Edited version of your written advice

Authorisation Number: 1013096235123

Date of advice: 23 September 2016

Ruling

Subject: Distributions

Question 1

Will the distribution made by Company X form part of the assessable income of the Taxpayer in accordance with subsection 44(1) of the ITAA 1936, being a 'dividend' as defined in subsection 6(1) of the ITAA 1936?

Answer

No.

Question 2

If the answer to Question 1 is no, does section 45B of the ITAA 1936 apply such that the Commissioner will make a determination under section 45C of the ITAA 1936 to treat the distribution as an unfrankable dividend taxable in the hands of the Taxpayer for the purposes of subsection 44(1) of the ITAA 1936?

Answer

No.

Question 3

If the answer to Question 2 is no, does the distribution form part of the Taxpayer's assessable income under section 6-5 of the ITAA 1997?

Answer

No.

Question 4

If the answer to Question 3 is no, would the distribution give rise to CGT event G1 under section 104-135 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

The year ended 30 June 2015

The scheme commences on:

The year ended 30 June 2015

Relevant facts and circumstances

Background

The Taxpayer is an Australian Tax Resident.

The Taxpayer was issued a number of shares in Company X.

The Taxpayer received distributions from Company X.

Company X

Company X was incorporated in Jersey under the Companies (Jersey) Law 1991 (Jersey Companies Law).

Company X is not an Australian tax resident.

At all times since Company X was incorporated, Australian Shareholders have represented less than 1% of the shareholders of Company X.

Par value company

Company X is a public company under article 3A of the Jersey Companies Law.

It is also a par value company under article 3E of the Jersey Companies Law.

Share Capital Account

For the purposes of the Jersey Companies Law, the share capital account of Company X includes the following accounts:

• The 'Share Capital Account'. This reflects the par value of shares issued.

• The 'Other Reserves' account. This account reflects the premium for shares issued above par value.

It is a 'share premium account' pursuant to article 39 of the Jersey Companies Law.

Company X's Other Reserves account has been credited on several occasions. Only sums equal to the aggregate amount or value of premiums received by Company X on shares have been transferred to this account. No other types of amounts have been transferred to it.

Distributions made by Company X

Company X generally makes distributions to its shareholders on a semi-annual basis. Since the incorporation of Company X, distributions have been debited to Company X's Other Reserves.

The process for making distributions is governed by Company X's Articles of Association (Articles of Association).

The amount of the distribution has been based on an amount consistent with the previous year with a slight uplift.

Company X's distribution policy is set out in publicly available documents.

Company X has made various distributions to date.

The distributions made by Company X to the Taxpayer were from the Other Reserves account.

Retained earnings of the XX group

As a general rule, distributions are not paid from subsidiaries through the XX group to Company X. The XX group has instead elected to reinvest profits at the subsidiary level.

Other facts

• Company X had made no distributable profits from which to pay the distribution in the year it was made.

• Company X has accounting losses and retained losses in several years.

• While Company X had profits in one year, these were less than the amount of the distributions it made to shareholders.

• Any cash available was anticipated to be required to meet various capital commitments.

In respect of the XX group:

• Borrowed cash in two years was for investment.

• While there was available cash in two years to pay a distribution, this amount was required to meet capital commitments.

• Profits made by Company X's subsidiaries were not moved 'up the chain' to it, as this required 'significant additional planning and considerations'.

Relevant legislative provisions

Income Tax Assessment Act 1936 (ITAA 1936),

• subsection 6(1)

• subsection 6(4)

• subsection 44(1)

• section 45B

• section 45C

Income Tax Assessment Act 1997 (ITAA 1997),

• section 6-5

• section 104-135

• subsection 177D(2)

Relevant ATO view documents

Law Administration Practice Statement PS LA 2008/10 - Application of section 45B of the Income Tax Assessment Act 1936 to share capital reductions

Other references (non ATO view)

Federal Commissioner of Taxation v. Montgomery (1999) 198 CLR 639

Federal Commissioner of Taxation v. McNeil (2007) 229 CLR 656

Reasons for decision

Question 1

Will the distribution made by Company X form part of the assessable income of the Taxpayer in accordance with subsection 44(1) of the ITAA 1936, being a 'dividend' as defined in subsection 6(1) of the ITAA 1936?

Answer

No.

Detailed answer

General provisions

Subsection 44(1) of the ITAA 1936 provides as follows:

The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes:

(a) if the shareholder is a resident:

(i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

(ii) all non-share dividends paid to the shareholder by the company…

The Taxpayer was a resident and a shareholder in Company X when the distributions were made by Company X. The issue is whether the distribution is a 'dividend' for the purposes of subsection 44(1).

Subsection 6(1): 'Dividend'

The definition of a 'dividend' that applies to a company whose shares continue to have par value, such as the shares of companies that are not incorporated under the Australian Corporations Law, is contained under subsection 6(1) of the ITAA 1936 prior to its amendment by Taxation Laws Amendment (Company Law Review) Act 1998 (63 of 1998): refer to item 8 in Schedule 3, and item 67 of Schedule 5 to that Act; also paragraph 1.57 of the Explanatory Memorandum to that Act.

Company X is a company whose shares continue to have par value for the following reasons:

• It was incorporated in Jersey under the Jersey Companies Law and is governed by the provisions in that legislation.

• It is a 'par value company' under article 3E of the Jersey Companies Law. Under article 3E, a company is a par value company if, amongst other conditions, it is registered with share capital and its shares are expressed as having a nominal (that is, par) value.

The applicable definition of a 'dividend' for Company X, being that which existed prior to the 1998 amendments, is as follows:

(a) any distribution made by a company to any of its shareholders, whether in money or other property;

(b) any amount credited by a company to any of its shareholders as shareholders; and

(c) the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid up value represents a capitalisation of profits;

but does not include:

(d) 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), where the amount of 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 premium account of the company;…".

'Share premium account' is in turn defined as follows:

'in relation to a company, means an account, whether called a share premium account or not, to which the company has, in respect of premiums received by the company on shares issued by it, credited amounts, being amounts not exceeding the respective amounts of the premiums, but does not include -

(a) Where any other amount is included in the amount standing to the credit of such an account - that amount; or

(b) Where an amount that has been credited to such an account in respect of a premium received by the company on a share issued by it (not being an amount that has been so credited immediately after the receipt by the company of the premium), could not, at any time before it was so credited, be identified in the books of the company as such a premium - that amount.'

Company X's Other Reserves Account is a 'share premium account' under the terms of article 39 of the Jersey Companies Law. While article 39(1A) of the Jersey Companies Law allows an amount to be transferred to a share premium account 'from any other account of the company other than the capital redemption reserve or the nominal capital account', only sums equal to the aggregate amount or value of premiums received by Company X on shares issued by it have been transferred to its Other Reserves account. The account does not contain any other type of amount.

As such it is not 'tainted' in the manner described in paragraphs (a) and (b) in the definition of 'share premium account' in subsection 6(1). Owing to the nature of each of the amounts credited to it, Company X's Other Reserves account falls within the definition of a 'share premium account' in subsection 6(1).

The distributions to the Taxpayer were made by Company X from the Others Reserves account. As this amount was paid from what is regarded as the share premium account of the company, it is prima facie excluded from the definition of a 'dividend' under subsection 6(1) by virtue of paragraph (d) in the definition. However, this is subject to the qualification in subsection 6(4).

Subsection 6(4): exception

Subsection 6(4) provides as follows:

Subject to subsection (5), where, in pursuance of or as part of an agreement or an arrangement, whether oral or in writing, being an agreement or arrangement made after the commencement of this subsection -

(a) a company issues shares at a premium, being a premium in respect of which the company credits an amount to a share premium account of the company; and

(b) the company pays or credits any moneys, or distributes any other property, to shareholders in the company and the amount of the moneys so paid or credited or the amount of the value of the property so distributed is debited against an amount standing to the credit of that share premium account,

paragraph (d) of the definition of 'dividend' in subsection (1) does not apply to the moneys so paid or credited or to the property so distributed.

In broad terms, subsection 6(4) captures agreements or arrangements entered into for the purpose of exploiting the exclusion of distributions from share premium accounts from the definition of 'dividend'. Under such arrangements, shares are issued at a premium and the premiums are distributed as part of the arrangement. The Explanatory Memorandum to the Income Tax Assessment Bill (No. 4) 1967, which introduced the provision, states:

Sub-sections (4.) and (5.) are designed as a safeguard against special arrangements that may be entered into for the purpose of exploiting the proposed exemption of distributions out of share premium accounts. Very broadly, the provisions will apply where a share premium account is created as part of a scheme for making a tax-free distribution of money or other property to shareholders.

Under sub-section (4.) where a share premium account has been created in these circumstances and, under the arrangement, any moneys are paid or credited or property is distributed to shareholders out of the share premium account, the moneys or property will be treated as a dividend. In these circumstances, paragraph (d) of the definition of "dividend" will not apply. The operation of this sub-section is, however, subject to the provisions of the proposed sub-section (5.) of section 6.

Note that subsection 6(5) relates to arrangements involving the redemption, cancellation, or a reduction in the paid-up value, of shares in a company.

Subsection 6(4) does not apply to this case for the following reasons:

• Each credit to the Other Reserves account appears to have been made for reasons appropriate to the use for which the account was established: that is, for the credit of premiums arising as a result of the shares issued for bona fide commercial purposes.

• The distributions paid to shareholders, on the other hand, appear to have been made independently pursuant to Company X's distribution policy.

• There is therefore insufficient indication in the facts of this case to suggest that any special 'agreement' or 'arrangement' as referred to in subsection 6(4) had been entered into for the purpose of exploiting the exemption of distributions from the share premium accounts.

The existence of any such purpose in the context of subsection 6(4) would also be difficult to establish in light of the fact that Australian shareholders only constitute 1% of the total shareholding in Company X.

Question 2

If the answer to Question 1 is no, does section 45B of the ITAA 1936 apply such that the Commissioner will make a determination under section 45C of the ITAA 1936 to treat the distribution as an unfrankable dividend taxable in the hands of the Taxpayer for the purposes of subsection 44(1) of the ITAA 1936?

Answer

No.

Detailed answer

Subsection 45B(2) provides as follows:

This section 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 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.

The application of the conditions in each of the above paragraphs is considered below.

Paragraph 45B(2)(a)

The conditions in paragraph 45B(2)(a) are satisfied on the basis of the following:

• 'Scheme' is defined in section 995-1 of the Income Tax Assessment Act 1997 as 'any arrangement' or 'any scheme, plan, proposal, action, course of action, or course of conduct, whether unilateral or otherwise'. The distribution to the Taxpayer by Company X would at the very least constitute an 'action' or 'course of conduct' and accordingly would be considered a 'scheme' for the purposes of subsection 45B(2).

• Given that the distribution by Company X is from its share premium account - which is comprised exclusively of amounts representing premiums received by the company on shares it has issued - it will be a 'capital benefit' for the purposes of subsection 45B(2), being a 'distribution to the person of…share premium': paragraph 45B(5)(b).

Paragraph 45B(2)(b)

Whether the Taxpayer obtains a 'tax benefit' from the payment of the capital benefit under the terms of paragraph 45B(2)(b) depends on whether the amount of tax payable by the Taxpayer would be less than, or payable at a later time than, if the capital benefit had been an assessable dividend: subsection 45B(9).

The application of CGT event G1 to the facts of this case is examined in question 4 of this analysis. For the present purposes, it is sufficient to note simply that paragraph 45B(2)(b) takes into account the Taxpayer's overall tax position in 2 scenarios:

1) where the amount is not treated as an assessable dividend; and

2) where the amount is treated as an assessable dividend.

With regard to (1) above, paragraph 1.27 of the Explanatory Memorandum to the Taxation Law amendment (Company Law Review) Act 1998 provides:

'…obtaining a tax benefit would include circumstances where the amount of tax assessed as being payable by the relevant taxpayer in respect of the capital benefits is substantially the same as would have been the case had the relevant taxpayer received a dividend, but the relevant taxpayer has income tax losses, or the company providing the capital benefits has franking credits, which are preserved for future income years (and therefore reduce tax in those years).'

Without an examination of the Taxpayer's final tax position in the 2 scenarios outlined above, it would not be possible to make a conclusive determination on the application of paragraph 45B(2)(b). However for the reasons expressed in detail below, it is considered that the distribution will not in any case fall within the scope of section 45B.

Paragraph 45B(2)(c)

The purpose test specified under this paragraph requires the consideration of 'the relevant circumstances of the scheme', which under subsection 45B(8) is taken to include various matters. The most relevant of these is examined below.

Paragraph 45B(8)(a) and Paragraph 45B(8)(b)

Paragraph 45B(8)(a) prescribes the following circumstances:

..the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company;

Paragraph 45B(8)(b) requires that consideration be made of:

..the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate….

The distribution in this case is made from Company X's Other Reserves account, being its primary share premium account to which sums equal to the aggregate amount or value of premiums received by Company X on shares issued have been credited. While prima facie the distribution is from a capital account, the question is whether it represents a payment of capital in substance.

In Law Administration Practice Statement PS LA 2008/10 - Application of section 45B of the Income Tax Assessment Act 1936 to share capital reductions (PS LA 2008/10), the Commissioner states at paragraph 35 that, as a general principle:

'…generation of surplus funds from carrying on business in the ordinary way is the occasion for the distribution of a dividend, not a return of capital…

and, at paragraph 38:

…If, therefore, a company can choose to distribute either capital or profits, there should be compelling, objective and commercial reasons why a company would choose the difficulty of distributing share capital over the relative simplicity of distributing profits, other than the tax preference of shareholders. Section 45B 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'.

It is noted that:

• Company X had made no distributable profits from which to pay the distribution in the year it was made;

• Company X has accounting losses and retained losses in several years;

• while it had profits in one year, these were less than the amount of the distributions it made to shareholders; and

• any cash available was anticipated to be required to meet various capital commitments.

It is also noted that, in respect of the XX group:

• Borrowed cash was for investment.

• While there was available cash in two years to pay distributions, this amount was required to meet capital commitments.

• Profits made by Company X's subsidiaries were not moved 'up the chain' to it.

The question posed by paragraph 45B(8)(a) is ultimately whether 'despite a distribution taking the form of share capital it can be ascribed in fact to either the company's share capital or the profits of the company': paragraph 59 in PS LA 2008/10. It is also stated at paragraph 61 that:

The inquiry contemplated by the words 'attributable to' is essentially a practical one concerned with determining whether there is a discernible connection between the amount distributed as share capital and the share capital and profits that are realistically available for distribution, including the profits of an associate of the company. The connection need not be that of a sole, dominant, direct or proximate cause and effect; a contributory causal connection is sufficient.

There does not appear to be a clear correlation between profits earned by the group and distributions to shareholders in this case.

In this respect paragraph 45B(8)(b), which refers to the pattern of distributions of dividends and returns of capital or share premium, has some bearing on the assessment of whether the capital benefit is in substance attributable to capital under paragraph 45B(8)(a).

The pattern of distributions made from the share premium account do not, reflect, the pattern of profits made by the group. The distributions in 4 years appear to be in accordance with XX group's independent distribution policy of maintaining or increasing distribution every year - a policy that was observed despite fluctuations in the group's annual profits and losses.

Company X's historical pattern of distributions do not indicate any 'discernible connection between the amount distributed as share capital and the share capital and profits' such that the payment from the share premium account can be said to be attributable to company profits.

Paragraph 45B(8)(c) to (f)

These paragraphs require an examination of the tax characteristics of the particular shareholder in question in determining the relevant circumstances of the scheme.

In general it is noted that the Taxpayer:

• is a resident;

• acquired the shares after 20 September 1985; and

• is subject to CGT event G1 in respect of the distributions (considered in further detail below).

In the circumstances of this particular case, the characteristics of the Taxpayer' own tax position, are not likely to have significant bearing on the scheme and its objectives. The distributions by Company X were made to all its shareholders, and at all times since Company X was incorporated, Australian Shareholders have represented less than 1% of the shareholders of Company X, suggesting that it would be unlikely (given the absence of evidence to the contrary) that the Taxpayer's tax position would have influence on the distribution scheme.

Paragraph 45B(8)(h)

This paragraph provides as follows:

'…if the scheme involves the distribution of share capital or share premium - whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium;..'

The paragraph requires a consideration of whether the interest held by the Taxpayer after the share capital reduction is the same as the interest would have been if an equivalent dividend had been paid.

We note the Taxpayer' submissions, that the distribution of share premium reduces their rights to share capital of the company. However where the share premium is distributed to all shareholders in proportion to their shareholding, the Commissioner takes the following view in PS LA 2008/10 at paragraph 91:

'..An equal share capital reduction under which no shares are cancelled (often called a pro-rata return of capital) does not affect the shareholder's substantive interests, either individually or inter se and thus the interests remain the same as if a dividend had been paid instead. From the shareholders' perspective a reduction of capital without a cancellation of shares is not dissimilar economically to a special dividend in that cash is distributed to them while they retain the share with all of its rights intact. ..'

The distribution in this case effects an equal share capital reduction as referred to above. However, this consideration is not itself determinative of the issue and must be taken in light of the other circumstances in this scheme. The Commissioner's view is that it is outweighed by the other considerations in this analysis.

Paragraph 45B(8)(k)

This paragraph requires that regard to 'any of the matters referred to in subsection 177D(2)', which are matters prescribed for the purposes of determining the 'dominant purpose' test in Part IVA. In the context of section 45B, however, they are to be applied in determining the 'more than incidental' test specific to the provision.

The factors prescribed in subsection 177D(2) focus on indicia that may reveal the true objectives of the relevant scheme. It is recognised that many of the considerations taken into account under this provision may overlap with those already mentioned above.

The circumstances which the Commissioner considers relevant to the assessment of the scheme in this case, and the corresponding paragraphs in subsection 177D(2) to which they relate, are as follows:

• the distributions have been made pursuant to Company X's distribution policy, and the history of distribution payments is consistent with the policy given that the total ordinary distributions each year have been maintained or increased. The 'manner in which the scheme was entered into or carried out' (paragraph 177D(2)(a)) supports the view that the distributions were made in carrying out the general distribution policy rather than for any specific tax consideration relating to the Taxpayer.

• The distribution pattern is independent of the profits and losses made by the XX group such that it would be difficult to establish that the substance of the distributions is one of profits rather than capital: see paragraph 177D(2)(b).

• It is also relevant, in the assessment of the form and substance of the scheme under paragraph 177D(2)(b), that the Australian shareholding in Company X is less than 1% of the total shares in the company. It is unlikely that the scheme is driven by the objective to afford a tax advantage to a less-than-1% minority of its shareholders in their tax jurisdiction. That is, the substance of the scheme does not appear to be referable to the gaining of an Australian tax advantage.

In light of the above considerations, paragraph 45B(2)(c) is not satisfied in this case; and consequently section 45B does not apply to the distribution; that is, having regard to the relevant circumstances of the scheme, it is not 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 of enabling the Taxpayer to obtain a tax benefit.

Question 3

If the answer to Question 2 is no, does the distribution form part of the Taxpayer's assessable income under section 6-5 of the ITAA 1997?

Answer

No.

Detailed answer

The distribution is not ordinary income and will not accordingly be included in assessable income under section 6-5 of the ITAA 1997.

The High Court in Federal Commissioner of Taxation v. Montgomery (1999) 198 CLR 639 regarded gains or profit that proceed from property severed from the capital from which they are derived as income in the hands of the recipient. In determining that payments made to the taxpayer to induce it to enter into a lease was income and not capital, the majority of the High Court stated:

The inducement amounts received by the firm did not augment the profit-yielding structure of the firm. There was, in the words of Pitney J in Eisner v. Macomber ' not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in , being 'derived', that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal.

Federal Commissioner of Taxation v. McNeil (2007) 229 CLR 656 (McNeil) concerned the issue of sell-back rights by St George Bank Ltd (SGL) to one of its shareholders. The question that arose was whether these rights were assessable income to the shareholder at the time they were received. The majority of the High Court held that while the sell-back rights were not dividends, they were ordinary income and assessable under section 6-5 of the ITAA 1997.

The sell-back rights issued by SGL to its shareholders were rights permitting them to sell back their shares to SGL for a price higher than market value at the relevant time. If they did not sell their shares, that right would be sold on their behalf and they would receive payment from the sale. The market value of one right was the difference between the market value of that share at the relevant time and the (higher) price which SGL was required to pay for it under that right.

The purchase price of the SGL shares bought back on exercise of the sell-back rights issued under the arrangement was debited by SGL to the SGL share capital account, and was funded from existing cash resources of SGL. The taxpayer in that case did not sell her shares back to SGL. Instead, she retained her shares. Accordingly, her sell-back rights were sold on her behalf and the money realised was paid over to her.

In the characterisation of the receipt by the shareholder, it was held by the High Court that:

...whether a particular receipt has the character of the derivation of income depends upon its quality in the hands of the recipient, not the character of the expenditure by the other party. ....

It also stated that:

..as a general proposition, a gain derived from property has the character of income and this includes a gain to an owner who has waited passively for that return from property...

Further, the gain in that case was held by the court to be severed and detached from the existing shareholding of the shareholder; it was a product of the shareholding rather than a realisation of it. The shareholding had been retained. That is, the taxpayer did not give up part of the profit-yielding structure represented by her shareholding on the grant of the sell-back rights. This was contrasted with the receipt of bonus shares, which, rather than being severed from the shareholding, are added to it, contributing to increased capital of the company.

The majority of the High Court did not view the receipt of the sell-back rights as altering the capital structure that was the taxpayer's shareholding. In doing so, it held:

Contrary to the taxpayer's submission, it is insufficient to say that SGL issued the sell-back rights to Custodial on behalf of shareholders "in partial satisfaction of the shareholders' right to participate in reductions of capital", this being "within the congeries of rights comprising the shares". It is the character of the grant of rights to the shareholders that, as already explained, is decisive. It is not the reduction of capital effected by SGL pursuant to the new statutory processes provided by the Corporations Law.

The question is whether the distribution in this case represents what might be regarded as a return of capital or a return in the character of income that is derived from (and that is severed and detached from) the Taxpayer's shareholding.

In this regard, it is agreed that McNeil is distinguishable from this case. In McNeil, the sell-back right was severable from the asset held by the shareholder, being her shareholding in SGL. The right was a new asset created by SGL and the gain made by the shareholder was realised through the mechanism provided for in a Deed Poll.

The distributions in this case are not similarly 'severable' - they are not new rights created for the benefit of the Taxpayer in the nature of, and arising in a manner akin to, the rights in McNeil. Instead, they are distributions made from an account to which has been credited the capital invested by the shareholders in the company. They may therefore be regarded as a return of capital to the Taxpayer.

Given the above considerations, the distribution is not assessable income under the terms of section 6-5 of the ITAA 1997.

Question 4

If the answer to Question 3 is no, would the distribution give rise to CGT event G1 under section 104-135 of the ITAA 1997?

Answer

Yes.

Detailed answer

Subsection 104-135 of the ITAA 1997 provides as follows:

CGT event G1 happens if:

The payment can include giving property.

In this case:

• Paragraph (a) is satisfied as Company X has made the payment to the Taxpayer in respect of the Taxpayer's shareholding in the company.

Note that CGT event A1 does not apply as there is no change of ownership of the shareholding. CGT event C2 does not apply as the distribution does not involve an end to the Taxpayer' ownership of the shares pursuant to any of the paragraphs contemplated under subsection 104-25(1).

• Paragraph (b) is satisfied as the payment is not a dividend for the reasons outlined earlier.

Note that section 47 of the ITAA 1936 does not apply as it concerns distributions to shareholders of a company by a liquidator in the course of winding up the company.

• Paragraph (c) is satisfied as the payment will not be included in the Taxpayer's assessable income. For the reasons explained above, the distribution does not fall within the scope of section 6-5 of the ITAA 1997.

It follows that CGT event G1 will apply to the Taxpayer in respect of the distribution made by Company X to the Taxpayer.

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