Edited version of your written advice

Authorisation Number: 1012736347718

Ruling

Subject: Payments to shareholders

Question

Does section 45B of the Income Tax Assessment Act 1936 apply to this arrangement?

Answer

No

This ruling applies for the following period

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

The entity was incorporated with X, $x ordinary shares issued.

The entity is required to be licensed with an external body.

To satisfy the licensing requirements the entity is required to hold a minimum level of net assets.

The entity applied for a license.

To meet the net asset test the shareholders purchased a further X, $x ordinary shares each.

The shareholders purchased the additional shares on the understanding that when the entity had sufficient net assets, excluding this additional share capital purchased to satisfy the licensing requirements, this additional share capital would be returned to the shareholders.

After a review of the financial statements, the directors and shareholders determined that the entity had sufficient net assets to support the continuing requirements to retain the licence if the share capital is reduced to the original X, $x shares.

The consideration payable to the shareholders for the share reduction will be the original purchase price of the shares.

The entity is considering the payment of dividends during the current financial year and future financial years.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 45B(1)

Income Tax Assessment Act 1936 Subsection 45B(2)

Income Tax Assessment Act 1936 Subsection 45B(5)

Income Tax Assessment Act 1936 Subsection 45B(9)

Reasons for decision

Section 45B of the Income Tax Assessment Act 1936 (ITAA 1936) was originally introduced as part of a "general anti-avoidance rule" to ensure that changes to the then Corporations Law did not provide opportunities for companies to use capital streaming and dividend substitution arrangements to distribute profits to shareholders as preferentially taxed capital rather than dividends.

When a company chooses to distribute either capital or profits, there should be compelling, objective and commercial reasons why it would choose the difficulty of distributing share capital over the relative simplicity of distributing profits, other than the tax preference of shareholders. Section 45B of the ITAA 1936 provides for those reasons to be identified and considered in determining whether the requisite purpose for the application of the section is present in relation to the distribution.

Subsection 45B(1) of the ITAA 1936 in part states the purpose of this section is to ensure the relevant amounts are treated as dividends for taxation purposes if certain payments, allocations and distributions are made in substituting for dividends.

Subsection 45B(2) states this section (45B) applies if:

(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 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.

Subsection 45B(5) of the ITAA 1936 (meaning of provided with a capital benefit) states a reference to a person being provided with a capital benefit is a reference to any of the following:

(a) the provision of ownership interests in a company to the person;

(b) the distribution to the person of share capital or share premium;

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

Subsection 45B(9) of the ITAA 1936 states a relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, 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 demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend.

In this case there is a scheme under which all shareholders will be provided with a benefit by the entity, however no tax benefit will be obtained by the shareholders as they will only receive back the same amount of capital injected by them to temporarily assist the entity in its quest to meet the net assets test (in order for the entity to gain a licence). Now that the directors and shareholders consider that the company is able to meet the net asset criteria (without the initial injection of $X) to enable it to retain the licence, the entity will reduce its capital back to the same level which existed before the shareholders injected the capital of X, $x shares in total by reducing its capital.

The payment of $X was not made in substitution for the payment of dividends.

As not tax benefit will be obtained by the shareholders section 45B of the ITAA 1936 will not apply in this situation.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).