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Ruling

Subject: CGT event G1

Question

Will the receipt of a distribution that was debited against a share capital account of a non-resident company trigger CGT event G1?

Answer

Yes.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

A taxpayer holds shares in a company. The company is a non-resident company. The company's shares have a par value.

Recently a new tax regulation became effective in the country of which the company is a resident company. This regulation meant any repayment of share premiums and other contributions into the capital conducted by shareholders after the late 1990s is not subject to withholding tax and no income tax is due for residents of the country.

The tax authority of this country approved that several million dollars of capital qualify under this regulation.

The taxpayer received a distribution from the company. The distributions were debited from the capital that qualified under the new regulation.

Relevant legislative provisions

Income Tax Assessment Act 1936, former subsection 6(1)

Income Tax Assessment Act 1936, former subsection 6(4)

Income Tax Assessment Act 1936, former subsection 160ARDM (2A)

Income Tax Assessment Act 1997, subsection 104-135(1)

Income Tax Assessment Act 1997, subsection 104-135(2)

Income Tax Assessment Act 1997, subsection 104-135(3)

Income Tax Assessment Act 1997, subsection 104-135(4)

Reasons for decision

CGT event G1

Subsection 104-135(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event G1 occurs if:

(a) a company makes a payment in respect of shares owned in the company (excluding a payment relating to CGT event A1 (disposal of a share) or CGT event C2 (cancellation, surrender etc of a share))

(b) all or part of the payment (the non-assessable part) is not a dividend or a deemed dividend under section 47 of the Income Tax Assessment Act 1936 (ITAA 1936), and

(c) the payment is not included in the shareholder's assessable income.
CGT event G1 only happens if a payment is made by a company to a shareholder where some or all of the payment is not a dividend or an amount taken to be a dividend under section 47 of the ITAA 1936.

Subsection 104-135(2) of the ITAA 1997 provides that CGT event G1 happens when the company makes the payment to the taxpayer in respect of the share the taxpayer holds in the company.

Subsection 104-135(3) of the ITAA 1997 states that a capital gain is made from CGT event G1 if the amount of the non-assessable part is more than the cost base of the share. The amount of the capital gain is the amount by which the non-assessable part exceeds the cost base.

You cannot make a capital loss when CGT event G1 happens

The meaning of 'dividend'

Amendments to the Corporations Act in 1997 abolished the concept of par value shares and associated concepts of share premium, share premium accounts and paid-up capital. As a result of these Corporations Act amendments, consequential amendments were made to the taxation laws by the Taxation Laws Amendment (Company Law Review) Act 1998 (the Act). These amendments included repealing the definition of share premium account and amending the definition of dividend in subsection 6(1), and amending subsection 6(4). These provisions as enacted prior to the amendments contained in the Act will be referred to hereafter as the 'former provisions'.

However, the amendments only have effect from 1 July 1998 for companies that do not have on issue par value shares. For those companies that continue to have par value shares on issue, the former provisions continue to apply.

The shares have a par value. Accordingly, the former provisions apply.

Dividend is defined in the former subsection 6(1) of the ITAA 1936 as:

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

· any amount credited by a company to any of its shareholders as shareholders; and

· 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 capitalization of profits;

· but does not include:

o 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 the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of a share premium account of the company;

o moneys paid or credited, or property distributed, by a company by way of repayment by the company of moneys paid upon a share except to the extent that:

o if the share is cancelled or redeemed-the amount of those moneys or the value of that property, as the case may be, is greater than the amount to which the share was paid up immediately before the cancellation or redemption; or

o in any other case-the amount of those moneys or the value of that property, as the case may be, is greater than the amount by which the amount to which the share was paid up immediately before the repayment exceeds the amount to which the share is paid up immediately after the repayment; or

o a reversionary bonus on a policy of life-assurance;

As per paragraph (d), moneys paid or credited or property distributed to shareholders to the extent that an amount is debited to the company's share premium account is not a dividend.

A note to former subsection 160ARDM (2A) of the ITAA 1936 stated that:

"The definition of share premium account in subsection 6(1) of this Act was repealed in relation to companies with shares with no par value (see item 5 and 67 in Schedule 5 to the Taxation Laws Amendment (Company Law Review) Act 1998). However, it has been retained in relation to companies with par value shares."

Income Tax Assessment Bill (No. 4) 1967 introduced the former definition of 'share premium account', which read:

'share premium account', 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 account; 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 account;

Furthermore, paragraph 39 of Taxation Ruling IT 2603 provides the requirement of a share premium account. It states:

"The definition of a "share premium account" in subsection 6(1) of the Income Tax Assessment Act requires that such an account may only contain premiums received by the company on shares issued by it."

However paragraph (d) of former subsection 6(1) does not apply if former subsection 6(4) of the ITAA 1936 does. Former subsection 6(4) stated:

6(4) Subject to subsection (5), where, in pursuance of or as a part of an agreement or an arrangement, whether or not 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 o 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.

Application of the law to your circumstances

A dividend does not include moneys paid or credited or property distributed to shareholders to the extent that an amount is debited to the company's share premium account.

A share premium account is an account that only contains premiums received by the company on shares issued by it.

Recently a new tax regulation became effective in the country of which the company is a resident company. This regulation meant any repayment of share premiums and other contributions into the capital conducted by shareholders after the late 1990s is not subject to withholding tax and no income tax is due for residents of the country.

The tax authority of this country approved that several million dollars of capital qualify under this regulation (capital reserve).

Although the capital reserve is not called a share premium account, it is an account which the company has credited with the premium that it received on the issue of shares by it. No other amount is included in the amount standing to the credit of the capital reserve.

Subsequently, the distribution the taxpayer received is not a dividend as per paragraph (d) of former subsection 6(1) of the ITAA 1936. However, as mentioned above, if former subsection 6(4) of ITAA 1936 applies then paragraph (d) of the ITAA 1936 will be negated.

In the present case, no arrangement existed under which the company raised share capital from certain shareholders and then distributed the capital raised to other shareholders. Accordingly, former subsection 6(4) of the ITAA 1936 will have no application in respect of the return of capital.

As the taxpayer received a payment in respect of shares they held in the company, the payment is not a dividend or deemed dividend, and the payment is not included in their assessable income, CGT event G1 will apply.

CGT event G1 happened when the company paid the taxpayer the return of capital in respect of a share that they own in the company.

If the return of capital is equal to or less than the cost base of the share at the payment date, the cost base and reduced cost base of the share will be reduced by the amount of the payment (subsection 104-135(4) of the ITAA 1997).

The taxpayer will make a capital gain if the proposed return of capital is more than the cost base of their share (subsection 104-135(3) of the ITAA 1997). The amount of the capital gain is equal to the excess.

If the taxpayer makes a capital gain when CGT event G1 happens, the cost base and reduced cost base of their share is reduced to nil.

A capital gain made when CGT event G1 happens will be eligible to be treated as a discount capital gain under subdivision 115-A of the ITAA 1997 provided that the share was acquired at least 12 months before the payment of the return of capital (subsection 115-25(1) of the ITAA 1997) and the other conditions of that subdivision are satisfied.