ATO Interpretative Decision
ATO ID 2002/860
Income Tax
Proposed share capital reductionFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Whether subsection 6(4) of the Income Tax Assessment Act 1936 ('ITAA 1936') will apply to deem a return of capital from the share capital account to be a dividend for income tax purposes.
Decision
No. Subsection 6(4) of the ITAA 1936 would not apply to deem the return of capital to be a dividend for income tax purposes.
Facts
The financing profile of the company was considered to be undergeared so that the company wished to obtain additional debt financing to increase its gearing levels to an optimum commercially acceptable level.
As such, the company proposed to borrow funds to undertake a distribution of share capital by way of a capital reduction and the return of capital has clearly been established as by way of borrowings and not paid out of profits.
Reasons for Decision
A dividend defined in subsection 6(1 ) of the ITAA 1936 includes any distribution made by a company to any of its shareholders but does not include moneys debited against an amount standing to the credit of the share capital account.
An exception exists in terms of subsection 6(4) if paid under an arrangement between the parties involved.
The previous shareholder contributed the capital by way of a debt/equity swap which was not related to the distribution to be paid out of the share capital account.
Date of decision: 29 June 2001Year of income: Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1936
Subsection 6(1)
Subsection 6(4)
ATO ID 2002/857
ATO ID 2002/858
ATO ID 2002/859
Keywords
Share capital
Capital reductions
Tainted share capital account
ISSN: 1445-2782