Class Ruling CR 2015/103
Date of effect: 1 July 2015

What this ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provisions 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: Class of entities 3. The class of entities to which this Ruling applies is the holders of ordinary shares in TGR Biosciences Pty Ltd (TGR Biosciences) who: 4. This Ruling does not apply to TGR Biosciences shareholders for whom the return of capital is either exempt income (within the meaning of section 6-20 of the ITAA 1997) or non-assessable non-exempt income (within the meaning of section 6-23 of the ITAA 1997). 5. In this Ruling, a person belonging to the class of entities to which this Ruling applies is referred to as a 'TGR Biosciences Shareholder'. Qualifications 6. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 7. The TGR Biosciences Shareholders may rely on the contents of this Ruling provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 10 to 23 of this Ruling. 8. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then:

Class of entities or scheme: 3. The class of entities to which this Ruling applies is the holders of ordinary shares in TGR Biosciences Pty Ltd (TGR Biosciences) who: 4. This Ruling does not apply to TGR Biosciences shareholders for whom the return of capital is either exempt income (within the meaning of section 6-20 of the ITAA 1997) or non-assessable non-exempt income (within the meaning of section 6-23 of the ITAA 1997). 5. In this Ruling, a person belonging to the class of entities to which this Ruling applies is referred to as a 'TGR Biosciences Shareholder'. | Qualifications: 6. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 7. The TGR Biosciences Shareholders may rely on the contents of this Ruling provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 10 to 23 of this Ruling. 8. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 9. This Ruling applies from 1 July 2015 to 30 June 2016. The Ruling continues to apply after 30 June 2016 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). 10. The following description of the scheme is based on information provided by the applicant. Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 11. TGR Biosciences is an unlisted, Australian resident, private company that was established in 2001. 12. TGR Biosciences conducts a biotechnology business which has historically focussed on the following three main areas: 13. The research and development component of TGR Biosciences' business was capital intensive and not commercially successful, incurring significant operating losses. As a result, TGR Biosciences decided to terminate its research and development activities in 2009 so that it could focus on the assay kit and services areas of its business. 14. In the years following this change in strategy, TGR Biosciences continued to develop and refine its assay kit technology. During this period, TGR Biosciences continued to operate at a loss; however, following a focus on cost reduction and steadily increasing sales of its assay kits, it recorded its first profit in 2013. 15. TGR Biosciences paid its first dividend (an unfranked dividend) in August 2014, after earning further profits in the income year ended 30 June 2014 and intended to pay future dividends annually out of available profits. Profits derived in the income year ended 30 June 2015 were also distributed to shareholders as an unfranked final dividend in 3 September 2015. 16. As a result of the cessation of its research and development activities and the stabilisation of its business performance, TGR Biosciences considered it had funds in excess of its working capital requirements and business needs. 17. On 6 November 2015 (the Payment Date), TGR Biosciences returned capital of $1,210,669, equating to approximately $1.40 per ordinary share. The return of capital was made to those shareholders who held ordinary shares on 2 November 2015 (the Record Date); with each shareholder participating in the capital return on the same terms in proportion to the number of ordinary shares they held at the time. 18. The return of capital was approved by the ordinary shareholders of TGR Biosciences on 5 November 2015. 19. The return of capital was debited to TGR Biosciences' share capital account and sourced entirely from TGR Biosciences' cash reserves. 20. Since its incorporation, TGR Biosciences has raised funds on several occasions, through the issue of ordinary and preference shares, to finance its business activities. However in 2012, TGR Biosciences reconstructed its share capital such that the only shares it had on issue were ordinary shares. 21. As at 30 June 2015, TGR Biosciences had 864,764 ordinary shares on issue. Each share has the same rights in respect of voting, dividends and the right to participate in returns of capital. 22. Immediately prior to the return of capital, TGR Biosciences had issued capital of $14,289,350 and accumulated losses of $11,693,127. 23. TGR Biosciences' share capital account is not tainted within the meaning of Division 197 of the ITAA 1997. | Return of capital is not a dividend: 24. The return of capital paid to a TGR Biosciences Shareholder is not a dividend, as defined in subsection 6(1) of the ITAA 1936, and therefore will not be included in the assessable income of a TGR Biosciences Shareholder under subsection 44(1) of the ITAA 1936. | The application of sections 45A, 45B and 45C of the ITAA 1936: 25. The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 or subsection 45B(3) of the ITAA 1936, that section 45C of the ITAA 1936 applies to the return of capital. Accordingly, the return of capital is not taken to be a dividend for income tax purposes. | CGT event G1: 26. CGT event G1 (section 104-135 of the ITAA 1997) happened when TGR Biosciences paid the return of capital of $1.40 per share to a TGR Biosciences Shareholder in respect of a TGR Biosciences ordinary share, that the Shareholder owned at the Record Date and continued to own at the Payment Date. | CGT event C2: 27. CGT event C2 (section 104-25 of the ITAA 1997) happened when TGR Biosciences paid the return of capital of $1.40 per share to a TGR Biosciences Shareholder, in respect of a TGR Biosciences ordinary share owned by the Shareholder at the Record Date, but not at the Payment Date. Commissioner of Taxation 25 November 2015 | Return of capital is not a dividend: 28. Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividends (as defined in subsection 6(1) of the ITAA 1936) that are paid to the shareholder by a company 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). 29. The term 'dividend' is defined in subsection 6(1) of the ITAA 1936. It includes a distribution made by a company to any of its shareholders. However, paragraph (d) of the definition of 'dividend' excludes a distribution that is debited against an amount standing to the credit of the share capital account of the company. 30. 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 after 1 July 1998 where the first amount credited to the account was an amount of share capital. 31. Subsection 975-300(3) of the ITAA 1997 states that an account is not a share capital account, except for certain 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. 32. The return of capital was wholly debited to TGR Biosciences' share capital account. As TGR Biosciences' share capital account is not tainted, within the meaning of section 197-50 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 applies. Accordingly, the return of capital of $1.40 per share is not a dividend as defined in subsection 6(1) of the ITAA 1936. | Application of sections 45A, 45B and 45C of the ITAA 1936: 33. Sections 45A and 45B of the ITAA 1936 are anti-avoidance provisions which, if they apply, allow the Commissioner to make a determination that section 45C of the ITAA 1936 applies to treat all or part of the return of capital received by a TGR Biosciences Shareholder as an unfranked dividend, paid by the company out of profits. | Section 45A of the ITAA 1936 - streaming of dividends and capital benefits: 34. Section 45A of the ITAA 1936 applies where capital benefits are streamed to certain shareholders (advantaged shareholders), who derive a greater benefit from the receipt of capital than other shareholders (disadvantaged shareholders) and the disadvantaged shareholders received, or are likely to receive, dividends. 35. Although TGR Biosciences has provided its shareholders with a 'capital benefit', as defined in paragraph 45A(3)(b) of the ITAA 1936, the capital benefit was provided to all TGR Biosciences' shareholders in direct proportion to their shareholding. The circumstances of the scheme do not indicate that there is a 'streaming' of capital benefits to advantaged shareholders and of dividends to disadvantaged shareholders. 36. Accordingly, section 45A of the ITAA 1936 does not apply to the return of capital by TGR Biosciences. Therefore, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit. | Section 45B of the ITAA 1936 - scheme to provide capital benefits: 37. Section 45B of the ITAA 1936 applies where certain capital payments are made to shareholders in substitution for dividends. Specifically, the provision applies if: 38. While the return of capital satisfies the conditions in paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936, paragraph 45B(2)(c) of the ITAA 1936 is not satisfied. Having regard to the relevant circumstances of the scheme, set out in subsection 45B(8) of the ITAA 1936, it cannot be concluded that the scheme was entered into or carried out for a more than incidental purpose of enabling the TGR Biosciences shareholders to obtain a tax benefit. 39. Accordingly, the Commissioner will not make a determination, under subsection 45B(3) of the ITAA 1936, that section 45C of the ITAA 1936 applies to the whole, or a part, of the payment of the return of capital. | CGT event G1- section 104-135 of the ITAA 1997: 40. CGT event G1 (section 104-135 of the ITAA 1997) happens when a company makes a payment to a shareholder in respect of a share owned by the shareholder, and some or all of the payment (the non-assessable part) is neither a dividend nor an amount taken to be a dividend under section 47 of the ITAA 1936. 41. Accordingly, CGT event G1 happened when TGR Biosciences paid the return of capital to a TGR Biosciences Shareholder in respect of a TGR Biosciences share held by that shareholder at the Record Date and continued to own at the Payment Date. 42. A TGR Biosciences Shareholder will make a capital gain if the return of capital amount is more than the cost base of the shareholder's TGR Biosciences share. The amount of the capital gain is equal to that excess (subsection 104-135(3) of the ITAA 1997). 43. If a TGR Biosciences Shareholder makes a capital gain from CGT event G1 happening, the cost base and reduced cost base of the TGR Biosciences share is reduced to nil. A TGR Biosciences Shareholder cannot make a capital loss from CGT event G1 happening (subsection 104-135(3) of the ITAA 1997). 44. If the return of capital amount is equal to or less than the cost base of the TGR Biosciences share at the Payment Date, the cost base and reduced cost base of the ordinary share will be reduced by the amount of the payment (subsection 104-135(4) of the ITAA 1997). 45. A capital gain made when CGT event G1 happened, will be eligible to be treated as a discount capital gain under Division 115 of the ITAA 1997. This is provided that the TGR Biosciences share was acquired at least 12 months before the payment of the 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: 46. The right to receive the return of capital is one of the rights inherent in the TGR Biosciences share at the Record Date. If, after the Record Date but before the Payment Date, a TGR Biosciences Shareholder ceased to own a TGR Biosciences share in respect of which the return of capital was payable, the right to receive the return of capital in respect of that share was still retained by the shareholder and hence was a separate CGT asset. 47. CGT event C2 happened when the return of capital was paid (section 104-25 of the ITAA 1997). The right to receive the payment ended when the right was discharged or satisfied, namely when the payment was made. 48. A TGR Biosciences Shareholder will make a capital gain if the capital proceeds from the ending of the right are more than the cost base of the right. The capital gain is equal to the amount of the excess. A TGR Biosciences Shareholder will make a capital loss if the capital proceeds from the ending of the right are less than its reduced cost base. The capital loss is equal to the amount of the difference (subsection 104-25(3) of the ITAA 1997). 49. For the purposes of working out the capital gain or capital loss made when CGT event C2 happened, the capital proceeds are the amount of the return of capital paid by TGR Biosciences (subsection116-20(1) of the ITAA 1997). 50. The cost base of the TGR Biosciences shareholder's right to receive the 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 a TGR Biosciences 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 TGR Biosciences Shareholder disposed of it after the Record Date. 51. Therefore, if the full cost base or reduced cost base of the TGR Biosciences share has been 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 generally have a nil cost base. As a result, the TGR Biosciences Shareholder will generally make a capital gain equal to the amount of the return of capital. 52. As the right to receive the return of capital was inherent in the TGR Biosciences 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). 53. Accordingly, if the TGR Biosciences share was acquired at least 12 months before the payment of 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 may be eligible to be treated as a discount capital gain under Division 115 of the ITAA 1997, provided other conditions of that Division are satisfied. 54. The following is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Not previously issued as a draft

Ruling: Return of capital is not a dividend: 24. The return of capital paid to a TGR Biosciences Shareholder is not a dividend, as defined in subsection 6(1) of the ITAA 1936, and therefore will not be included in the assessable income of a TGR Biosciences Shareholder under subsection 44(1) of the ITAA 1936. | The application of sections 45A, 45B and 45C of the ITAA 1936: 25. The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 or subsection 45B(3) of the ITAA 1936, that section 45C of the ITAA 1936 applies to the return of capital. Accordingly, the return of capital is not taken to be a dividend for income tax purposes. | CGT event G1: 26. CGT event G1 (section 104-135 of the ITAA 1997) happened when TGR Biosciences paid the return of capital of $1.40 per share to a TGR Biosciences Shareholder in respect of a TGR Biosciences ordinary share, that the Shareholder owned at the Record Date and continued to own at the Payment Date. | CGT event C2: 27. CGT event C2 (section 104-25 of the ITAA 1997) happened when TGR Biosciences paid the return of capital of $1.40 per share to a TGR Biosciences Shareholder, in respect of a TGR Biosciences ordinary share owned by the Shareholder at the Record Date, but not at the Payment Date. Commissioner of Taxation 25 November 2015


Appendix: Return of capital is not a dividend: 28. Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividends (as defined in subsection 6(1) of the ITAA 1936) that are paid to the shareholder by a company 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). 29. The term 'dividend' is defined in subsection 6(1) of the ITAA 1936. It includes a distribution made by a company to any of its shareholders. However, paragraph (d) of the definition of 'dividend' excludes a distribution that is debited against an amount standing to the credit of the share capital account of the company. 30. 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 after 1 July 1998 where the first amount credited to the account was an amount of share capital. 31. Subsection 975-300(3) of the ITAA 1997 states that an account is not a share capital account, except for certain 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. 32. The return of capital was wholly debited to TGR Biosciences' share capital account. As TGR Biosciences' share capital account is not tainted, within the meaning of section 197-50 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 applies. Accordingly, the return of capital of $1.40 per share is not a dividend as defined in subsection 6(1) of the ITAA 1936. | Application of sections 45A, 45B and 45C of the ITAA 1936: 33. Sections 45A and 45B of the ITAA 1936 are anti-avoidance provisions which, if they apply, allow the Commissioner to make a determination that section 45C of the ITAA 1936 applies to treat all or part of the return of capital received by a TGR Biosciences Shareholder as an unfranked dividend, paid by the company out of profits. | Section 45A of the ITAA 1936 - streaming of dividends and capital benefits: 34. Section 45A of the ITAA 1936 applies where capital benefits are streamed to certain shareholders (advantaged shareholders), who derive a greater benefit from the receipt of capital than other shareholders (disadvantaged shareholders) and the disadvantaged shareholders received, or are likely to receive, dividends. 35. Although TGR Biosciences has provided its shareholders with a 'capital benefit', as defined in paragraph 45A(3)(b) of the ITAA 1936, the capital benefit was provided to all TGR Biosciences' shareholders in direct proportion to their shareholding. The circumstances of the scheme do not indicate that there is a 'streaming' of capital benefits to advantaged shareholders and of dividends to disadvantaged shareholders. 36. Accordingly, section 45A of the ITAA 1936 does not apply to the return of capital by TGR Biosciences. Therefore, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit. | Section 45B of the ITAA 1936 - scheme to provide capital benefits: 37. Section 45B of the ITAA 1936 applies where certain capital payments are made to shareholders in substitution for dividends. Specifically, the provision applies if: 38. While the return of capital satisfies the conditions in paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936, paragraph 45B(2)(c) of the ITAA 1936 is not satisfied. Having regard to the relevant circumstances of the scheme, set out in subsection 45B(8) of the ITAA 1936, it cannot be concluded that the scheme was entered into or carried out for a more than incidental purpose of enabling the TGR Biosciences shareholders to obtain a tax benefit. 39. Accordingly, the Commissioner will not make a determination, under subsection 45B(3) of the ITAA 1936, that section 45C of the ITAA 1936 applies to the whole, or a part, of the payment of the return of capital. | CGT event G1- section 104-135 of the ITAA 1997: 40. CGT event G1 (section 104-135 of the ITAA 1997) happens when a company makes a payment to a shareholder in respect of a share owned by the shareholder, and some or all of the payment (the non-assessable part) is neither a dividend nor an amount taken to be a dividend under section 47 of the ITAA 1936. 41. Accordingly, CGT event G1 happened when TGR Biosciences paid the return of capital to a TGR Biosciences Shareholder in respect of a TGR Biosciences share held by that shareholder at the Record Date and continued to own at the Payment Date. 42. A TGR Biosciences Shareholder will make a capital gain if the return of capital amount is more than the cost base of the shareholder's TGR Biosciences share. The amount of the capital gain is equal to that excess (subsection 104-135(3) of the ITAA 1997). 43. If a TGR Biosciences Shareholder makes a capital gain from CGT event G1 happening, the cost base and reduced cost base of the TGR Biosciences share is reduced to nil. A TGR Biosciences Shareholder cannot make a capital loss from CGT event G1 happening (subsection 104-135(3) of the ITAA 1997). 44. If the return of capital amount is equal to or less than the cost base of the TGR Biosciences share at the Payment Date, the cost base and reduced cost base of the ordinary share will be reduced by the amount of the payment (subsection 104-135(4) of the ITAA 1997). 45. A capital gain made when CGT event G1 happened, will be eligible to be treated as a discount capital gain under Division 115 of the ITAA 1997. This is provided that the TGR Biosciences share was acquired at least 12 months before the payment of the 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: 46. The right to receive the return of capital is one of the rights inherent in the TGR Biosciences share at the Record Date. If, after the Record Date but before the Payment Date, a TGR Biosciences Shareholder ceased to own a TGR Biosciences share in respect of which the return of capital was payable, the right to receive the return of capital in respect of that share was still retained by the shareholder and hence was a separate CGT asset. 47. CGT event C2 happened when the return of capital was paid (section 104-25 of the ITAA 1997). The right to receive the payment ended when the right was discharged or satisfied, namely when the payment was made. 48. A TGR Biosciences Shareholder will make a capital gain if the capital proceeds from the ending of the right are more than the cost base of the right. The capital gain is equal to the amount of the excess. A TGR Biosciences Shareholder will make a capital loss if the capital proceeds from the ending of the right are less than its reduced cost base. The capital loss is equal to the amount of the difference (subsection 104-25(3) of the ITAA 1997). 49. For the purposes of working out the capital gain or capital loss made when CGT event C2 happened, the capital proceeds are the amount of the return of capital paid by TGR Biosciences (subsection116-20(1) of the ITAA 1997). 50. The cost base of the TGR Biosciences shareholder's right to receive the 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 a TGR Biosciences 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 TGR Biosciences Shareholder disposed of it after the Record Date. 51. Therefore, if the full cost base or reduced cost base of the TGR Biosciences share has been 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 generally have a nil cost base. As a result, the TGR Biosciences Shareholder will generally make a capital gain equal to the amount of the return of capital. 52. As the right to receive the return of capital was inherent in the TGR Biosciences 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). 53. Accordingly, if the TGR Biosciences share was acquired at least 12 months before the payment of 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 may be eligible to be treated as a discount capital gain under Division 115 of the ITAA 1997, provided other conditions of that Division are satisfied.


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. | Capital gains tax (CGT) 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)(a) ITAA 1936 45B(2)(b) ITAA 1936 45B(2)(c) ITAA 1936 45B(3) ITAA 1936 45B(8) ITAA 1936 45C ITAA 1997 ITAA 1997 6-20 ITAA 1997 6-23 ITAA 1997 104-25 ITAA 1997 104-25(3) ITAA 1997 104-135 ITAA 1997 104-135(3) ITAA 1997 104-135(4) 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 Div 197 ITAA 1997 197-50 ITAA 1997 Div 230 ITAA 1997 975-300 ITAA 1997 975-300(3) ITAA 1997 995-1 TAA 1953