Edited version of your private ruling

Authorisation Number: 1012565356536

Ruling

Subject: Return of capital

Question 1

Will the Commissioner make a determination pursuant to subsection 45B(3) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C of the ITAA 1936 applies to the return of capital by Company Y?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

Overview

· Company Y is a privately owned investment company.

· All of the Company Y shareholders are non-residents for Australian tax purposes.

Dividend history

· Company Y has paid dividends to its shareholders over the past 5 years (including an expected dividend for the 20XX financial year).

Return of capital

· Company Y has an amount of share capital that is surplus to its needs.

· Company Y used a portion of its share capital to acquire shares in a private company (Company Z).

· A third party has offered to purchase Company Y's shares in Company Z during the financial year ended 30 June 20XX.

· From the sale proceeds, the Directors would like to return the capital to shareholders in proportion to their shares. The shares would not be cancelled.

Other matters

· Company Y's share capital account, or equivalent account, is not tainted within the meaning of Division 197 of the Income Tax Assessment Act 1997 (ITAA 1997).

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1997 Division 197

Reasons for decision

Distribution of capital is not a dividend

1. Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividends, as defined in subsection 6(1) of the ITAA 1936, paid to the shareholder out of profits derived by the company from any source (if the shareholder is a resident of Australia).

2. The term 'dividend' in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders. However, later paragraphs in this subsection exclude certain items from being a dividend for tax purposes.

3. Relevantly, paragraph (d) of subsection 6(1) of the ITAA 1936 specifically excludes from the definition of 'dividend':

moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company…

4. The exclusion in paragraph (d) of the definition of dividend is limited by subsection 6(4) of the ITAA 1936 which applies in circumstances where, under an arrangement:

· a company raises share capital, receiving either cash or property from a person or group of persons crediting it to its share capital account; and

· returns it to another person or group of persons, giving them either cash or property, debiting it to its share capital account.

5. In the present circumstances an arrangement of the type contemplated by subsection 6(4) is not apparent. Accordingly, subsection 6(4) of the ITAA 1936 will have no application in respect of the return of capital.

6. The return of capital will be recorded in Company Y's share capital account. As this account is not tainted within the meaning of Division 197 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 applies. Accordingly, the return of capital does not constitute a dividend.

Section 45B

7. Section 45B of the ITAA 1936 applies where certain capital payments, including a return of capital, are paid to shareholders in substitution for dividends. It allows the Commissioner to make a determination that section 45C of the ITAA 1936 applies to a capital benefit. Specifically, the provision applies where:

· there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936);

· under the scheme a taxpayer (the relevant taxpayer), who may or may not be the person provided with the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936); and

· having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling the relevant taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936).

8. Where the requirements of subsection 45B(2) of the ITAA 1936 are met, subsection 45B(3) empowers the Commissioner to make a determination that section 45C of the ITAA 1936 applies in relation to a capital benefit.

9. Based on the information provided and having regard to the relevant circumstances and criteria in subsection 45B(8) of the ITAA 1936, the Commissioner will not make a determination under subsection 45B(3) that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the proposed return of capital amount.

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