling applies. 13. The Taxpayers sourced alternative financial arrangements for the Company and have secured a borrowing facility, where Company C would borrow in the amount of $zz from an unrelated lender. 14. To enable the Taxpayers to repay their loan funds to Company F, those borrowed funds would then be provided by Company C to Company A, as head of the Tax Consolidated Group, and would be used to undertake a return of capital to the Taxpayers in proportion to their existing shareholding percentages. Additional facts 15. Company A will undertake the return of capital, in accordance with section 256B(1) of the Corporations Act 2001 (Cth). 16. No shares will be cancelled or bought back from the shareholders as a result of this refinancing arrangement or prior to the return of capital. 17. There will be no changes to the rights of the ordinary shareholders in Company A before the return of capital. 18. The number of shares, and percentage of ordinary shares held by each of the Taxpayers in Company A will remain the same as that set out in the private ruling application submitted by Company A on yy/YY/20ZZ, until after the proposed return of capital is completed. 19. No shares (ordinary or otherwise) will be issued by Company A to any other party prior to the return of capital. 20. No dividends will be paid to the Taxpayers by Company A prior to the proposed return of capital. 21. After the share capital reduction, the Taxpayers ordinary shares will have a total paid up capital amount of $yy. 22. The share capital accounts of all members of the ABC Group have not been tainted in anyway pursuant to Division 197 of the ITAA 1936. 23. The share capital reduction does not coincide with any disposal (or planned disposal) of a significant part of the business or relate to any surplus cash generated as part of the underlying operations of the business over time. 24. Since the purchase of the issued shares of Company B on xx YY 20YY, the ABC Group of companies have not paid any dividends, allotted any bonus shares or returned capital or distributed a share premium. 25. None of the Taxpayers have any available capital losses that, apart from the proposed scheme as outlined above, would be unutilised. Information provided 26. You have provided several documents containing detailed information in relation to Company A, including: a. Private Binding Ruling ('PBR') Application, dated yy ZZ 20Z b. Further information provided in email response requesting further information 27. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 16K | Income Tax Assessment Act 1936 Section 45B | Income Tax Assessment Act 1936 Subsection 45B(3) | Income Tax Assessment Act 1936 Section 45C | Income Tax Assessment Act 1936 Division 197 | Income Tax Assessment Act 1936 Section 318 | Corporations Act 2001 (Cth). Section 256B(1)

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1936 ('ITAA 1936') unless otherwise stated. | Detailed Reasoning - QUESTION 1:: Does section 45B of the Income Tax Assessment Act 1936 ('ITAA 1936') apply, such that the Commissioner is able to make a determination under subsection 45B(3) of the ITAA 1936, that section 45C of the ITAA1936 applies to treat any part of the amount of return of capital as an unfranked dividend paid out of the profits of the company? | Summary: No determination by the Commissioner pursuant to subsection 45B(3)(b) will be made in respect of section 45C, to treat any part of the amount of return of capital as an unfranked dividend paid out of the profits of Company A to their majority shareholder, Taxpayer A. | Detailed Reasoning - DETAILED REASONING: 28. The purpose of section 45B of the ITAA 1936 is to ensure that amounts paid in substitution for dividends are treated as unfranked dividends for income tax purposes, as outlined in subsection 45B(1), as follows: (1) The purpose of this section is to ensure that relevant amounts are treated as dividends for taxation purposes if: (a) components of a demerger allocation as between capital and profit do not reflect the circumstances of a demerger; or (b) certain payments, allocations and distributions are made in substitution for dividends. 29. Subsection 45B(2) of the ITAA 1936 sets out the conditions under which section 45B of the ITAA 1936 applies, as follows: (2) This section applies if: (a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and (b) under the scheme, a taxpayer (the relevant taxpayer ), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; 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 a taxpayer (the relevant taxpayer ) to obtain a tax benefit. 30. Subsection 45B(10) provides that ' scheme ' in section 45B has the same meaning as provided in subsection 995-1(1) of the Income Tax Assessment Act 1997 ('ITAA 1997'). That definition is widely drawn and includes any arrangement, scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. 31. The borrowing by Company C and subsequent distribution of those funds through a capital distribution to the Taxpayer's by Company A is a 'scheme' within the broad meaning of that term, for the purposes of section 45B of the ITAA 1936. 32. Subsection 45B(3) of the ITAA 1936 outlines how the Commissioner is to determine when section 45BA or section 45C of the ITAA 1936 applies, as follows: (3) The Commissioner may make, in writing, a determination that: (a) section 45BA applies in relation to the whole, or a part, of the demerger benefit; or (b) section 45C applies in relation to the whole, or part, of the capital benefit. A determination does not form part of an assessment. 33. Subsection 45B(5) of the ITAA 1936 outlines the meaning of ' provided with a capital benefit ', as follows: (5) 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; (c) something that is done in relation to the 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. 34. Subsection 45B(8) of the ITAA 1936 outlines the meaning of relevant circumstances of the scheme, as follows: (8) The relevant circumstances of a scheme include the following: (a) the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company; (b) the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company; (c) whether the relevant taxpayer has capital losses that, apart from the scheme, would be unutilised (within the meaning of the Income Tax Assessment Act 1997) at the end of the relevant year of income; (d) whether some or all of the ownership interests in the company or in an associate (within the meaning in section 318) of the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985; (e) whether the relevant taxpayer is a non-resident; (f) whether the cost base (for the purposes of the Income Tax Assessment Act 1997) of the relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit; (h) if the scheme involves the distribution of share capital or share premium-whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium; (i) if the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests: (j) the period for which the ownership interests are held by the holder of the interests; and (ii) when the arrangement for the disposal of the ownership interests was entered into; (j) for a demerger only: (i) whether the profits of the demerging entity and demerged entity are attributable to transactions between the entity and an associate (within the meaning in section 318) of the entity; and (ii) whether the assets of the demerging entity and demerged entity were acquired under transactions between the entity and an associate (within the meaning in section 318) of the entity; (k) any of the matters referred to in subsection 177D(2). 35. Subsection 45B(9) of the ITAA 1936 outlines the meaning of obtaining a tax benefit , as follows: (9) A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, 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 demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend. 47. The proposed capital benefit will be tax free, but for the application of subsection 45C, therefore the taxpayer has obtained a tax benefit within the meaning of subsection 45B(9). 48. Section 45C of the ITAA 1936 outlines the effect of determinations under sections 45A and 45B for capital benefits, as follows: (1) If the Commissioner makes a determination under subsection 45A(2) or 45B(3), the amount of the capital benefit, or the part of the benefit, is taken, for the purposes of this Act, to be an unfranked dividend that is paid by the company to the shareholder or relevant taxpayer at the time that the shareholder or relevant taxpayer is provided with the capital benefit. (2) The dividend is taken to have been paid out of profits of the company. (3) If the Commissioner has made a determination under section 45B in respect of the whole or a part of a capital benefit and the Commissioner makes a further written determination that the capital benefit, or the part of the capital benefit, was paid under a scheme for which a purpose, other than an incidental purpose, was to avoid franking debits arising in relation to the distribution from the company: (a) on the day on which notice of the determination is served in writing on the company, a franking debit of the company arises in respect of the capital benefit; and (b) the amount of the franking debit is the amount that, if the company had: (i) paid a dividend of an amount equal to the amount of the capital benefit, or the part of the capital benefit, at the time when it was provided; and (ii) fully franked the dividend; would have been the amount of the franking credit of the company that would have arisen as a result of the dividend. (4) The amount of the capital benefit is: (a) if the benefit is the provision of an ownership interest-the market value of the interest at the time that it is provided; or (b) if the benefit is an increase in the market value of an ownership interest-the increase in the market value of the interest as a result of the change; or (c) if the benefit is a distribution to the shareholder of share capital or share premium-the amount debited to the share capital account or share premium account of the company in connection with the provision of the benefit. (4A) For the purposes of this section: (a) a non-share distribution to an equity holder is taken to be the distribution to the equity holder of share capital to the extent to which it is a non-share capital return; and (b) the debit to the company's non-share capital account, in respect of the non-share distribution, is taken to be a debit to the company's share capital account. | Detailed Reasoning - Purpose: 49. As all the other criteria in subsection 45B(2) are satisfied, the application of section 45B turns on whether, having regard to the relevant circumstances of the scheme, it may be concluded objectively that a more than incidental purpose of one of the persons who entered into or carried out the scheme was to enable a taxpayer to obtain a tax benefit. | Detailed Reasoning - APPLICATION TO YOUR CIRCUMSTANCES: 50. Subsection 45B(8) lists the relevant circumstances of the scheme which the Commissioner must have regard to when determining whether or not the requisite purpose exists. The list of circumstances is not exhaustive, and the Commissioner may have regard to other circumstances which he regards as relevant. The relevant circumstances listed in subsection 45B(8) encompass a range of matters which, when taken individually or collectively, will reveal whether the requisite purpose exists or not. | Detailed Reasoning - Paragraph 45B(8)(a): the attribution question: 51. Paragraph 45B(8)(a) concerns the extent to which the capital benefit is attributable to capital and profits (realised and unrealised) of the company or of an associate (within the meaning of section 318) of the company. If the composition of the share capital return is inconsistent with the substance of the capital benefit (that is, the capital and profit it is attributable to), this would tend to support a conclusion that the requisite purpose exists. 52. In regards to the facts, the capital benefit relates to and is sourced from $xyz in borrowings by Company C from a third party. Those funds will be provided to the head of the consolidated tax group ABC Group, who will be making the capital return to the Taxpayers. The capital return will be used to repay the loan from Company F, effectively refinancing the original loans to the Taxpayers. The funds used in the arrangement are not sourced from the profits of the company, suggesting that there is no inconsistency with the substance of the capital benefit. | Detailed Reasoning - Paragraph 45B(8)(b): pattern of distributions: 53. Paragraph 45B(8)(b) directs attention to the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or an associate (within the meaning in section 318) of the company. The inference here is that an interruption to the normal pattern of profit distribution and its replacement with a distribution of capital may suggest dividend substitution. 54. In regard to the facts, there is no pattern of distribution to the taxpayers as no dividends have been paid out by Company A as Company A was newly created. No dividends will be paid out prior to the proposed return of capital. After the establishment of Company A and its acquisition of Company B, through financial support of Company F, the parties fell into dispute, leading to the unwinding of arrangements. 55. It cannot be inferred that the normal pattern of distribution has been interrupted and replaced by the proposed capital distribution. | Detailed Reasoning - Paragraph 45B(8)(c): capital losses: 56. Paragraph 45B(8)(c) considers whether the shareholders of a company receiving a capital benefit have any capital losses they could apply to the capital benefit as this would result in reduced or no CGT implications for shareholders. Where shareholders have capital losses that can be applied against the capital benefit this would suggest that the capital benefit was provided for the purpose of securing a tax benefit. 57. In these circumstances, Taxpayer A has no capital losses to apply but for this scheme as set out in the facts. The proposed capital benefit will result in a reduced cost base in Company A for Taxpayer A, but no tax loss. 58. This suggests that the capital benefit was not provided for the purpose of securing a tax benefit. | Detailed Reasoning - Paragraph 45B(8)(d): pre-CGT ownership interests: 59. Paragraph 45B(8)(d) directs attention to whether some or all of the ownership interests held by the shareholders of the company were acquired or are taken to have been acquired by them before 20 September 1985. 60. Not applicable in these circumstances. | Detailed Reasoning - Paragraph 45B(8)(e): residency of the shareholders of the company: 61. Paragraph 45B(8)(e) requires consideration of whether the shareholders of the company are non-residents. The implication of non-residency is that it would normally point towards a tax preference for a distribution of capital over profit. 62. All of Company A's shareholders, including Taxpayer A who owns x% of the total shares, are Australian residents for taxation purposes. | Detailed Reasoning - Paragraph 45B(8)(f): cost base of ownership interest;: 63. Paragraph 45B(8)(f) directs that attention be paid to whether the cost base (for the purposes of ITAA 1997) of the relevant ownership interest is not substantially less than the value of the capital benefit. Where the cost base of the ownership interest is similar or greater in value than the capital benefit provided, the capital distribution will not expose the relevant taxpayer to a capital gain under CGT event G1 or CGT event C2 where the provision of the capital benefit involves the subsequent cancellation of a share. This could point towards a tax preference for capital over profit. 64. As above, this will reduce cost base in Company A, but not extinguish it. In some ways, it does point to a tax preference for capital, but as sourced from finance and not profits and the shares in Company A are not intended to be cancelled, it is accepted that this does not support the outcome that the purpose was to derive a capital benefit. The reduction in share capital reflects the change in funding put in through equity as compared to funding sourced from borrowings. | Detailed Reasoning - Paragraph 45B(8)(h): nature of interest after the return of capital: 65. Paragraph 45B(8)(h) requires that regard be had to whether the interest held by the shareholders after the share capital reduction is the same as the interest would have been if an equivalent dividend had been paid. 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. 66. As there has been no change in shareholdings or dividends prior to proposed return of capital, the ownership percentages and interests stay the same. | Detailed Reasoning - Paragraph 45B(8)(i): scheme involving later disposal of ownership interests: 67. Paragraph 45B(8)(i) directs attention to those cases where the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests; recognising that the proceeds on disposal of such ownership interests may provide the equivalent of a cash dividend in a more tax-effective form. Such a scheme would not necessarily involve a share capital reduction, but it does point to a preference for a capital benefit over a dividend. 68. The relevant scheme comprises the Return of Capital only and does not involve the provision and later disposal of "ownership interests" in Company A. 69. Accordingly, this factor is not relevant. | Detailed Reasoning - Paragraph 45B(8)(j): transactions between the entity and an associate: 70. This factor is not relevant as there is no demerger taking place, aside from the effect of the unwinding of the previous arrangements between the Taxpayers and Company F. Paragraph 45B(8)(k): any of the matters referred to in subsection 177D(2) . 71. This paragraph requires regard to be had to any of the matters referred to in paragraphs 177D(2)(a) to (h) of the ITAA 1936. 72. The matters referred to in these paragraphs are matters of reference 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. Furthermore, they are matters by reference to which one is able to examine a return of capital from a broad, practical perspective in order to identify and compare its tax and non-tax objectives. | Detailed Reasoning - Subparagraph 177D(2)(a): manner: 73. Subparagraph 177D(2)(a) refers to the manner in which the scheme was entered into or carried out. This is a reference to consideration of the way in which a method or procedure by which the particular scheme in question was established; in other words, consideration of the decisions, steps and events that combine to make up the scheme. 74. To refinance the loans owed by the Taxpayers to Company F, the below scheme in the form of a return of share capital was proposed as follows: • The Taxpayers have sourced alternative financial arrangements for the ABC Group and have secured a borrowing facility, where Company C would borrow in the amount of $xy from an unrelated lender. • The borrowed funds would then be provided by Company C to Company A, as head of the Tax Consolidated Group, and would be used to undertake a return of capital from Company A to the Taxpayers in proportion to their existing shareholding percentages. • The Taxpayers would use the returned capital to repay the Company F loans. 75. The foregoing factors indicate that there are genuine commercial reasons for the return of share capital. After considering the manner of how this scheme is proposed to be entered into, it could not be concluded that the manner of the scheme could be said to be entered into for the purposes of obtaining a tax benefit for the Taxpayers. 76. Accordingly, these circumstances do not incline towards a finding that the requisite purpose exists in entering into or carrying out the scheme. | Detailed Reasoning - Subparagraph 177D(2)(b): form and substance: 77. Subparagraph 177D(2)(b) refers to the form and substance of the scheme. The form of the scheme is the visible aspect of the scheme; the substance of the scheme is its essential nature which is normally determined from its commercial and economic implications (PSLA 2008/10). 78. As mentioned in paragraphs 26-29 above, it is submitted by the applicant that the 'return of capital' is to be done by way of an equal share capital reduction in accordance with section 256B(1) of the Corporations Act 2001 (Cth), such that no shares will be cancelled, nor will the shareholders' interests in the company be otherwise affected. 79. The essential nature of the return of share capital is to refinance the Taxpayers' existing debt to Company F. 80. The factors do not show discrepancy between the form and substance of the return of capital as the amount of capital to be returned to the Taxpayers closely corresponds with the borrowed funds which are stated to be in excess of the ABC Group's capital requirements. 81. Accordingly, the circumstances do not incline towards a finding that the requisite purpose exists in entering into or carrying out the scheme. | Detailed Reasoning - Subparagraph 177D(2)(c): timing: 82. Subparagraph 177D(2)(c) directs attention to the time at which the scheme was entered into and the length of the period during which the scheme was carried out. This factor requires not only reference to time measurement but also reference to the timing of the scheme from the point of view of the scheme's coincidence with events or circumstances beyond the scheme itself. In particular, it enables consideration of the extent to which the timing and duration of the scheme go towards delivering the relevant tax benefit or are related to commercial opportunities or requirements. 83. The applicant has submitted at paragraph 23, that the timing of the scheme is related to the proposed refinancing - ie. the return of capital will take place during the period that this ruling applies, ie. the 20ZZ financial year. The scheme would not have been entered into but for the refinancing of the loans. 84. Accordingly, in the circumstances it could not be concluded that the scheme is being entered into or carried out for the requisite purpose. | Detailed Reasoning - Subparagraph 177D(2)(d): result: 85. Subparagraph 177D(2)(d) requires that consideration be given to 'the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme'. 86. The tax outcomes produced by the return of capital, assuming the non-application of section 45B, will be as follows; • The return of share capital will be a distribution that is debited against the company's share capital account. The distribution carries the tax advantage of falling outside the definition of dividend in subsection 6(1) of the ITAA 1936 and is not received as income in the shareholder's hands. • CGT Event G1 will occur when Company A pays the return of capital. A distribution of share capital falls outside the definition of dividend in section 6(1). 87. Accordingly, the circumstances do not incline towards a finding that the requisite purpose in entering into of carrying out the scheme. | Detailed Reasoning - Subparagraph 177D(2)(e): change in financial position of taxpayer: 88. Subparagraph 177D(2)(e) directs attention to any change in the financial position of the shareholders that results, will result or may reasonably be expected to result from the share capital reduction scheme. 89. If the scheme is an equal share capital reduction, the shareholders will receive the distribution with their proportionate interests in the company. However, their income producing investment has a reduced capacity to provide them with income and capital returns due to the increased interest expenses and capital repayment requirements that will be borne by the ABC Group. 90. As mentioned in paragraphs 26-29 above, it is submitted by the applicant that the return of capital is to be done by way of an equal share capital reduction under the Corporations Act 2001 , such that no shares will be cancelled, nor will the shareholders' interest in the company be otherwise affected. 91. Accordingly, the circumstances do not incline towards a finding that the requisite purpose exists in entering into or carrying out the scheme. | Detailed Reasoning - Subparagraph 177D(2)(f): change in financial position of others: 92. Subparagraph 177(2)(f) requires that consideration be given to any change in the financial position of any person who has, or has had, any connection with the relevant taxpayer, that is the shareholders and any other entities affected by the scheme. In relation to a share capital reduction the company would generally be the only other party whose financial position will change as a result of the scheme (PS LA 2008/10). 93. No changes are to be made to the shareholdings; the return of capital will affect the Taxpayers only in accordance with their existing shareholdings. They will use the funds to pay back the loan owing to Company F. The reduction in debt owed by the Taxpayers to Company F aligns with the drop in the value of the shares due to the increased debt taken on by Company C. 94. Accordingly, the circumstances do not incline towards a finding that the requisite purpose exists for the entering into or carrying out of the scheme. | Detailed Reasoning - Subparagraph 177D(2)(g): Any other consequence: 95. Subparagraph 177D(2)(g) directs attention to any 'other' consequence of the return of capital scheme for the shareholders or the company. 96. PS LA 2005/21 states at paragraphs 99 and 100 that the consequences contemplated by subparagraph 177D(2)(g) include all the changes of a non-financial nature that might occur in, and be consistent with, a business restructure. 97. The applicant has submitted that the return of capital is being undertaken for commercial reasons and is required in order to restructure their finance. 98. Accordingly, this factor does not incline towards a finding that the requisite purpose exists in the entering into or carrying out of the scheme. | Detailed Reasoning - Subparagraph 177D(2)(h): Nature of any connection between relevant taxpayer and any person in subparagraph 177D(2)(f): 99. Subparagraph 177D(2)(h) requires consideration of the nature of any connection (whether of a business, family or other nature) between the shareholders and any person referred to in paragraph (vi); ordinarily that would be the company that is distributing share capital to the shareholders. The connection between the two parties is the relationship of shareholder and company. 100. The applicant has submitted in paragraph 3.5(k) of the private ruling request that the nature of the relationship between Company A and the recipients of the return of capital is a shareholder relationship. 101. Taxpayer A is a major shareholder in Company A. The use of debt to refinance Company A's return of capital allows Taxpayer A to recoup their initial investment whilst keeping the same ownership stake. There is therefore an economic incentive for Taxpayer A to have an influence on the decision to return share capital as a major shareholder in the company. 102. After the refinancing and related actions there will be no relationship between the Taxpayers and Company F. 103. Accordingly, the circumstances slightly incline towards a finding that the requisite purpose exists in entering into or carrying out the scheme. | Detailed Reasoning - CONCLUSION: 104. Having regard to the relevant circumstances of the scheme outlined above, it cannot be concluded that the return of capital scheme was entered into for a more than incidental purpose of enabling a taxpayer to obtain a tax benefit. The scheme appears to have been carried out for genuine commercial reasons, being the desire to refinance the company with the cheaper cost of debt as opposed to higher cost of equity. The fact that shareholders may obtain a tax benefit under the scheme appears to be incidental to the commercial reason. 105. Accordingly, the Commissioner will not make a determination under subsection 45B(3) that section 45C applies.