ATO Interpretative Decision
ATO ID 2004/652
Income Tax
Return of Capital: not a dividendFOI status: may be released
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This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 paid by a company to its shareholders fall within the definition of dividend in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. A return of capital paid by a company to its shareholders falls within the exclusion in paragraph (d) in the definition of dividend in subsection 6(1) of the ITAA 1936.
Facts
The company distributed funds to its shareholders as a return of capital in proportion to their shareholding.
The return of capital was debited to the company's share capital account and funded out of the company's existing borrowing facilities.
The company had not transferred any amount to its share capital account that could constitute the tainting of the share capital account.
Reasons for Decision
The distribution was debited against an amount standing to the credit of the company's share capital account.
The definition of a 'dividend' contained in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders but excludes moneys debited against an amount standing to the credit of the share capital account.
By virtue of paragraph (d) of the definition of a dividend contained in subsection 6(1) of the ITAA 1936, moneys debited against an amount standing to the credit of the share capital account are not defined as dividends except to the extent that subsection 6(4) of the ITAA 1936 excludes those monies from this definition.
In this instance the paragraph (d) exclusion does not apply as the arrangement is not one that triggers the operation of subsection 6(4) of the ITAA 1936, that is, the capital reduction is not part of an arrangement where:
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- a person pays or credits any money or gives property to the company and the company credits its share capital account with the amount of the money or the value of the property; and
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- the company pays or credits any money, or distributes property to another person, and debits its share capital account with the amount of the money or the value of the property so paid, credited or distributed.
As subsection 6(4) of the ITAA 1936 does not apply to negate the effect of paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936, the moneys paid by the company to its shareholders as a capital return do not constitute a dividend under subsection 6(1) of the ITAA 1936.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 9 June 2017 | Reasons for decision | Add "1936" after "subsection 6(4) of the ITAA" in paragraph three. |
| Date reviewed | Change from "25 September 2014" to "2 June 2017". |
Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1936
subsection 6(1)
subsection 6(4)
ATO ID 2002/860
Keywords
Share capital
Capital reductions
Dividend income
Date reviewed: 2 June 2017
ISSN: 1445-2782
| Date: | Version: | |
| 8 April 2004 | Original statement | |
| You are here | 9 June 2017 | Updated statement |