ATO Interpretative Decision

ATO ID 2004/653

Income Tax

Return of Capital - section 45A does not apply
FOI status: may be released
Status of this decision: Decision Current

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Issue

Does section 45A of the Income Tax Assessment Act 1936 (ITAA 1936) apply such that the Commissioner is able to make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the amount of a return of capital as an unfranked dividend paid out of the profits of the company?

Decision

No. Section 45A of the ITAA 1936 does not apply to treat the amount of a return of capital as an unfranked dividend paid out of the profits of the company.

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 its existing borrowing facilities.

Reasons for Decision

Section 45A of the ITAA 1936 applies in circumstances where capital benefits are streamed to certain shareholders who derive a greater benefit from the receipt of capital (the advantaged shareholders) and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or would receive dividends.

By distributing an amount as a return of capital, the company will provide shareholders with a 'capital benefit' (as defined in paragraph 45A(3)(b) of ITAA 1936). However, there is nothing in the arrangement to indicate that there is a 'streaming' of capital benefits to some shareholders and dividends to other shareholders as all shareholders will receive the capital return in direct proportion to their shareholding. Therefore section 45A of the ITAA 1936 does not apply to the distribution.

Date of decision: 08 April 2004

Year of income: Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
section 45A

Related ATO Interpretative Decisions
ATO ID 2002/857

Keywords
Share capital
Capital reductions
Return of capital on shares

Siebel/TDMS Reference Number: 3973112

Business Line: Public Groups and International

Date of publication: 6 August 2004

ISSN: 1445-2782

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