Edited version of your written advice

Authorisation Number: 1012692508540

Ruling

Subject: Return of Share Capital

Question 1

Will the Commissioner make a determination under subsection 45B(3) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C of the ITAA 1936 applies in relation to the whole or any part of the proposed return of capital?

Answer

No

This ruling applies for the following period:

XX/XX/XXXX to XX/XX/XXXX

The scheme commences on:

XX/XX/XXXX

Relevant facts and circumstances

Background

1. Company H was incorporated by Company B's management on XX/XX/XXXX.

2. Company H was used as the takeover vehicle to acquire the Company B's business. All Company H's s shareholders are Australian residents and they are all unrelated. No shareholder controls Company H in their own right.

3. Immediately after the takeover, Company H and its subsidiaries consolidated for tax purposes.

Acquisition of a business

4. A business was acquired from Company G on XX/XX/XXXX. at a very large discount to the prevailing market value of the business.

5. For accounting purposes, this gave rise to a large ($XX) 'discount gain' on acquisition which has been booked to a reserve account in Company H's ledgers.

Company H's share capital and financial performance

6. There was no movement in Company H's share capital account from XX/XX/XXX to present.

7. The share capital account of Company H is not tainted within the meaning of the term in section 197-50 of the Income Tax Assessment Act 1997.

8. For the financial years XXXX, no dividends have been declared or paid. Also, the company has a nil franking account balance.

9. The applicant has stated that Company H's return of capital would not otherwise affect the payment of any future dividends by Company H.

Proposed equity distribution

10. Company H is proposing to return $XX of equity to its shareholders in XX 2014, partly from share capital and partly from retained profits.

11. The return of capital would be funded out of Company H's surplus working capital in the Company H group (i.e. a reduction of trade debtors).

Proposed profit/equity mix

12. The applicant has proposed a split between share capital and profits. Of the $XX proposed to be distributed to the shareholders, $X will be a return of capital and the balance of $X will be distributed as unfranked dividends.

Other relevant matters

13. Company H made a return of capital previously.

14. The applicant is not aware of the tax profile of Company H's shareholders. Whilst some of the return of capital may create a CGT event G1 gain, the other part would generally simply reduce the cost base of the shares.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 section 45C

Reasons for decision

All legislative references in this document are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated.

Summary

The Commissioner will not make a determination under section 45B that section 45C applies to the whole, or part, of the proposed return of capital by Company to its shareholders

Detailed reasoning

Subsection 45B(2) provides that section 45B will apply where:

(a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and

(b) under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and

(c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit.

Scheme

Subsection 45B(10) provides that 'scheme' in section 45B has the meaning as provided in subsection 995-1(1) of the ITAA 1997. That definition is widely drawn and includes any arrangement, scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The return of share capital by Company H will constitute a scheme for the purposes of paragraph 45B(2)(a).

Capital benefit

The phrase 'provided with a capital benefit' is defined in subsection 45B(5). It states that a person is provided with a capital benefit if:

(a) An ownership interest in a company is issued to the person;

(b) There is a distribution to the person of share capital; or

(c) The company does something in relation to an ownership interest that has the effect of increasing the value of the ownership interest (which may or may not be the same interest) held by that person.

The return of capital will be recorded as a debit to Company H's share capital account and the Company H shareholders will receive a distribution of share capital. Therefore, the Company H shareholders will be provided with a capital benefit under paragraph 45B(5)(b).

Tax benefit

A tax benefit is obtained by a relevant taxpayer under the scheme if an amount of tax payable by the relevant taxpayer would, apart from the operation of section 45B, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the capital benefit had been an assessable dividend: subsection 45B(9) of the ITAA 1936.

Under the scheme, Company H shareholders will have obtained a tax benefit because:

(a) Apart from section 45B, the capital benefit provided as the capital return would give rise to CGT event G1 or CGT event C2. A capital gain would only arise to the extent that the amount of the capital return exceeds the cost base of the shares held. Where CGT event G1 applies to a taxpayer, it is likely that the cost base of shares will exceed the amount of the capital benefit received such that no capital gain should arise to the relevant taxpayer.

(b) If the capital benefit received was instead assessable as a dividend, income tax would be payable by the relevant taxpayer.

Relevant circumstances

As all the other criteria in subsection 45B(2) are satisfied, the application of section 45B turns on whether, having regard to the relevant circumstances of the scheme, it may be concluded objectively that a more than incidental purpose of one of the persons who entered into or carried out the scheme was to enable a taxpayer to obtain a tax benefit.

The relevant circumstances of a scheme are set out in subsection 45B(8). The Commissioner must have regard to these matters in determining whether or not the requisite purpose exists. The list of circumstances is not exhaustive and the Commissioner may have regard to other circumstances which he regards as relevant.

Based on the information provided and having regard to the relevant circumstances of the scheme, it cannot be concluded that the scheme is proposed to be entered into for a more than incidental purpose of enabling a taxpayer to obtain a tax benefit. Accordingly, the Commissioner will not make a determination under subsection 45B(3) that section 45C applies to the return of capital.

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