Class Ruling CR 2014/108
Date of effect: 1 July 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 provisions 2. The relevant provisions dealt with in this ruling are: Legislative references are to provisions of the ITAA 1936 unless specified otherwise. Class of entities 3. The class of entities to which this Ruling applies are shareholders of Asset Resolution Limited ( ARL ) who: In this Ruling, a person belonging to this class of entities is referred to as an 'ARL 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 29 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 Asset Resolution Limited ( ARL ) who: In this Ruling, a person belonging to this class of entities is referred to as an 'ARL 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 29 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 1 July 2014 to 30 June 2015. The Ruling continues to apply after 30 June 2015 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. Asset Resolution Limited (ARL) is an unlisted, special purpose turnaround and recovery vehicle company. In its 2014 Annual Report , ARL disclosed its principal activities during the year ended 30 June 2014 was: 10. On 4 September 2012, ARL issued 830,532,768 shares to Wellington Capital Limited as responsible entity for the Premium Income Fund (PI Fund) in exchange for receiving various assets. 11. The assets included a number of mortgages and debts owed on various real properties or ventures, and rights in respect of certain legal proceedings. 12. The assets were transferred to ARL at market value on 4 September 2012 of $50,465,000. 13. The PI Fund made an in specie distribution of the 830,532,768 shares to unitholders in the PI Fund on 5 September 2012. 14. On 19 December 2012, ARL issued 150,025,399 shares (the 'additional shares') to Perpetual Nominees Ltd (PNL) as custodian for the PI Fund in exchange for receiving various additional assets. 15. The additional assets included facilities and securities relating to the Forest Resort Hotel. 16. The additional assets were transferred to ARL at market value on 19 December 2012 of $4,940,000. 17. PNL continues to hold the additional shares. 18. The PI Fund disclosed in its 2014 Annual Report that the market value amounts for the transfer of both the assets and the additional assets were recorded as a reduction to the Contributed Equity of the PI Fund in the year ended 30 June 2013. 19. The PI Fund was originally called the MFS Premium Income Fund. The PI Fund is a managed investment scheme that was established in 1999. Units in the PI Fund are traded on the National Stock Exchange of Australia (NSX) under the ticker PIN. 20. The in specie distribution of ARL shares to unitholders was subject to litigation under specific provisions of Australian corporations legislation. On 5 November 2014, the High Court of Australia made orders in Wellington Capital Limited v. Australian Securities and Investment Commission [2014] HCA 43 such that the declarations of the Full Court of the Federal Court of Australia stand. Those declarations have the effect for present purposes that the in specie distribution of the 830,532,768 shares to unitholders in the PI Fund on 5 September 2012 remains in place. Further, the decision of the High Court of Australia does not impugn the validity of the transfer of legal title in the shares in ARL to unitholders in the PI Fund. 21. In its 2014 Annual Report , ARL disclosed: 22. At Notes 1(a) and 1(d) to its 2014 Annual Report , ARL also disclosed that: 23. As disclosed in the PI Fund 'Investor Update' dated 5 September 2012, when ARL completes recovery and turnaround of its loan assets including sales of underlying securities (being real properties), ARL will cease to trade. 24. At the AGM held at 11:00am on 28 November 2014, ARL shareholders approved a resolution to make a return of share capital payment of $9,805,581.67 (that is, 1 cent per ARL share) to ARL shareholders at the Record Date as at 05:00pm on 28 November 2014. 25. ARL shareholders received the return of share capital payment on the Implementation Date, 11 December 2014. 26. Prior to the return of share capital payment made on 11 December 2014, ARL has not made any dividend or other distributions to its shareholders. 27. When the return of share capital payment was made on 11 December 2014, ARL did not have retained profits. Further, ARL's accumulated losses had not reduced from the amount disclosed as at 30 June 2014. 28. Foreign residents hold less than 2% of shares on issue in ARL. 29. ARL's share capital account is not tainted for the purposes of Division 197 of the ITAA 1997. | Return of share capital payment not a dividend: 30. The return of share capital payment made to ARL shareholders will not be a dividend as defined in subsection 6(1). | The application of sections 45B and 45C: 31. The Commissioner will not make a determination under subsection 45B(3) that section 45C applies to the whole or any part of the return of share capital received by ARL shareholders. Accordingly, no part of the capital return will be taken to be a dividend for income tax purposes. | Capital gains tax (CGT) consequences: 32. CGT event G1 (section 104-135 of the ITAA 1997) happened when ARL made the return of share capital payment to an ARL shareholder in respect of a share owned by the shareholder at the Record Date which the shareholder continued to own on the Payment Date. 33. CGT event C2 (section 104-25 of the ITAA 1997) happened when ARL made the return of share capital payment to an ARL shareholder that owned a share at the Record Date, but no longer owned the share on the Payment Date. | Foreign resident shareholders: 34. A foreign resident ARL shareholder who received the return of share capital payment may disregard any capital gain made when CGT event G1 happened if their ARL share did not constitute 'taxable Australian property' (section 855-10 of the ITAA 1997). 35. A foreign resident ARL shareholder who received the return of share 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 17 December 2014 | Return of share capital payment not a dividend: 36. 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). 37. 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. 38. 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. 39. 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. ARL has confirmed that its share capital account is not tainted within the meaning of Division 197 of the ITAA 1997. 40. The return of share capital payment was recorded as a debit to ARL's share capital account. As the share capital account of ARL 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). | Section 45B - scheme to provide capital benefits: 41. 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: 42. Each of these conditions is considered in paragraphs 43 to 77 of this Explanation. | Schemes to provide capital benefits: 43. 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 share capital payment constitutes a scheme. 44. 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: 45. As the return of share capital was debited to ARL's share capital account, ARL 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: 46. A relevant taxpayer 'obtains a tax benefit' for the purposes of paragraph 45B(2)(b) as defined in subsection 45B(9) if: would, apart from the operation of section 45B, be less than the amount that would: if the capital benefit had instead been a dividend. 47. As discussed in paragraphs 44-45 of this Explanation, the return of share capital payment to shareholders is a capital benefit. The tax consequences associated with a return of share 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 share capital payment been a dividend instead, the shareholders would have been required to include the payment in their assessable income. Consequently, when contrasted with the receipt of a dividend, the receipt of the capital benefit results in ARL shareholders obtaining a 'tax benefit'. | Relevant circumstances: 48. Paragraph 45B(2)(c) requires a conclusion as to whether 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 with regard to the 'relevant circumstances of the scheme'. Subsection 45B(8) sets out a list of factors for consideration for the 'relevant circumstances of the scheme'. 49. 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 ARL shareholder. The 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. 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 ARL. The Commissioner cannot ascertain the purposes of ARL's numerous shareholders, all of whom voted on the proposed return of share capital payment in accordance with section 256C of the Corporations Act 2001 and 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. 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 return of share capital was made to all ARL shareholders, regardless of individual circumstances, paragraph 45B(8)(c) does not incline for or against a conclusion as to purpose. The circumstances covered by paragraph 45B(8)(d) which is concerned with Pre-CGT shares is not relevant as all ARL shares are Post-CGT shares, as the PI Fund was established in 1999 and ARL shares were subject to an in specie distribution made by the PI Fund in September 2012. 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(e), 45B(f), 45B(8)(h) and 45B(8)(k). Paragraph 45B(8)(a) 52. 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. 53. 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. 54. 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. 55. In the current circumstances, ARL is a specialist recovery and turnaround vehicle which has generated cash flow from the realisation of the underlying securities (or real properties) for mortgage loan assets as well as the proceeds from certain legal proceedings. The cash flows were generated where the mortgage loans were significantly impaired or realised at a loss, and a modest gain on some mortgage loans was offset by operating costs. The return of share capital payment was sourced from the ARL's cash flows. 56. ARL's 2014 Annual Report for the year to 30 June 2014 disclosed that the company incurred a loss before tax and also disclosed no retained earnings. 57. ARL also did not have any retained profits as at 30 June 2013, and has not paid any dividends or made any other distributions to ARL shareholders since the in specie distribution of ARL shares in September 2012. 58. When the return of share capital payment was made on 11 December 2014, ARL had no realised or unrealised profits, nor had ARL's accumulated losses reduced since 30 June 2014. 59. The absence of realised or unrealised profits suggests that this circumstance does not incline towards the conclusion as to requisite purpose. Paragraph 45B(8)(b) 60. 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. 61. ARL has no history of paying dividends or other distributions. 62. ARL did not have retained profits available as at 30 June 2014 or at 11 December 2014 when the return of share capital payment was made. 63. Overall, ARL's circumstances do not suggest that this circumstance does not incline towards the conclusion as to requisite purpose. Paragraph 45B(8)(e) 64. Paragraph 45B(8)(e) is concerned with whether the shareholders of ARL are non-residents. 65. The implication of non-residency is that it would normally point towards a tax preference for a distribution of capital over profit. Non-residents are normally taxed on dividends at the rate of 15%, but they are not exposed to capital gains on the disposal of shares unless those shares are 'indirect Australian real property interests' as defined in section 855-25 of the ITAA 1997. 66. Less than 2% of shares in ARL is held by a number of non-residents. 67. This circumstance does not incline towards the conclusion as to requisite purpose. Paragraph 45B(8)(f) 68. Paragraph 45B(8)(f) is concerned in this instance with whether the cost base of the ARL shares is not substantially less than the capital benefit of the return of share capital payment of 1 cent per ARL share. 69. Where the cost base of ARL shares is similar or greater in value than the capital benefit provided, the capital distribution will not expose the relevant taxpayer to a capital gain under CGT event G1 (or CGT event C2 where the capital benefit is provided to an ARL shareholder that no longer holds ARL shares). This could point towards a tax preference for capital over profit. 70. Based on the market values of the assets transferred to ARL when shares were issued to the PI Fund and those shares subsequently distributed in specie to unitholders in the PI Fund and to PNL as custodian for the PI Fund, and the somewhat limited trading in ARL shares, the cost base of each ARL share will most likely exceed the return of share capital payment of 1 cent. That is, the cost base of each ARL share was not substantially less than the return of share capital payment of 1 cent per ARL share. 71. This circumstance inclines moderately towards the conclusion as to requisite purpose. Paragraph 45B(8)(h) 72. 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. 73. Following the return of share capital, no shares were cancelled. Furthermore, the individual interests as well as the relative interests of shareholders in ARL 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. 74. This circumstance inclines moderately towards the conclusion as to purpose. Paragraph 45B(8)(k) 75. 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. 76. In drawing a conclusion as to requisite purpose, the Commissioner should be satisfied that the scheme seeks to return an amount of capital released from cash flows arising from the realisation of the underlying securities (or real properties) for mortgage loan assets as well as the proceeds from certain legal proceedings in circumstances where the market values of the mortgage loans exceed the amounts realised. ARL considers that the amount used to fund the return of share capital payment is consistent with its operations as a specialist recovery and turnaround vehicle. The practical implications of the scheme for ARL and its shareholders are consistent with the scheme being, in form and substance, a return of share capital. 77. Therefore, having regard to the relevant circumstances as set out in paragraphs 48 to 76 above, it cannot be concluded that the scheme was entered into or carried out for a more than incidental purpose of enabling ARL 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 a part, of the return of share capital payment. | Section 45C: 78. As the Commissioner will not make a determination subsection 45B(3) in relation to the scheme as described, section 45C will not deem any part of the return of share 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: 79. CGT event G1 happened when ARL made the return of share capital payment to an ARL shareholder in respect of a share that the shareholder owned at the Record Date (5:00pm on 28 November 2014) and continued to own at the time of Payment Date on 11 December 2014 (section 104-135 of the ITAA 1997). 80. An ARL shareholder made a capital gain if the return of share capital is more than the cost base of the shareholder's ARL share. The amount of the capital gain is equal to the excess (subsection 104-135(3) of the ITAA 1997). 81. If an ARL shareholder made a capital gain when CGT event G1 happened, the cost base and reduced cost base of the ARL share is reduced to nil. An ARL shareholder cannot make a capital loss when CGT event G1 happened (subsection 104-135(3) of the ITAA 1997). 82. If the return of share capital payment is equal to or less than the cost base of the ARL 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 ARL share prior to the payment exceeds 1 cent per share, the cost base and reduced cost base is reduced by 1 cent. 83. 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 provided that the shareholder acquired the ARL 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: 84. CGT event C2 happened when the return of share capital payment was made (section 104-25 of the ITAA 1997) to an ARL shareholder that held the share at the Record Date (5:00pm on 28 November 2014) but no longer owned the share at the Payment Date on 11 December 2014. The right to receive the return of share capital is one of the rights inherent in an ARL share held at the Record Date. If, after the Record Date but before the Payment Date, an ARL shareholder ceased to own an ARL 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. 85. The right to receive the payment ended when the right was discharged or satisfied when the payment was made. 86. An ARL shareholder made 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 ARL 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). 87. 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 of 1 cent per ARL share (subsection 116-20(1) of the ITAA 1997). 88. The cost base of the ARL 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 ARL shareholder that was applied in working out a capital gain or capital loss made when a CGT event happened to the share (when the ARL shareholder ceased to own the share) for example when the ARL shareholder disposed of the share after the Record Date. 89. Therefore, if the entire cost base or reduced cost base of the ARL 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 ARL shareholder will generally make a capital gain equal to the amount of the return of share capital payment of 1 cent per share. 90. As the right to receive the payment of the return of share capital was inherent in the ARL 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 ARL 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 83 of this Explanation, from 8 May 2012, foreign or temporary resident individuals must meet further conditions to apply the CGT discount. | Foreign resident shareholders: 91. Under subsection 855-10(1) of the ITAA 1997, an entity disregards a capital gain or capital loss made from a CGT event if: 92. 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: 93. 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 ARL shares under subsection 855-10(1) if: 94. 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 share capital payment if: 95. 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 share capital payment not a dividend: 30. The return of share capital payment made to ARL shareholders will not be a dividend as defined in subsection 6(1). | The application of sections 45B and 45C: 31. The Commissioner will not make a determination under subsection 45B(3) that section 45C applies to the whole or any part of the return of share capital received by ARL shareholders. Accordingly, no part of the capital return will be taken to be a dividend for income tax purposes. | Capital gains tax (CGT) consequences: 32. CGT event G1 (section 104-135 of the ITAA 1997) happened when ARL made the return of share capital payment to an ARL shareholder in respect of a share owned by the shareholder at the Record Date which the shareholder continued to own on the Payment Date. 33. CGT event C2 (section 104-25 of the ITAA 1997) happened when ARL made the return of share capital payment to an ARL shareholder that owned a share at the Record Date, but no longer owned the share on the Payment Date. | Foreign resident shareholders: 34. A foreign resident ARL shareholder who received the return of share capital payment may disregard any capital gain made when CGT event G1 happened if their ARL share did not constitute 'taxable Australian property' (section 855-10 of the ITAA 1997). 35. A foreign resident ARL shareholder who received the return of share 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 17 December 2014


Appendix: Return of share capital payment not a dividend: 36. 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). 37. 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. 38. 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. 39. 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. ARL has confirmed that its share capital account is not tainted within the meaning of Division 197 of the ITAA 1997. 40. The return of share capital payment was recorded as a debit to ARL's share capital account. As the share capital account of ARL 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). | Section 45B - scheme to provide capital benefits: 41. 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: 42. Each of these conditions is considered in paragraphs 43 to 77 of this Explanation. | Schemes to provide capital benefits: 43. 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 share capital payment constitutes a scheme. 44. 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: 45. As the return of share capital was debited to ARL's share capital account, ARL 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: 46. A relevant taxpayer 'obtains a tax benefit' for the purposes of paragraph 45B(2)(b) as defined in subsection 45B(9) if: would, apart from the operation of section 45B, be less than the amount that would: if the capital benefit had instead been a dividend. 47. As discussed in paragraphs 44-45 of this Explanation, the return of share capital payment to shareholders is a capital benefit. The tax consequences associated with a return of share 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 share capital payment been a dividend instead, the shareholders would have been required to include the payment in their assessable income. Consequently, when contrasted with the receipt of a dividend, the receipt of the capital benefit results in ARL shareholders obtaining a 'tax benefit'. | Relevant circumstances: 48. Paragraph 45B(2)(c) requires a conclusion as to whether 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 with regard to the 'relevant circumstances of the scheme'. Subsection 45B(8) sets out a list of factors for consideration for the 'relevant circumstances of the scheme'. 49. 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 ARL shareholder. The 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. 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 ARL. The Commissioner cannot ascertain the purposes of ARL's numerous shareholders, all of whom voted on the proposed return of share capital payment in accordance with section 256C of the Corporations Act 2001 and 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. 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 return of share capital was made to all ARL shareholders, regardless of individual circumstances, paragraph 45B(8)(c) does not incline for or against a conclusion as to purpose. The circumstances covered by paragraph 45B(8)(d) which is concerned with Pre-CGT shares is not relevant as all ARL shares are Post-CGT shares, as the PI Fund was established in 1999 and ARL shares were subject to an in specie distribution made by the PI Fund in September 2012. 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(e), 45B(f), 45B(8)(h) and 45B(8)(k). Paragraph 45B(8)(a) 52. 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. 53. 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. 54. 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. 55. In the current circumstances, ARL is a specialist recovery and turnaround vehicle which has generated cash flow from the realisation of the underlying securities (or real properties) for mortgage loan assets as well as the proceeds from certain legal proceedings. The cash flows were generated where the mortgage loans were significantly impaired or realised at a loss, and a modest gain on some mortgage loans was offset by operating costs. The return of share capital payment was sourced from the ARL's cash flows. 56. ARL's 2014 Annual Report for the year to 30 June 2014 disclosed that the company incurred a loss before tax and also disclosed no retained earnings. 57. ARL also did not have any retained profits as at 30 June 2013, and has not paid any dividends or made any other distributions to ARL shareholders since the in specie distribution of ARL shares in September 2012. 58. When the return of share capital payment was made on 11 December 2014, ARL had no realised or unrealised profits, nor had ARL's accumulated losses reduced since 30 June 2014. 59. The absence of realised or unrealised profits suggests that this circumstance does not incline towards the conclusion as to requisite purpose. Paragraph 45B(8)(b) 60. 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. 61. ARL has no history of paying dividends or other distributions. 62. ARL did not have retained profits available as at 30 June 2014 or at 11 December 2014 when the return of share capital payment was made. 63. Overall, ARL's circumstances do not suggest that this circumstance does not incline towards the conclusion as to requisite purpose. Paragraph 45B(8)(e) 64. Paragraph 45B(8)(e) is concerned with whether the shareholders of ARL are non-residents. 65. The implication of non-residency is that it would normally point towards a tax preference for a distribution of capital over profit. Non-residents are normally taxed on dividends at the rate of 15%, but they are not exposed to capital gains on the disposal of shares unless those shares are 'indirect Australian real property interests' as defined in section 855-25 of the ITAA 1997. 66. Less than 2% of shares in ARL is held by a number of non-residents. 67. This circumstance does not incline towards the conclusion as to requisite purpose. Paragraph 45B(8)(f) 68. Paragraph 45B(8)(f) is concerned in this instance with whether the cost base of the ARL shares is not substantially less than the capital benefit of the return of share capital payment of 1 cent per ARL share. 69. Where the cost base of ARL shares is similar or greater in value than the capital benefit provided, the capital distribution will not expose the relevant taxpayer to a capital gain under CGT event G1 (or CGT event C2 where the capital benefit is provided to an ARL shareholder that no longer holds ARL shares). This could point towards a tax preference for capital over profit. 70. Based on the market values of the assets transferred to ARL when shares were issued to the PI Fund and those shares subsequently distributed in specie to unitholders in the PI Fund and to PNL as custodian for the PI Fund, and the somewhat limited trading in ARL shares, the cost base of each ARL share will most likely exceed the return of share capital payment of 1 cent. That is, the cost base of each ARL share was not substantially less than the return of share capital payment of 1 cent per ARL share. 71. This circumstance inclines moderately towards the conclusion as to requisite purpose. Paragraph 45B(8)(h) 72. 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. 73. Following the return of share capital, no shares were cancelled. Furthermore, the individual interests as well as the relative interests of shareholders in ARL 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. 74. This circumstance inclines moderately towards the conclusion as to purpose. Paragraph 45B(8)(k) 75. 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. 76. In drawing a conclusion as to requisite purpose, the Commissioner should be satisfied that the scheme seeks to return an amount of capital released from cash flows arising from the realisation of the underlying securities (or real properties) for mortgage loan assets as well as the proceeds from certain legal proceedings in circumstances where the market values of the mortgage loans exceed the amounts realised. ARL considers that the amount used to fund the return of share capital payment is consistent with its operations as a specialist recovery and turnaround vehicle. The practical implications of the scheme for ARL and its shareholders are consistent with the scheme being, in form and substance, a return of share capital. 77. Therefore, having regard to the relevant circumstances as set out in paragraphs 48 to 76 above, it cannot be concluded that the scheme was entered into or carried out for a more than incidental purpose of enabling ARL 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 a part, of the return of share capital payment. | Section 45C: 78. As the Commissioner will not make a determination subsection 45B(3) in relation to the scheme as described, section 45C will not deem any part of the return of share 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: 79. CGT event G1 happened when ARL made the return of share capital payment to an ARL shareholder in respect of a share that the shareholder owned at the Record Date (5:00pm on 28 November 2014) and continued to own at the time of Payment Date on 11 December 2014 (section 104-135 of the ITAA 1997). 80. An ARL shareholder made a capital gain if the return of share capital is more than the cost base of the shareholder's ARL share. The amount of the capital gain is equal to the excess (subsection 104-135(3) of the ITAA 1997). 81. If an ARL shareholder made a capital gain when CGT event G1 happened, the cost base and reduced cost base of the ARL share is reduced to nil. An ARL shareholder cannot make a capital loss when CGT event G1 happened (subsection 104-135(3) of the ITAA 1997). 82. If the return of share capital payment is equal to or less than the cost base of the ARL 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 ARL share prior to the payment exceeds 1 cent per share, the cost base and reduced cost base is reduced by 1 cent. 83. 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 provided that the shareholder acquired the ARL 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: 84. CGT event C2 happened when the return of share capital payment was made (section 104-25 of the ITAA 1997) to an ARL shareholder that held the share at the Record Date (5:00pm on 28 November 2014) but no longer owned the share at the Payment Date on 11 December 2014. The right to receive the return of share capital is one of the rights inherent in an ARL share held at the Record Date. If, after the Record Date but before the Payment Date, an ARL shareholder ceased to own an ARL 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. 85. The right to receive the payment ended when the right was discharged or satisfied when the payment was made. 86. An ARL shareholder made 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 ARL 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). 87. 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 of 1 cent per ARL share (subsection 116-20(1) of the ITAA 1997). 88. The cost base of the ARL 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 ARL shareholder that was applied in working out a capital gain or capital loss made when a CGT event happened to the share (when the ARL shareholder ceased to own the share) for example when the ARL shareholder disposed of the share after the Record Date. 89. Therefore, if the entire cost base or reduced cost base of the ARL 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 ARL shareholder will generally make a capital gain equal to the amount of the return of share capital payment of 1 cent per share. 90. As the right to receive the payment of the return of share capital was inherent in the ARL 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 ARL 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 83 of this Explanation, from 8 May 2012, foreign or temporary resident individuals must meet further conditions to apply the CGT discount. | Foreign resident shareholders: 91. Under subsection 855-10(1) of the ITAA 1997, an entity disregards a capital gain or capital loss made from a CGT event if: 92. 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: 93. 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 ARL shares under subsection 855-10(1) if: 94. 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 share 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. | ... holding; improving; and realising various assets securing mortgage loans. Each of the Company's mortgage loans have been in default prior to their assignment to the Company ... | The net gain or loss on disposal or settlement of an asset, other than mortgage loan security assets, is included as either a revenue or an expense at the date control of the asset passes to the buyer, usually when an unconditional contract of sale is signed, or when final settlement of the loan is achieved. | The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal (including incidental costs). | Receipts collected and payments made in relation to the management of the asset held as underlying security for the mortgage loans, have been included in the mortgage loan's carrying value calculation. The carrying value of the loan is then subject to impairment considerations as noted. | 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). | Appendix 2 - Detailed contents list | Legislative References: ITAA 1936 ITAA 1936 6(1) ITAA 1936 44(1) 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)(h) ITAA 1936 45B(8)(h) ITAA 1936 45B(8)(k) ITAA 1936 45B(9) ITAA 1936 45C ITAA 1936 45C(3) 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 Corporations Act 2001


Related rulings: TR 2006/10
Legislative references: Legislative references are to provisions of the ITAA 1936 unless specified otherwise.
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