Class Ruling CR 2012/83
Date of effect: 1 July 2012

What this ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates. Relevant provision(s) 2. The relevant provisions dealt with in this Ruling are: All subsequent legislative references in this Ruling are to the ITAA 1936 unless otherwise stated. Class of entities 3. The class of entities to which this Ruling applies is the ordinary shareholders of Domino's Pizza Enterprises Limited (DPE) who: In this Ruling, a person belonging to this class of entities is referred to as a 'DPE shareholder'. Qualifications 4. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 5. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 10 to 24 of this Ruling. 6. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 7. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 3. The class of entities to which this Ruling applies is the ordinary shareholders of Domino's Pizza Enterprises Limited (DPE) who: In this Ruling, a person belonging to this class of entities is referred to as a 'DPE shareholder'. | Qualifications: 4. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 5. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 10 to 24 of this Ruling. 6. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 7. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 8. This Ruling applies from 1 July 2012 to 30 June 2013. The Ruling continues to apply after 30 June 2013 to all entities within the specified class who entered into the specified scheme during the term of the Ruling. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). 9. The following description of the scheme is based on information provided by the applicant. 10. DPE is an Australian resident company which listed on the Australian Securities Exchange on 16 May 2005. 11. DPE holds the exclusive master franchise rights for the Domino's brand and network in Australia, New Zealand, France, Belgium, the Netherlands and the Principality of Monaco. The Domino's brand is owned by Domino's Pizza Inc, a listed United States of America company unrelated to DPE. 12. At the time of listing, DPE's corporate strategy was to hold both franchise and company owned stores, with approximately one third of stores to be company owned. 13. In February 2007, DPE announced that the corporate strategy had shifted to a model of predominantly operating via the franchise network, with the aim of reducing company owned stores from 30% to 15-20%. Accordingly, DPE began to sell down its company owned stores to franchisees. 14. In August 2009, DPE confirmed that it would reduce the number of company owned stores down to 80. In August 2010, DPE announced that it would further reduce company owned stores down to 30-40 over the next three years. 15. In early 2012, approximately 82 of 550 stores were company owned. DPE's current management strategy is to hold approximately 30-40 stores. 16. As a result of the strategy revision, DPE has determined that it now has an amount of capital that is excess to requirements and proposes to return capital to its shareholders, subject to shareholder approval. 17. DPE is proposing to make two pro-rata returns of capital totalling $0.43 per share to all shareholders registered on the relevant Record Date. The total amount of capital expected to be returned to shareholders pursuant to the two returns of capital is approximately $30 million. 18. The first Payment Date is expected to occur in December 2012 and the second Payment Date is expected to occur in June 2013. No shares will be cancelled as a result of the distributions. 19. Each return of capital will be debited to DPE's share capital account. 20. As at 25 June 2012, DPE had 69,899,674 ordinary shares on issue. 21. DPE has a history of paying regular dividends. DPE's dividend policy is not expected to change as a result of the payment of the returns of capital. 22. The shareholders of DPE comprise a mix of both Australian resident shareholders and foreign resident shareholders. 23. DPE's share capital account is not tainted within the meaning of Division 197 of the ITAA 1997. 24. DPE has confirmed that at the time of the payments of the proposed returns of capital a DPE share is not an 'indirect Australian real property interest' (as defined in section 855-25 of the ITAA 1997). | Proposed distributions of capital are not dividends: 25. The proposed returns of capital to DPE shareholders will not be a dividend, as defined in subsection 6(1). | The application of sections 45A, 45B and 45C to the proposed returns of capital: 26. The Commissioner will not make a determination under subsection 45A(2) or subsection 45B(3) that section 45C applies to the proposed returns of capital. Accordingly, no part of the proposed returns of capital will be taken to be a dividend for income tax purposes. | Capital gains tax (CGT) consequences: 27. For each return of capital, CGT event G1 will happen when DPE pays the return of capital to a DPE shareholder in respect of a DPE share that they own at the Record Date for that return of capital and continue to own at the Payment Date for that return of capital (section 104-135 of the ITAA 1997). 28. For each return of capital, CGT event C2 will happen when DPE pays the return of capital to a DPE shareholder in respect of a DPE share that they own at the Record Date for that return of capital but cease to own before the Payment Date for that return of capital (section 104-25 of ITAA 1997). | Foreign resident shareholders: 29. A foreign resident shareholder in DPE who is paid either return of capital disregards any capital gain made from CGT event G1 happening to that return of capital if their DPE shares are not 'taxable Australian property' (section 855-10 of the ITAA 1997). 30. A foreign resident shareholder in DPE who is paid either return of capital disregards any capital gain or capital loss made from CGT event C2 happening to that return of capital if their right to receive that return of capital is not 'taxable Australian property' (section 855-10 of the ITAA 1997). Commissioner of Taxation 26 September 2012 | Proposed distributions of capital are not dividends: 31. Subsection 44(1) includes in a shareholder's assessable income any dividends, as defined in subsection 6(1), paid to the shareholders out of profits derived by the company from any source (if the shareholder is a resident of Australia) and from an Australian source (if the shareholder is a non-resident of Australia). 32. The term 'dividend' is defined in subsection 6(1) and includes any distribution made by a company to any of its shareholders. However, paragraph (d) of the definition of 'dividend' excludes a distribution from the meaning of 'dividend' if the amount of the distribution is debited against an amount standing to the credit of the company's share capital account. 33. The term 'share capital account' is defined in section 975-300 of the 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. 34. Subsection 975-300(3) of the ITAA 1997 states that an account is not a share capital account, except for certain limited purposes, if it is tainted. Section 197-50 of the ITAA 1997 states that a share capital account is tainted if an amount to which Division 197 of the ITAA 1997 applies is transferred to the account and the account is not already tainted. 35. The proposed returns of capital will be recorded as debits to DPE's share capital account. As the share capital account of DPE is not tainted within the meaning of Division 197 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 will apply. Accordingly, the returns of capital will not be a dividend as defined in subsection 6(1) of the ITAA 1936. | Anti-avoidance provisions: 36. Sections 45A and 45B are two anti-avoidance provisions which, if they apply, allow the Commissioner to make a determination that section 45C applies to treat all or part of the proposed returns of capital amounts received by the shareholders as an unfranked dividend paid by the company out of profits to the shareholder. | Section 45A - streaming of dividends and capital benefits: 37. Section 45A applies where capital benefits are streamed to some shareholders (the Advantaged Shareholders), who would derive a greater benefit from the receipt of capital than other shareholders (the Disadvantaged Shareholders) and these Disadvantaged Shareholders receive, or are likely to receive, dividends. 38. A reference to the 'provision of a capital benefit to a shareholder in a company' is defined in paragraph 45A(3)(b) to include the distribution to the shareholder of share capital. DPE will provide its shareholders with a 'capital benefit' as defined in paragraph 45A(3)(b). The capital benefit will be provided to all of its shareholders in the same proportion as their share holdings. 39. Accordingly, section 45A will not apply to the proposed returns of capital and the Commissioner will not make a determination under subsection 45A(2) that section 45C applies in relation to the whole or a part of the proposed returns of capital amounts. | Section 45B - schemes to provide capital benefits: 40. Section 45B applies where certain capital payments, including a return of capital, are paid to shareholders in substitution for dividends. It allows the Commissioner to make a determination that section 45C applies to a capital benefit. Specifically, the provision applies where: Each of these conditions is considered below. | Scheme: 41. 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 widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan or proposal. 42. The proposed returns of capital by DPE will constitute a scheme for the purposes of paragraph 45B(2)(a). 43. The phrase 'provided with a capital benefit' is defined in subsection 45B(5). It states that a person is provided with a capital benefit if: 44. As the proposed returns of capital will be debited to DPE's share capital account, DPE will provide shareholders with a capital benefit under paragraph 45B(5)(b) in the form of distributions of share capital. | Tax benefit: 45. A relevant taxpayer 'obtains a tax benefit' as defined in subsection 45B(9) if: would, apart from the operation of section 45B, be less than the amount that: if the capital benefit had instead been a dividend. 46. The proposed distributions to DPE's shareholders are return of capital payments and therefore each payment will constitute a capital benefit. In the event that the relevant distributions were dividends rather than a capital benefit, it is likely that the amount of tax payable by DPE's shareholders would be greater than is payable in respect of each of the proposed return of capital payments (that payment being the capital benefit). Consequently, the receipt of the capital benefit is a 'tax benefit'. 47. Ordinarily, a return of capital would be subject to the CGT provisions of the income tax law. 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 (section 104-135 of the ITAA 1997). It is only to the extent (if any) that the distribution exceeds the cost base of the shares that a capital gain arises. By contrast, a dividend would generally be included in the assessable income of a resident shareholder or in the case of a foreign resident, be subject to a dividend withholding tax under section 128B of the ITAA 1936. Therefore, DPE shareholders will obtain a tax benefit from the proposed returns of capital. | Relevant circumstances: 48. Paragraph 45B(2)(c) requires the Commissioner to consider the 'relevant circumstances' of the scheme as set out in subsection 45B(8). 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 (an ordinary shareholder in DPE) to obtain a tax benefit. 49. The test of purpose is an objective one. The question is whether it would be concluded that a person who enters into or carries out the scheme does so for the purpose of obtaining a tax benefit for the relevant taxpayer. This requisite purpose does not have to be the most influential or prevailing purpose but it must be more than an incidental purpose. 50. The purpose which causes section 45B to apply may be the purpose of any party to the scheme. In this case, however, the Commissioner is concerned only with the purpose of DPE. The Commissioner cannot ascertain the purposes of DPE's numerous shareholders, all of whom will be eligible to vote on the proposed returns of capital under section 256C of the Corporations Act 2001 , and all of whom may participate in the proposed returns of capital. Nevertheless, in a case such as this, an objective conclusion as to the purpose of the company, generally speaking, should not be inconsistent with an objective conclusion as to the purpose of the shareholders, in particular those shareholders who will vote in favour of the payment. 51. The relevant circumstances under subsection 45B(8) cover the circumstances of the company and the tax profile of the shareholders. In this instance, because the proposed returns of capital will be made to all DPE shareholders, regardless of individual circumstances, paragraphs 45B(8)(c) to 45B(8)(h) do not incline for or against a conclusion as to purpose. The relevant circumstances covered by paragraphs 45B(8)(i) and 45B(8)(j), pertaining to the provision of ownership interests and demerger respectively, are not relevant in the context of the proposed distributions. The relevant matters are those covered by the circumstances described in paragraphs 45B(8)(a), 45B(8)(b) and 45B(8)(k). 52. Paragraph 45B(8)(a) refers to the extent to which the capital benefit is attributable to capital and profits (realised or unrealised) of the company or an associate (within the meaning of section 318) of the company. 53. The proposed returns of capital are not considered to be attributable to the profits of DPE. The proposed returns of capital are considered attributable to capital only and not to any realised or unrealised profits of DPE. 54. Paragraph 45B(8)(b) refers to the pattern of distributions made by a company or an associate (within the meaning of section 318) of the company. 55. DPE has a consistent history of making dividend distributions to shareholders and this policy is expected to continue. Accordingly, DPE's pattern of distributions does not suggest that the proposed returns of share capital will be made in substitution for dividends. 56. Paragraph 45B(8)(k) refers to the matters in subparagraphs 177D(b)(i) to 177D(b)(viii). These are matters by reference to which a scheme is able to be examined from a practical perspective in order to identify and compare its tax and non-tax objectives. The matters include the manner in which the scheme is carried out, the timing of the scheme, its form and substance, and the financial and other implications for the parties involved. 57. In this case, the practical implications of the scheme for DPE and its shareholders are consistent with it being, in form and substance, a distribution of share capital. 58. It cannot be concluded that DPE or the DPE shareholders entered into or carried out the scheme for the purpose of enabling the shareholders to obtain a tax benefit. Accordingly, the Commissioner will not make a determination under subsection 45B(3) that section 45C applies to the whole or any part of the proposed returns of capital. | Section 45C: 59. As the Commissioner will not make a determination under subsection 45A(2) or subsection 45B(3) in relation to the scheme as described, section 45C will not deem any part of the proposed returns of capital to be an unfranked dividend for the purposes of the ITAA 1936 or the ITAA 1997. | CGT event G1 - section 104-135 of the ITAA 1997: 60. CGT event G1 will happen each time DPE pays one of the returns of capital to a DPE shareholder in respect of a share that they own in DPE at the Record Date and continue to own at the Payment Date (section 104-135 of the ITAA 1997). 61. If the return of capital is equal to or less than the cost base of the DPE share at the time of payment, the cost base and reduced cost base of the share will be reduced (but not below nil) by the amount of the payment (subsection 104-135(4) of the ITAA 1997). 62. A DPE shareholder will make a capital gain if the return of capital is more than the cost base of the DPE share (subsection 104-135(3) of the ITAA 1997). The amount of the capital gain is equal to the excess. 63. If a DPE shareholder makes a capital gain when CGT event G1 happens, the cost base and reduced cost base of the DPE share is reduced to nil. A DPE shareholder cannot make a capital loss when CGT event G1 happens (subsection 104-135(3) of the ITAA 1997). 64. A capital gain made when CGT event G1 happens will be eligible to be treated as a discount capital gain under Division 115 of the ITAA 1997 provided the DPE share was acquired at least 12 months before the payment of the proposed return of capital (subsection 115-25(1) of the ITAA 1997) and the other conditions of that Division are satisfied. | CGT event C2 - section 104-25 of the ITAA 1997: 65. Each right to receive a return of capital is one of the rights inherent in a DPE share at the Record Date for that return of capital. If, after the Record Date but before the Payment Date, a DPE shareholder ceases to own a DPE share, the right to receive the proposed return of capital in respect of that share will be retained by the shareholder and is a separate CGT asset. 66. CGT event C2 (section 104-25 of the ITAA 1997) will happen each time one of the returns of capital is paid and the right to receive the payment (being an intangible CGT asset) ends. 67. A DPE shareholder will make a capital gain if the capital proceeds from the ending of the right are more than its cost base. The capital gain is equal to the amount of the excess. A DPE shareholder will make a capital loss if the capital proceeds from the ending of the right are less than its reduced cost base (subsection 104-25(3) of the ITAA 1997). The capital loss is equal to the amount of the difference. 68. In working out the capital gain or capital loss made when CGT event C2 happens, the capital proceeds will be the amount of the return of capital at that time (subsection 116-20(1) of the ITAA 1997). 69. The cost base of a DPE shareholder's right to receive a return of capital is worked out under Division 110 of the ITAA 1997 (modified by Division 112 of the ITAA 1997). The cost base of the right does not include the cost base or reduced cost base of the share previously owned by the DPE shareholder that has been applied in working out a capital gain or capital loss made when a CGT event happened to the share - for example, when the DPE shareholder disposed of the share after the Record Date but before the Payment Date for that return of capital. 70. Therefore, if the full cost base or reduced cost base of a DPE share has been previously applied in working out a capital gain or capital loss made when a CGT event happened to that share, the right to receive the return of capital will have a nil cost base. 71. As the right to receive a return of capital was inherent in the DPE share during the time it was owned, the right is considered to have been acquired at the time when the corresponding share was acquired (section 109-5 of the ITAA 1997). Accordingly, if the DPE share was acquired at least 12 months before the return of capital, a capital gain made from the ending of the corresponding right will satisfy the requirements of section 115-25 of the ITAA 1997. Such a capital gain will be eligible to be treated as a discount capital gain under Division 115 of the ITAA 1997 provided the other conditions of that Division are satisfied. | Foreign resident shareholders: 72. Under subsection 855-10(1) of the ITAA 1997, an entity disregards a capital gain or capital loss made from a CGT event if they are a foreign resident, or the trustee of a foreign trust for CGT purposes, just before the CGT event happens and the CGT event happens in relation to a CGT asset that is not 'taxable Australian property'. 73. The term 'taxable Australian property' is defined in the table in section 855-15 of the ITAA 1997. The table sets out five categories of CGT assets: 74. DPE has advised that at the time CGT event G1 happens for any foreign resident DPE shareholder who is entitled to either return of capital, a DPE share will not be an indirect Australian real property interest (as defined in section 855-25 of the ITAA 1997) as the interest will not pass the principal asset test in section 855-30 of the ITAA 1997 at that time. 75. However, a foreign resident DPE shareholder, just before CGT event G1 happens, cannot disregard under subsection 855-10(1) of the ITAA 1997 a capital gain made if: 76. A DPE foreign resident shareholder who has a right to the payment of either return of capital disregards any capital gain or capital loss made when CGT event C2 happens to that right because the right is not 'taxable Australian property' (section 855-10 of the ITAA 1997). 77. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: Proposed distributions of capital are not dividends: 25. The proposed returns of capital to DPE shareholders will not be a dividend, as defined in subsection 6(1). | The application of sections 45A, 45B and 45C to the proposed returns of capital: 26. The Commissioner will not make a determination under subsection 45A(2) or subsection 45B(3) that section 45C applies to the proposed returns of capital. Accordingly, no part of the proposed returns of capital will be taken to be a dividend for income tax purposes. | Capital gains tax (CGT) consequences: 27. For each return of capital, CGT event G1 will happen when DPE pays the return of capital to a DPE shareholder in respect of a DPE share that they own at the Record Date for that return of capital and continue to own at the Payment Date for that return of capital (section 104-135 of the ITAA 1997). 28. For each return of capital, CGT event C2 will happen when DPE pays the return of capital to a DPE shareholder in respect of a DPE share that they own at the Record Date for that return of capital but cease to own before the Payment Date for that return of capital (section 104-25 of ITAA 1997). | Foreign resident shareholders: 29. A foreign resident shareholder in DPE who is paid either return of capital disregards any capital gain made from CGT event G1 happening to that return of capital if their DPE shares are not 'taxable Australian property' (section 855-10 of the ITAA 1997). 30. A foreign resident shareholder in DPE who is paid either return of capital disregards any capital gain or capital loss made from CGT event C2 happening to that return of capital if their right to receive that return of capital is not 'taxable Australian property' (section 855-10 of the ITAA 1997). Commissioner of Taxation 26 September 2012


Appendix: Proposed distributions of capital are not dividends: 31. Subsection 44(1) includes in a shareholder's assessable income any dividends, as defined in subsection 6(1), paid to the shareholders out of profits derived by the company from any source (if the shareholder is a resident of Australia) and from an Australian source (if the shareholder is a non-resident of Australia). 32. The term 'dividend' is defined in subsection 6(1) and includes any distribution made by a company to any of its shareholders. However, paragraph (d) of the definition of 'dividend' excludes a distribution from the meaning of 'dividend' if the amount of the distribution is debited against an amount standing to the credit of the company's share capital account. 33. The term 'share capital account' is defined in section 975-300 of the 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. 34. Subsection 975-300(3) of the ITAA 1997 states that an account is not a share capital account, except for certain limited purposes, if it is tainted. Section 197-50 of the ITAA 1997 states that a share capital account is tainted if an amount to which Division 197 of the ITAA 1997 applies is transferred to the account and the account is not already tainted. 35. The proposed returns of capital will be recorded as debits to DPE's share capital account. As the share capital account of DPE is not tainted within the meaning of Division 197 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 will apply. Accordingly, the returns of capital will not be a dividend as defined in subsection 6(1) of the ITAA 1936. | Anti-avoidance provisions: 36. Sections 45A and 45B are two anti-avoidance provisions which, if they apply, allow the Commissioner to make a determination that section 45C applies to treat all or part of the proposed returns of capital amounts received by the shareholders as an unfranked dividend paid by the company out of profits to the shareholder. | Section 45A - streaming of dividends and capital benefits: 37. Section 45A applies where capital benefits are streamed to some shareholders (the Advantaged Shareholders), who would derive a greater benefit from the receipt of capital than other shareholders (the Disadvantaged Shareholders) and these Disadvantaged Shareholders receive, or are likely to receive, dividends. 38. A reference to the 'provision of a capital benefit to a shareholder in a company' is defined in paragraph 45A(3)(b) to include the distribution to the shareholder of share capital. DPE will provide its shareholders with a 'capital benefit' as defined in paragraph 45A(3)(b). The capital benefit will be provided to all of its shareholders in the same proportion as their share holdings. 39. Accordingly, section 45A will not apply to the proposed returns of capital and the Commissioner will not make a determination under subsection 45A(2) that section 45C applies in relation to the whole or a part of the proposed returns of capital amounts. | Section 45B - schemes to provide capital benefits: 40. Section 45B applies where certain capital payments, including a return of capital, are paid to shareholders in substitution for dividends. It allows the Commissioner to make a determination that section 45C applies to a capital benefit. Specifically, the provision applies where: Each of these conditions is considered below. | Scheme: 41. 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 widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan or proposal. 42. The proposed returns of capital by DPE will constitute a scheme for the purposes of paragraph 45B(2)(a). 43. The phrase 'provided with a capital benefit' is defined in subsection 45B(5). It states that a person is provided with a capital benefit if: 44. As the proposed returns of capital will be debited to DPE's share capital account, DPE will provide shareholders with a capital benefit under paragraph 45B(5)(b) in the form of distributions of share capital. | Tax benefit: 45. A relevant taxpayer 'obtains a tax benefit' as defined in subsection 45B(9) if: would, apart from the operation of section 45B, be less than the amount that: if the capital benefit had instead been a dividend. 46. The proposed distributions to DPE's shareholders are return of capital payments and therefore each payment will constitute a capital benefit. In the event that the relevant distributions were dividends rather than a capital benefit, it is likely that the amount of tax payable by DPE's shareholders would be greater than is payable in respect of each of the proposed return of capital payments (that payment being the capital benefit). Consequently, the receipt of the capital benefit is a 'tax benefit'. 47. Ordinarily, a return of capital would be subject to the CGT provisions of the income tax law. 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 (section 104-135 of the ITAA 1997). It is only to the extent (if any) that the distribution exceeds the cost base of the shares that a capital gain arises. By contrast, a dividend would generally be included in the assessable income of a resident shareholder or in the case of a foreign resident, be subject to a dividend withholding tax under section 128B of the ITAA 1936. Therefore, DPE shareholders will obtain a tax benefit from the proposed returns of capital. | Relevant circumstances: 48. Paragraph 45B(2)(c) requires the Commissioner to consider the 'relevant circumstances' of the scheme as set out in subsection 45B(8). 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 (an ordinary shareholder in DPE) to obtain a tax benefit. 49. The test of purpose is an objective one. The question is whether it would be concluded that a person who enters into or carries out the scheme does so for the purpose of obtaining a tax benefit for the relevant taxpayer. This requisite purpose does not have to be the most influential or prevailing purpose but it must be more than an incidental purpose. 50. The purpose which causes section 45B to apply may be the purpose of any party to the scheme. In this case, however, the Commissioner is concerned only with the purpose of DPE. The Commissioner cannot ascertain the purposes of DPE's numerous shareholders, all of whom will be eligible to vote on the proposed returns of capital under section 256C of the Corporations Act 2001 , and all of whom may participate in the proposed returns of capital. Nevertheless, in a case such as this, an objective conclusion as to the purpose of the company, generally speaking, should not be inconsistent with an objective conclusion as to the purpose of the shareholders, in particular those shareholders who will vote in favour of the payment. 51. The relevant circumstances under subsection 45B(8) cover the circumstances of the company and the tax profile of the shareholders. In this instance, because the proposed returns of capital will be made to all DPE shareholders, regardless of individual circumstances, paragraphs 45B(8)(c) to 45B(8)(h) do not incline for or against a conclusion as to purpose. The relevant circumstances covered by paragraphs 45B(8)(i) and 45B(8)(j), pertaining to the provision of ownership interests and demerger respectively, are not relevant in the context of the proposed distributions. The relevant matters are those covered by the circumstances described in paragraphs 45B(8)(a), 45B(8)(b) and 45B(8)(k). 52. Paragraph 45B(8)(a) refers to the extent to which the capital benefit is attributable to capital and profits (realised or unrealised) of the company or an associate (within the meaning of section 318) of the company. 53. The proposed returns of capital are not considered to be attributable to the profits of DPE. The proposed returns of capital are considered attributable to capital only and not to any realised or unrealised profits of DPE. 54. Paragraph 45B(8)(b) refers to the pattern of distributions made by a company or an associate (within the meaning of section 318) of the company. 55. DPE has a consistent history of making dividend distributions to shareholders and this policy is expected to continue. Accordingly, DPE's pattern of distributions does not suggest that the proposed returns of share capital will be made in substitution for dividends. 56. Paragraph 45B(8)(k) refers to the matters in subparagraphs 177D(b)(i) to 177D(b)(viii). These are matters by reference to which a scheme is able to be examined from a practical perspective in order to identify and compare its tax and non-tax objectives. The matters include the manner in which the scheme is carried out, the timing of the scheme, its form and substance, and the financial and other implications for the parties involved. 57. In this case, the practical implications of the scheme for DPE and its shareholders are consistent with it being, in form and substance, a distribution of share capital. 58. It cannot be concluded that DPE or the DPE shareholders entered into or carried out the scheme for the purpose of enabling the shareholders to obtain a tax benefit. Accordingly, the Commissioner will not make a determination under subsection 45B(3) that section 45C applies to the whole or any part of the proposed returns of capital. | Section 45C: 59. As the Commissioner will not make a determination under subsection 45A(2) or subsection 45B(3) in relation to the scheme as described, section 45C will not deem any part of the proposed returns of capital to be an unfranked dividend for the purposes of the ITAA 1936 or the ITAA 1997. | CGT event G1 - section 104-135 of the ITAA 1997: 60. CGT event G1 will happen each time DPE pays one of the returns of capital to a DPE shareholder in respect of a share that they own in DPE at the Record Date and continue to own at the Payment Date (section 104-135 of the ITAA 1997). 61. If the return of capital is equal to or less than the cost base of the DPE share at the time of payment, the cost base and reduced cost base of the share will be reduced (but not below nil) by the amount of the payment (subsection 104-135(4) of the ITAA 1997). 62. A DPE shareholder will make a capital gain if the return of capital is more than the cost base of the DPE share (subsection 104-135(3) of the ITAA 1997). The amount of the capital gain is equal to the excess. 63. If a DPE shareholder makes a capital gain when CGT event G1 happens, the cost base and reduced cost base of the DPE share is reduced to nil. A DPE shareholder cannot make a capital loss when CGT event G1 happens (subsection 104-135(3) of the ITAA 1997). 64. A capital gain made when CGT event G1 happens will be eligible to be treated as a discount capital gain under Division 115 of the ITAA 1997 provided the DPE share was acquired at least 12 months before the payment of the proposed return of capital (subsection 115-25(1) of the ITAA 1997) and the other conditions of that Division are satisfied. | CGT event C2 - section 104-25 of the ITAA 1997: 65. Each right to receive a return of capital is one of the rights inherent in a DPE share at the Record Date for that return of capital. If, after the Record Date but before the Payment Date, a DPE shareholder ceases to own a DPE share, the right to receive the proposed return of capital in respect of that share will be retained by the shareholder and is a separate CGT asset. 66. CGT event C2 (section 104-25 of the ITAA 1997) will happen each time one of the returns of capital is paid and the right to receive the payment (being an intangible CGT asset) ends. 67. A DPE shareholder will make a capital gain if the capital proceeds from the ending of the right are more than its cost base. The capital gain is equal to the amount of the excess. A DPE shareholder will make a capital loss if the capital proceeds from the ending of the right are less than its reduced cost base (subsection 104-25(3) of the ITAA 1997). The capital loss is equal to the amount of the difference. 68. In working out the capital gain or capital loss made when CGT event C2 happens, the capital proceeds will be the amount of the return of capital at that time (subsection 116-20(1) of the ITAA 1997). 69. The cost base of a DPE shareholder's right to receive a return of capital is worked out under Division 110 of the ITAA 1997 (modified by Division 112 of the ITAA 1997). The cost base of the right does not include the cost base or reduced cost base of the share previously owned by the DPE shareholder that has been applied in working out a capital gain or capital loss made when a CGT event happened to the share - for example, when the DPE shareholder disposed of the share after the Record Date but before the Payment Date for that return of capital. 70. Therefore, if the full cost base or reduced cost base of a DPE share has been previously applied in working out a capital gain or capital loss made when a CGT event happened to that share, the right to receive the return of capital will have a nil cost base. 71. As the right to receive a return of capital was inherent in the DPE share during the time it was owned, the right is considered to have been acquired at the time when the corresponding share was acquired (section 109-5 of the ITAA 1997). Accordingly, if the DPE share was acquired at least 12 months before the return of capital, a capital gain made from the ending of the corresponding right will satisfy the requirements of section 115-25 of the ITAA 1997. Such a capital gain will be eligible to be treated as a discount capital gain under Division 115 of the ITAA 1997 provided the other conditions of that Division are satisfied. | Foreign resident shareholders: 72. Under subsection 855-10(1) of the ITAA 1997, an entity disregards a capital gain or capital loss made from a CGT event if they are a foreign resident, or the trustee of a foreign trust for CGT purposes, just before the CGT event happens and the CGT event happens in relation to a CGT asset that is not 'taxable Australian property'. 73. The term 'taxable Australian property' is defined in the table in section 855-15 of the ITAA 1997. The table sets out five categories of CGT assets: 74. DPE has advised that at the time CGT event G1 happens for any foreign resident DPE shareholder who is entitled to either return of capital, a DPE share will not be an indirect Australian real property interest (as defined in section 855-25 of the ITAA 1997) as the interest will not pass the principal asset test in section 855-30 of the ITAA 1997 at that time. 75. However, a foreign resident DPE shareholder, just before CGT event G1 happens, cannot disregard under subsection 855-10(1) of the ITAA 1997 a capital gain made if: 76. A DPE foreign resident shareholder who has a right to the payment of either return of capital disregards any capital gain or capital loss made when CGT event C2 happens to that right because the right is not 'taxable Australian property' (section 855-10 of the ITAA 1997).


What this Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | taxable Australian real property; | an indirect Australian real property interest not covered by item 5; | a CGT asset used at any time in carrying on a business through a permanent establishment in Australia and which is not covered by item 1, 2, or 5; | an option or right to acquire a CGT asset covered by item 1, 2 or 3; and | a CGT asset that is covered by subsection 104-165(3) of the ITAA 1997 (choosing to disregard a gain or loss on ceasing to be an Australian resident). | Capital gains tax consequences | Appendix 2 - Detailed contents list


Related rulings: TR 2006/10
Legislative references: ITAA 1936 ITAA 1936 6(1) ITAA 1936 44(1) ITAA 1936 45A ITAA 1936 45A(2) ITAA 1936 45A(3)(b) ITAA 1936 45B ITAA 1936 45B(2) ITAA 1936 45B(2)(a) ITAA 1936 45B(2)(b) ITAA 1936 45B(2)(c) ITAA 1936 45B(3) ITAA 1936 45B(5) ITAA 1936 45B(8) ITAA 1936 45B(8)(a) ITAA 1936 45B(8)(b) ITAA 1936 45B(8)(c) ITAA 1936 45B(8)(d) ITAA 1936 45B(8)(e) ITAA 1936 45B(8)(f) ITAA 1936 45B(8)(g) ITAA 1936 45B(8)(h) ITAA 1936 45B(8)(k) ITAA 1936 45B(9) ITAA 1936 45C ITAA 1936 128B ITAA 1936 177A(1) ITAA 1936 177D(b) ITAA 1936 318 ITAA 1997 ITAA 1997 104-25 ITAA 1997 104-25(3) ITAA 1997 104-25(5)(a) ITAA 1997 104-135 ITAA 1997 104-135(3) ITAA 1997 104-135(4) ITAA 1997 104-135(5) ITAA 1997 109-5 ITAA 1997 Div 110 ITAA 1997 Div 112 ITAA 1997 Div 115 ITAA 1997 115-25 ITAA 1997 115-25(1) ITAA 1997 116-20(1) ITAA 1997 104-165(3) ITAA 1997 197-5(1) ITAA 1997 197-50(1) ITAA 1997 Div 230 ITAA 1997 855-10 ITAA 1997 855-15 ITAA 1997 975-300 ITAA 1997 975-300(3) ITAA 1997 995-1 TAA 1953 Copyright Act 1968 Corporations Act 2001 256C
Subject references: capital benefit capital gains tax capital reductions CGT event C1-C3 - end of a CGT asset CGT event G1-G3 - shares return of capital on shares share capital shareholder payments