Class Ruling CR 2014/31
Date of effect: 23 January 2014

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 are shareholders of Iron Mountain Mining Limited (Iron Mountain) who: In this Ruling, a person belonging to this class of entities is referred to as an 'Iron Mountain 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 8 to 27 of this Ruling. 6. 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 are shareholders of Iron Mountain Mining Limited (Iron Mountain) who: In this Ruling, a person belonging to this class of entities is referred to as an 'Iron Mountain 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 8 to 27 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 Ruling applies from 23 January 2014 to 30 June 2014. The Ruling continues to apply after 30 June 2014 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). 8. 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. 9. Iron Mountain is an Australian resident company listed on the Australian Securities Exchange (ASX) since 25 May 2007. 10. Iron Mountain's principal activity is mineral exploration. 11. In August 2008 and March 2012, the Board of Directors announced the sale of the Mount Richardson tenement and the sale of the Wandoo tenement respectively. | Business Disposal: 12. On 13 August 2008, Iron Mountain announced that it had entered into an agreement for the sale of Mount Richardson to an unrelated entity, for total consideration of $10 million payable fully in cash on completion. The sale was completed on 13 July 2010. 13. On 6 March 2012, Iron Mountain announced that it had signed a binding agreement for the sale of Wandoo tenement to an unrelated entity, for a total consideration of $4 million. The settlement of the sale of the Wandoo tenement was completed on 24 August 2012. 14. Following the above mentioned transactions, Iron Mountain had excess funds which the Board proposed to distribute in the most effective manner. | Return of capital: 15. On 6 December 2013 Iron Mountain released a notice and explanatory memorandum announcing that a General Meeting of Iron Mountain shareholders was to be held to approve a return of share capital to the shareholders of $1,359,337 (1 cent per share). 16. Iron Mountain shareholders approved the return of share capital at a General Meeting held on 15 January 2014. All Iron Mountain shareholders were eligible to vote on the proposed return of share capital. 17. The return of share capital payment was made equally to each Iron Mountain shareholder listed on Iron Mountain's share register on the Record Date being 4.00pm WST on 23 January 2014. 18. Iron Mountain made the return of share capital payment to its shareholders on 31 January 2014. 19. Iron Mountain debited the entire amount of the return of share capital payment against the company's share capital account. There was no change in either the number of Iron Mountain shares on issue or the proportionate interest of each Iron Mountain shareholder in Iron Mountain. 20. The return of share capital payment was sourced from Iron Mountain's existing net cash reserves. | Other matters: 21. Iron Mountain's 2013 Annual Report discloses a total loss of ($2,523,541) for the year. 22. As disclosed in Iron Mountain's 2013 Annual Report, Iron Mountain has accumulated losses of ($8,932,546) as at 30 June 2013, and did not pay any dividends during this period. 23. Total equity of $6,624,256 is represented solely by contributed equity. 24. Iron Mountain has no history of paying dividends. 25. At the time of the capital reduction, Iron Mountain had: 26. As at 24 September 2013 Iron Mountain had 3,097 shareholders on its share registry of which the top 20 held 45.92% of issued shares. 27. Iron Mountain has confirmed that its share capital account (as defined in section 975-300 of the ITAA 1997) is not tainted (within the meaning of Division 197 of the ITAA 1997). | Distribution of capital is not a dividend: 28. The return of share capital payment made to Iron Mountain shareholders will not be a dividend as defined in subsection 6(1). | The application of sections 45A, 45B and 45C: 29. The Commissioner will not make a determination under subsection 45A(2) or subsection 45B(3) that section 45C applies to the whole or any part of the return of share capital received by Iron Mountain shareholders. Accordingly, no part of the capital return will be taken to be a dividend for income tax purposes. | Capital gains tax (CGT) consequences: 30. CGT event G1 (section 104-135 of the ITAA 1997) happened when Iron Mountain made the return of share capital payment to a Iron Mountain shareholder in respect of a share owned by the shareholder at the Record Date which the shareholder continued to own on the Payment Date. 31. CGT event C2 (section 104-25 of the ITAA 1997) happened when Iron Mountain made the return of share capital payment to a Iron Mountain shareholder that owned a share at the Record Date, but no longer owned the share on the Payment Date. | Foreign resident shareholders: 32. A foreign resident Iron Mountain shareholder who received the return of capital payment may disregard any capital gain made when CGT event G1 happened if their Iron Mountain share did not constitute 'taxable Australian property' (section 855-10 of the ITAA 1997). 33. A foreign resident Iron Mountain shareholder who received the return of capital payment may disregard any capital gain or capital loss made when CGT event C2 happened if their right to receive the payment was not 'taxable Australian property' (section 855-10 of the ITAA 1997). Commissioner of Taxation 19 March 2014 | Distribution is not dividend: 34. Subsection 44(1) includes in a shareholder's assessable income any dividends, as defined in subsection 6(1), paid to the shareholder 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). 35. 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. 36. 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. 37. Subsection 975-300(3) of the ITAA 1997 states that an account is generally taken not to be a share capital account if it is tainted. Iron Mountain has confirmed that its share capital account is not tainted within the meaning of Division 197 of the ITAA 1997. 38. The return of share capital payment was recorded as a debit to Iron Mountain's share capital account. As the share capital account of Iron Mountain was not tainted within the meaning of Division 197 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) applies. Accordingly, the return of share capital payment was not a dividend as defined in subsection 6(1). | Anti-avoidance provisions: 39. 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 return of capital amounts received by Iron Mountain shareholders as an unfranked dividend paid by the company out of profits. | Section 45A - streaming of dividends and capital benefits: 40. 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 the Disadvantaged Shareholders receive, or are likely to receive, dividends. 41. 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. Iron Mountain provided its shareholders with a 'capital benefit' as defined in paragraph 45A(3)(b) when Iron Mountain made the return of share capital payment to its shareholders. 42. The capital benefit will be provided to all Iron Mountain shareholders in the same proportion as their share holdings. 43. Accordingly, section 45A does not apply to the return of share capital payment 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 return of share capital. | Section 45B - scheme to provide capital benefits: 44. Section 45B applies where certain capital payments, including a return of share 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. Should section 45C apply, the capital benefit is taken to be a dividend. Specifically, the provision applies where: Each of these conditions is considered in paragraphs 45 to 76 of this Explanation. | Schemes to provide capital benefits: 45. 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. The return of capital payment constitutes a scheme. 46. 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: 47. As the return of share capital was debited to Iron Mountain's share capital account, Iron Mountain is taken to have provided each shareholder with a capital benefit under paragraph 45B(5)(b) in the form of a distribution of share capital. | Tax benefit: 48. A relevant taxpayer 'obtains a tax benefit' for the purposes of paragraph 45B(2)(b) as defined in subsection 45B(9) if: 49. As discussed in paragraph 47 of this Explanation, the return of capital to shareholders is a capital benefit. The tax consequences associated with a return of capital payment is that the cost base of the relevant shares are first reduced by the amount of the payment before any liability to capital gains tax arises. However, had the return of capital payment been a dividend instead, the shareholders would have been required to include the payment in their assessable income. Consequently, the receipt of the capital benefit results in shareholders obtaining a 'tax benefit'. | Relevant circumstances: 50. For the purposes of paragraph 45B(2)(c), the Commissioner is required to consider the 'relevant circumstances' set out in subsection 45B(8) to determine if any part of the scheme was entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit. 51. The test for purpose is an objective one. The question is whether objectively, it would be concluded that a person who entered into or carried out the scheme did so for the purpose of obtaining a tax benefit for the 'relevant taxpayer'. A 'relevant taxpayer' in this instance is an Iron Mountain shareholder. This requisite purpose does not have to be the most influential or prevailing purpose, the test will be met if it is more than a merely incidental purpose. 52. 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 Iron Mountain. The Commissioner cannot ascertain the purposes of Iron Mountain's numerous shareholders, all of whom voted on the proposed return of share capital payment under section 256C of the Corporations Act 2001 , and most if not all of whom participated in the return of share 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 voted in favour of the payment. 53. 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 return of share capital was made to all Iron Mountain shareholders, regardless of individual circumstances, paragraphs 45B(8)(c) to 45B(8)(e) do not incline for or against a conclusion as to purpose. The circumstances covered by paragraphs 45B(8)(i) and 45B(8)(j), which are concerned with the provision of ownership interests and demerger respectively, are not relevant. The relevant matters are those covered by the circumstances described in paragraphs 45B(8)(a), 45B(8)(b), 45B(8)(h) and 45B(8)(k). Paragraph 45B(8)(a) 54. Paragraph 45B(8)(a) refers to the extent to which the capital benefit is attributable to capital and to profits (realised or unrealised) of the company or of an associate (within the meaning of section 318) of the company. 55. To determine the extent to which a capital benefit is attributable to capital and to profits, it is necessary to consider the characteristics of share capital and profits, the availability of each in the circumstances of the company, and the context of the scheme. 56. Where a capital distribution is attributable to the disposal of business assets, a reasonable approach should be taken in determining the extent to which share capital was invested in the disposed assets and is available to be distributed to shareholders. 57. In the current circumstances, Iron Mountain had funds in excess of short term to medium term spending requirements due to funds received from the settlement of the Mount Richardson option agreement and the sale of the Wandoo tenement. The return of share capital payment was sourced from the Iron Mountain's existing net cash reserves. 58. Iron Mountain's consolidated accounts for the year to 30 June 2013 disclosed that the company incurred a loss before tax and also disclosed no retained earnings. 59. The consolidated entity did not have any retained profits as at 30 June 2013 and did not pay any dividends during the period. 60. When the return of capital payment was made on 28 January 2014, Iron Mountain had no realised or unrealised profits. 61. The fact that the accounts of Iron Mountain will not have either realised or unrealised profits suggests that the distribution will be attributable to capital. Paragraph 45B(8)(b) 62. 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. 63. Iron Mountain has no history of paying dividends. 64. Iron Mountain did not have retained profits available as at 30 June 2013. 65. Overall, Iron Mountain's circumstances do not suggest that the return of capital has been made in substitution for a dividend. Paragraph 45B(8)(h) 66. Paragraph 45B(8)(h) is concerned with whether the capital benefit was provided to a shareholder in circumstances where the shareholder's interest in the company was affected. If the shareholder continues to own the same number of shares and retains the same proportional interest in the company, the outcome is consistent with that which would be achieved in the context of a dividend. 67. Following the return of capital, no shares were cancelled. Furthermore, the individual interests as well as the relative interests of shareholders in Iron Mountain were not affected. Shareholders' rights and obligations in respect of their shares were not affected. The outcome was consistent with the payment of a dividend. 68. This circumstance inclines towards the conclusion as to purpose. Paragraph 45B(8)(k) 69. Paragraph 45B(8)(k) refers to the matters in subparagraphs 177D(2)(a) to (h). These are matters which require examination of a scheme 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. 70. The Commissioner should be satisfied that the scheme seeks to return an amount of capital released from the sale of the Mount Richardson tenement and the sale of the Wandoo tenement. Iron Mountain considers that the amount used to fund the return of capital payment will be in excess of Iron Mountain's ongoing operating requirements. The practical implications of the scheme for Iron Mountain and its shareholders are consistent with the scheme being, in form and substance, a return of capital. 71. Therefore, having regard to the relevant circumstances it cannot be concluded that the scheme was entered into or carried out for a more than incidental purpose of enabling Iron Mountain shareholders to obtain a tax benefit. Accordingly, the Commissioner should not make a determination under subsection 45B(3) that section 45C applies to the whole, or a part, of the return of capital payment. | Section 45C: 72. 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 return of capital payment 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: 73. CGT event G1 happened when Iron Mountain made the return of share capital payment to a Iron Mountain shareholder in respect of a share that the shareholder owned at the Record Date and continued to own at the time of Payment Date (section 104-135 of the ITAA 1997). 74. An Iron Mountain shareholder made a capital gain if the return of share capital is more than the cost base of the shareholder's Iron Mountain share. The amount of the capital gain is equal to the excess (subsection 104-135(3) of the ITAA 1997). 75. If an Iron Mountain shareholder made a capital gain when CGT event G1 happened, the cost base and reduced cost base of the Iron Mountain share is reduced to nil. An Iron Mountain shareholder cannot make a capital loss when CGT event G1 happened (subsection 104-135(3) of the ITAA 1997). 76. If the return of share capital payment is equal to or less than the cost base of the Iron Mountain share at the time of payment, the cost base and reduced cost base of the share will be reduced by the amount of the payment (subsection 104-135(4) of the ITAA 1997). Where the cost base and reduced cost base of an Iron Mountain share prior to the payment exceeds 1 cent per share, the cost base and reduced cost base is reduced by 1 cent. 77. A capital gain made when CGT event G1 happened will be eligible to be treated as a discount capital gain under Division 115 provided that the shareholder acquired the Iron Mountain share at least 12 months before the return of share capital payment was made (subsection 115-25(1) of the ITAA 1997) and the other conditions of that Division are satisfied. Foreign or temporary resident individuals must meet further conditions to apply the CGT discount - for CGT events occurring after 8 May 2012, the application of a CGT discount percentage will depend on: | CGT event C2 - section 104-25 of the ITAA 1997: 78. CGT event C2 happened when the return of share capital payment was made (section 104-25 of the ITAA 1997) to a Iron Mountain shareholder that held the share at the Record Date but no longer owned the share at the Payment Date. The right to receive the return of share capital is one of the rights inherent in an Iron Mountain share held at the Record Date. If, after the Record Date but before the Payment Date, an Iron Mountain shareholder ceased to own an Iron Mountain share in respect of which the return of share capital was payable, the right to receive the return of share capital was retained by that shareholder and the right constitutes a separate CGT asset. 79. The right to receive the payment ended by the right being discharged or satisfied when the payment was made. 80. An Iron Mountain 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. An Iron Mountain shareholder will make a capital loss if the capital proceeds from the ending of the right are less than the reduced cost base of the right. The capital loss is equal to the amount of the difference (subsection 104-25(3) of the ITAA 1997). 81. In working out the capital gain or capital loss made when CGT event C2 happened, the capital proceeds will be the amount of the return of share capital (subsection 116-20(1) of the ITAA 1997). 82. The cost base of the Iron Mountain shareholder's right to receive the return of share capital is worked out under Division 110 (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 an Iron Mountain shareholder that was applied in working out a capital gain or capital loss made when a CGT event happened to the share (when the Iron Mountain shareholder ceased to own the share) for example when the Iron Mountain shareholder disposed of the share after the Record Date. 83. Therefore, if the entire cost base or reduced cost base of the Iron Mountain share was applied in working out a capital gain or capital loss when a CGT event happened to that share, then the right to receive the return of share capital is likely to result in a cost base of nil. Therefore, the Iron Mountain shareholder will generally make a capital gain equal to the amount of the return of share capital payment of 1 cent per share. 84. As the right to receive the payment of the return of share capital was inherent in the Iron Mountain 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 Iron Mountain share was acquired at least 12 months before the payment of the return of share capital, a capital gain made from the ending of the corresponding right satisfies the requirements of section 115-25 of the ITAA 1997. The capital gain may 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. As discussed in paragraph 77 of this Explanation, from 8 May 2012, foreign or temporary resident individuals must meet further conditions to apply the CGT discount. | Foreign resident shareholders: 85. Under subsection 855-10(1) of the ITAA 1997, an entity disregards a capital gain or capital loss made from a CGT event if: 86. 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: 87. A foreign resident, or the trustee of a foreign resident trust for CGT purposes, cannot disregard a capital gain or capital loss made when a CGT event G1 happened to their Iron Mountain share under subsection 855-10(1) if: 88. A foreign resident, or trustee of a foreign resident trust for CGT purposes, cannot disregard a capital gain or capital loss made when a CGT event C2 happened to their right to receive the return of capital payment if: 89. 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: Distribution of capital is not a dividend: 28. The return of share capital payment made to Iron Mountain shareholders will not be a dividend as defined in subsection 6(1). | The application of sections 45A, 45B and 45C: 29. The Commissioner will not make a determination under subsection 45A(2) or subsection 45B(3) that section 45C applies to the whole or any part of the return of share capital received by Iron Mountain shareholders. Accordingly, no part of the capital return will be taken to be a dividend for income tax purposes. | Capital gains tax (CGT) consequences: 30. CGT event G1 (section 104-135 of the ITAA 1997) happened when Iron Mountain made the return of share capital payment to a Iron Mountain shareholder in respect of a share owned by the shareholder at the Record Date which the shareholder continued to own on the Payment Date. 31. CGT event C2 (section 104-25 of the ITAA 1997) happened when Iron Mountain made the return of share capital payment to a Iron Mountain shareholder that owned a share at the Record Date, but no longer owned the share on the Payment Date. | Foreign resident shareholders: 32. A foreign resident Iron Mountain shareholder who received the return of capital payment may disregard any capital gain made when CGT event G1 happened if their Iron Mountain share did not constitute 'taxable Australian property' (section 855-10 of the ITAA 1997). 33. A foreign resident Iron Mountain shareholder who received the return of capital payment may disregard any capital gain or capital loss made when CGT event C2 happened if their right to receive the payment was not 'taxable Australian property' (section 855-10 of the ITAA 1997). Commissioner of Taxation 19 March 2014


Appendix: Distribution is not dividend: 34. Subsection 44(1) includes in a shareholder's assessable income any dividends, as defined in subsection 6(1), paid to the shareholder 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). 35. 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. 36. 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. 37. Subsection 975-300(3) of the ITAA 1997 states that an account is generally taken not to be a share capital account if it is tainted. Iron Mountain has confirmed that its share capital account is not tainted within the meaning of Division 197 of the ITAA 1997. 38. The return of share capital payment was recorded as a debit to Iron Mountain's share capital account. As the share capital account of Iron Mountain was not tainted within the meaning of Division 197 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) applies. Accordingly, the return of share capital payment was not a dividend as defined in subsection 6(1). | Anti-avoidance provisions: 39. 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 return of capital amounts received by Iron Mountain shareholders as an unfranked dividend paid by the company out of profits. | Section 45A - streaming of dividends and capital benefits: 40. 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 the Disadvantaged Shareholders receive, or are likely to receive, dividends. 41. 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. Iron Mountain provided its shareholders with a 'capital benefit' as defined in paragraph 45A(3)(b) when Iron Mountain made the return of share capital payment to its shareholders. 42. The capital benefit will be provided to all Iron Mountain shareholders in the same proportion as their share holdings. 43. Accordingly, section 45A does not apply to the return of share capital payment 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 return of share capital. | Section 45B - scheme to provide capital benefits: 44. Section 45B applies where certain capital payments, including a return of share 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. Should section 45C apply, the capital benefit is taken to be a dividend. Specifically, the provision applies where: Each of these conditions is considered in paragraphs 45 to 76 of this Explanation. | Schemes to provide capital benefits: 45. 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. The return of capital payment constitutes a scheme. 46. 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: 47. As the return of share capital was debited to Iron Mountain's share capital account, Iron Mountain is taken to have provided each shareholder with a capital benefit under paragraph 45B(5)(b) in the form of a distribution of share capital. | Tax benefit: 48. A relevant taxpayer 'obtains a tax benefit' for the purposes of paragraph 45B(2)(b) as defined in subsection 45B(9) if: 49. As discussed in paragraph 47 of this Explanation, the return of capital to shareholders is a capital benefit. The tax consequences associated with a return of capital payment is that the cost base of the relevant shares are first reduced by the amount of the payment before any liability to capital gains tax arises. However, had the return of capital payment been a dividend instead, the shareholders would have been required to include the payment in their assessable income. Consequently, the receipt of the capital benefit results in shareholders obtaining a 'tax benefit'. | Relevant circumstances: 50. For the purposes of paragraph 45B(2)(c), the Commissioner is required to consider the 'relevant circumstances' set out in subsection 45B(8) to determine if any part of the scheme was entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit. 51. The test for purpose is an objective one. The question is whether objectively, it would be concluded that a person who entered into or carried out the scheme did so for the purpose of obtaining a tax benefit for the 'relevant taxpayer'. A 'relevant taxpayer' in this instance is an Iron Mountain shareholder. This requisite purpose does not have to be the most influential or prevailing purpose, the test will be met if it is more than a merely incidental purpose. 52. 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 Iron Mountain. The Commissioner cannot ascertain the purposes of Iron Mountain's numerous shareholders, all of whom voted on the proposed return of share capital payment under section 256C of the Corporations Act 2001 , and most if not all of whom participated in the return of share 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 voted in favour of the payment. 53. 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 return of share capital was made to all Iron Mountain shareholders, regardless of individual circumstances, paragraphs 45B(8)(c) to 45B(8)(e) do not incline for or against a conclusion as to purpose. The circumstances covered by paragraphs 45B(8)(i) and 45B(8)(j), which are concerned with the provision of ownership interests and demerger respectively, are not relevant. The relevant matters are those covered by the circumstances described in paragraphs 45B(8)(a), 45B(8)(b), 45B(8)(h) and 45B(8)(k). Paragraph 45B(8)(a) 54. Paragraph 45B(8)(a) refers to the extent to which the capital benefit is attributable to capital and to profits (realised or unrealised) of the company or of an associate (within the meaning of section 318) of the company. 55. To determine the extent to which a capital benefit is attributable to capital and to profits, it is necessary to consider the characteristics of share capital and profits, the availability of each in the circumstances of the company, and the context of the scheme. 56. Where a capital distribution is attributable to the disposal of business assets, a reasonable approach should be taken in determining the extent to which share capital was invested in the disposed assets and is available to be distributed to shareholders. 57. In the current circumstances, Iron Mountain had funds in excess of short term to medium term spending requirements due to funds received from the settlement of the Mount Richardson option agreement and the sale of the Wandoo tenement. The return of share capital payment was sourced from the Iron Mountain's existing net cash reserves. 58. Iron Mountain's consolidated accounts for the year to 30 June 2013 disclosed that the company incurred a loss before tax and also disclosed no retained earnings. 59. The consolidated entity did not have any retained profits as at 30 June 2013 and did not pay any dividends during the period. 60. When the return of capital payment was made on 28 January 2014, Iron Mountain had no realised or unrealised profits. 61. The fact that the accounts of Iron Mountain will not have either realised or unrealised profits suggests that the distribution will be attributable to capital. Paragraph 45B(8)(b) 62. 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. 63. Iron Mountain has no history of paying dividends. 64. Iron Mountain did not have retained profits available as at 30 June 2013. 65. Overall, Iron Mountain's circumstances do not suggest that the return of capital has been made in substitution for a dividend. Paragraph 45B(8)(h) 66. Paragraph 45B(8)(h) is concerned with whether the capital benefit was provided to a shareholder in circumstances where the shareholder's interest in the company was affected. If the shareholder continues to own the same number of shares and retains the same proportional interest in the company, the outcome is consistent with that which would be achieved in the context of a dividend. 67. Following the return of capital, no shares were cancelled. Furthermore, the individual interests as well as the relative interests of shareholders in Iron Mountain were not affected. Shareholders' rights and obligations in respect of their shares were not affected. The outcome was consistent with the payment of a dividend. 68. This circumstance inclines towards the conclusion as to purpose. Paragraph 45B(8)(k) 69. Paragraph 45B(8)(k) refers to the matters in subparagraphs 177D(2)(a) to (h). These are matters which require examination of a scheme 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. 70. The Commissioner should be satisfied that the scheme seeks to return an amount of capital released from the sale of the Mount Richardson tenement and the sale of the Wandoo tenement. Iron Mountain considers that the amount used to fund the return of capital payment will be in excess of Iron Mountain's ongoing operating requirements. The practical implications of the scheme for Iron Mountain and its shareholders are consistent with the scheme being, in form and substance, a return of capital. 71. Therefore, having regard to the relevant circumstances it cannot be concluded that the scheme was entered into or carried out for a more than incidental purpose of enabling Iron Mountain shareholders to obtain a tax benefit. Accordingly, the Commissioner should not make a determination under subsection 45B(3) that section 45C applies to the whole, or a part, of the return of capital payment. | Section 45C: 72. 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 return of capital payment 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: 73. CGT event G1 happened when Iron Mountain made the return of share capital payment to a Iron Mountain shareholder in respect of a share that the shareholder owned at the Record Date and continued to own at the time of Payment Date (section 104-135 of the ITAA 1997). 74. An Iron Mountain shareholder made a capital gain if the return of share capital is more than the cost base of the shareholder's Iron Mountain share. The amount of the capital gain is equal to the excess (subsection 104-135(3) of the ITAA 1997). 75. If an Iron Mountain shareholder made a capital gain when CGT event G1 happened, the cost base and reduced cost base of the Iron Mountain share is reduced to nil. An Iron Mountain shareholder cannot make a capital loss when CGT event G1 happened (subsection 104-135(3) of the ITAA 1997). 76. If the return of share capital payment is equal to or less than the cost base of the Iron Mountain share at the time of payment, the cost base and reduced cost base of the share will be reduced by the amount of the payment (subsection 104-135(4) of the ITAA 1997). Where the cost base and reduced cost base of an Iron Mountain share prior to the payment exceeds 1 cent per share, the cost base and reduced cost base is reduced by 1 cent. 77. A capital gain made when CGT event G1 happened will be eligible to be treated as a discount capital gain under Division 115 provided that the shareholder acquired the Iron Mountain share at least 12 months before the return of share capital payment was made (subsection 115-25(1) of the ITAA 1997) and the other conditions of that Division are satisfied. Foreign or temporary resident individuals must meet further conditions to apply the CGT discount - for CGT events occurring after 8 May 2012, the application of a CGT discount percentage will depend on: | CGT event C2 - section 104-25 of the ITAA 1997: 78. CGT event C2 happened when the return of share capital payment was made (section 104-25 of the ITAA 1997) to a Iron Mountain shareholder that held the share at the Record Date but no longer owned the share at the Payment Date. The right to receive the return of share capital is one of the rights inherent in an Iron Mountain share held at the Record Date. If, after the Record Date but before the Payment Date, an Iron Mountain shareholder ceased to own an Iron Mountain share in respect of which the return of share capital was payable, the right to receive the return of share capital was retained by that shareholder and the right constitutes a separate CGT asset. 79. The right to receive the payment ended by the right being discharged or satisfied when the payment was made. 80. An Iron Mountain 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. An Iron Mountain shareholder will make a capital loss if the capital proceeds from the ending of the right are less than the reduced cost base of the right. The capital loss is equal to the amount of the difference (subsection 104-25(3) of the ITAA 1997). 81. In working out the capital gain or capital loss made when CGT event C2 happened, the capital proceeds will be the amount of the return of share capital (subsection 116-20(1) of the ITAA 1997). 82. The cost base of the Iron Mountain shareholder's right to receive the return of share capital is worked out under Division 110 (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 an Iron Mountain shareholder that was applied in working out a capital gain or capital loss made when a CGT event happened to the share (when the Iron Mountain shareholder ceased to own the share) for example when the Iron Mountain shareholder disposed of the share after the Record Date. 83. Therefore, if the entire cost base or reduced cost base of the Iron Mountain share was applied in working out a capital gain or capital loss when a CGT event happened to that share, then the right to receive the return of share capital is likely to result in a cost base of nil. Therefore, the Iron Mountain shareholder will generally make a capital gain equal to the amount of the return of share capital payment of 1 cent per share. 84. As the right to receive the payment of the return of share capital was inherent in the Iron Mountain 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 Iron Mountain share was acquired at least 12 months before the payment of the return of share capital, a capital gain made from the ending of the corresponding right satisfies the requirements of section 115-25 of the ITAA 1997. The capital gain may 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. As discussed in paragraph 77 of this Explanation, from 8 May 2012, foreign or temporary resident individuals must meet further conditions to apply the CGT discount. | Foreign resident shareholders: 85. Under subsection 855-10(1) of the ITAA 1997, an entity disregards a capital gain or capital loss made from a CGT event if: 86. 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: 87. A foreign resident, or the trustee of a foreign resident trust for CGT purposes, cannot disregard a capital gain or capital loss made when a CGT event G1 happened to their Iron Mountain share under subsection 855-10(1) if: 88. A foreign resident, or trustee of a foreign resident trust for CGT purposes, cannot disregard a capital gain or capital loss made when a CGT event C2 happened to their right to receive the return of capital payment if:


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) (choosing to disregard a gain or loss on ceasing to be an Australian resident). | The application of section 45A, 45B and 45C | Distribution is not a dividend | Section 45B - schemes to provide capital benefits | 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 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 45B(3) ITAA 1936 45C ITAA 1936 128B ITAA 1936 177A(1) ITAA 1936 177D(2)(a) ITAA 1936 177D(2)(b) ITAA 1936 177D(2)(c) ITAA 1936 177D(2)(d) ITAA 1936 177D(2)(e) ITAA 1936 177D(2)(f) ITAA 1936 177D(2)(g) ITAA 1936 177D(2)(h) ITAA 1936 318 ITAA 1997 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 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
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