ATO Interpretative Decision
ATO ID 2002/858
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Will a return of capital trigger the application of section 45B of the Income Tax Assessment Act 1936 ('ITAA 1936') to enable the Commissioner to regard the capital reduction as paid in substitution for dividends that would be treated as dividends for taxation purposes?
Decision
No. It is accepted that section 45B will not apply in respect of the return of capital and the distribution will not be treated as a dividend for income tax purposes.
Facts
The sole shareholder had acquired all the issued share capital from a company incorporated and resident in the USA. Following the acquisition the company was subsequently "migrated" to Australia and is now an Australian resident. Additional capital had resulted from earlier conversions to equity of all debt resulting in the company being 100% financed by equity.
Retained earnings have been accumulated since incorporation in the USA and there is no pattern of distribution of dividends 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.
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 has not been paid out of profits.
Reasons for Decision
The distribution paid out of capital had been motivated by commercial objectives and was achieved by way of specific borrowings for that purpose. While mutually accepted that a scheme exists in respect of the capital benefit paid to the sole shareholder and a tax benefit would result in the year ended 30 June 2001, para.45B(2)(c ) was not applied in view of the dominant purpose of the capital reduction ie. to introduce commercial debt levels into the company.
The Commissioner will not make a determination in terms of subsection 45B(3) that section 45C applies in relation to the capital benefit.
Date of decision: 29 June 2001Year of income: Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1936
Section 45B
Section 45C
ATO ID 2002/857
ATO ID 2002/859
ATO ID 2002/860
Keywords
Share capital
Capital reduction
ISSN: 1445-2782