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Ruling

Subject: Payment received from a non resident company

Question 1:

Is the payment of a certain foreign amount that you received from a non resident company included in your assessable income as a dividend?

Answer 1:

Yes.

Question 2:

Does the payment of a certain foreign amount that you received from a non resident company represent a return of capital in respect of your shareholding in the non resident company?

Answer 2:

No.

This ruling applies for the following period

Year ended 30 June 2012.

The scheme commenced on

1 January 1996.

Relevant facts and circumstances

You originally acquired shares in an Australian listed company. The Australian listed company was taken over a number of years ago and at that time there was an alternative of either cash or shares, you chose to keep a small shareholding in the non resident company.

The non resident company was listed in Australia for a few years, after which it was delisted.

Late last year, the non resident company announced the proposed return of cash to shareholders following the completion of the disposal of a significant shareholding in the non resident company to another company.

The return of cash by the non resident company was conditional upon the approval by shareholders at their General Meeting early this year and the listing of the new ordinary shares. Both of these conditions were satisfied.

The non resident company cash return was made by way of a B share structure with a connected share capital consolidation, the highlights were:

· Shareholders to receive a cash return amount calculated at a certain foreign currency amount for each existing ordinary share;

· Return to be implemented by way of a B share scheme with a view to providing the foreign country's tax resident shareholders with flexibility to elect to receive cash in the form of income or capital, or a combination of both;

· Shareholders in certain prohibited territories and shareholders who fail to make an election will be deemed to have elected for the income option and receive a single dividend of a certain foreign amount per B share;

· One B share for every one existing ordinary share held on the record date;

· A share consolidation to seek to maintain comparability of share price and earnings per share;

· General Meeting to approve the return in early 2012.

A prohibited territory is defined by the non resident company as including Australia.

Shareholders resident of the foreign country had three choices available to them on how to receive their cash return, or they could choose a combination of the three choices.

In summary the choices were as follows:

Choice 1: Single B Share Dividend

Shareholders received a single dividend of a certain foreign amount per B share, the dividend became payable on a certain date in the first half of the 2012 year, following which the B shares were automatically converted into deferred shares with a negligible value.

The non resident company has stated that the single B share dividend shall be payable out of the profits of the company available for distribution. The single B share dividend is taxed as income.

Choice 2: Initial Purchase Offer

Shareholders had their B shares purchased from them by a financial services firm in the first half of the 2012 year at a certain foreign amount per B share.

The proceeds from this purchase was treated as capital for the shareholders resident of the foreign company's tax jurisdiction.

Choice 3: Future Purchase Offer

Shareholders retained their B shares until sometime later in 2012, when the financial services firm would then make an offer to purchase the B shares at a certain foreign amount per B share. The proceeds from this future purchase offer was treated as capital for the shareholders resident of the foreign company's tax jurisdiction.

Note: Shareholders from a prohibited territory, which included Australia did not have a choice, they were only entitled to receive (and were deemed to have elected for) the single B share dividend, (Choice 1).

The non resident company cash return via B shares

The non resident company created the B shares by subdividing each existing ordinary share in the non resident company held at the record date into one intermediate ordinary share of a certain amount and one B share. The B shares carried limited voting rights and were not listed on the Official List or admitted to trading on the foreign country's Stock Exchange.

Immediately following the subdivision, the holding of intermediate ordinary shares were consolidated and divided so that shareholders received a fraction of a new ordinary share for each existing ordinary share they owned at the record date. The new ordinary shares were listed on the foreign country's Stock Exchange and replaced the existing ordinary shares.

Those shareholders who either elected option one; or were deemed to have elected option one, had, immediately following payment of the single B share dividend, their B shares on which the single B share dividend had been paid, automatically converted into deferred shares. This meant that the shareholder received one deferred share for each B share. The deferred shares were not listed and carried extremely limited rights and had negligible value. No share certificates were issued to represent the deferred shares. Those deferred shares that are in issue may be purchased by the financial services firm. Shareholders will not receive any payment in connection with the purchase by the financial services firm of any of their deferred shares.

As at a certain date in early 2012 you held a certain amount of existing ordinary shares in the non resident company.

On the nominated payment date in the first half of 2012 you were sent a cheque in respect of the single B share dividend at the rate of a certain foreign amount per B share on the number of B shares registered in your name on the nominated record date in early 2012. This equated to a dividend payable of a certain foreign amount, with a tax credit of a certain foreign amount.

Following the share consolidation you became the certified holder of a reduced number of new ordinary shares in the non resident company. You were also advised that the previous existing certificate was no longer valid.

Your bank advised you on a certain date in the first half of 2012 that a net amount in Australian dollars had been deposited into your bank account.

You have included various documents including official documents from the non resident company, outlining the return of cash, these documents form part of and are to be read with these facts.

Relevant legislative provisions

Income Tax Assessment Act 1936 sub-section 6(1),

Income Tax Assessment Act 1936 Section 44,

Income Tax Assessment Act 1997 Section 104-135 and

Income Tax Assessment Act 1997 Section 112-25.

Reasons for decision

Question 1:

Summary

The payment of a certain foreign amount that you received from a non resident company is included in your assessable income as a dividend.

Detailed reasoning

The provisions that determine whether the receipt of the payment from the non resident company is to be treated as a dividend are contained in the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 44(1) of the ITAA 1936 includes dividends paid to a shareholder by a company out of profits derived by it from any source in the assessable income of a shareholder who is a resident of Australia. (It is not relevant whether the company is a resident or a non-resident.)

Subsection 6(1) of the ITAA 1936 defines 'dividend' as including any distribution made by a company to any of its shareholders, whether in money or other property, but excludes such a distribution if it is debited against the share capital account of the company.

As the payment was debited against the non resident company's retained earnings, it falls within the definition of 'dividend' and is therefore included in your assessable income.

The dividend is considered to have been paid to you on a certain date in the first half of 2012 as this was the time it was posted to you by the non resident company. (Brookton Co-operative Society v FCT 81 ATC 4346, 11 ATR 880)

Question 2

Summary

The payment of a certain foreign amount that you received from the non resident company does not represent a return of capital in respect of your shareholding in the non resident company.

Where a company subdivides (splits) or consolidates its share capital without cancelling or redeeming the original shares, there is no disposal.

A return of capital (CGT event G1) happens if a company makes a payment to you in respect of a share that you own in the company, some or all of the payment is not a dividend and you continue to own that share after the payment is made. (Section 104-135 of the ITAA 1997).

As we have concluded that the payment to you of a certain foreign amount from the non resident company is considered to be a dividend, a return of capital does not occur.

The cost base for capital gains tax purposes of your holding of the non resident company new ordinary shares will not be altered by receiving the payment of the certain foreign amount.

Detailed reasoning

Capital gains tax will not apply because there has not been a CGT event in relation to your non resident company shares, there has been no buy back of your existing non resident company shares, nor has there been a cancellation or a re-issue.

What has happened in chronological order to your non resident company shareholding is as follows:

a subdivision of your existing ordinary shares, which resulted in you owning an equivalent amount of intermediate ordinary shares and an identical amount of B shares.

In relation to your B shares you were then deemed to have elected for the single B share dividend in respect of the B shares held by you. This meant that you were paid a dividend of a certain foreign amount per B share. This equated to a dividend payment of a certain foreign amount being declared on a certain date in the first half of 2012 and paid to you a week later.

Following the declaration of the dividend payment of a certain foreign amount on a certain date in the first half of 2012, your B shares were automatically converted into deferred shares with negligible value and very limited rights. No share certificate was issued to you in relation to the deferred shares and these deferred shares could be purchased by a certain financial services firm for no consideration at any time.

Immediately following the subdivision (outlined above) of your existing ordinary shares into an equivalent amount of intermediate ordinary shares and an identical amount of B shares; the intermediate ordinary shares where then consolidated and divided so that you became the holder of a lesser amount of new ordinary shares in the non resident company.

For CGT purposes you continue to hold the same asset with no change to the cost base.

The following ATO view clearly states that any subdivision or consolidation of a share in the manner conducted by Cairn does not result in a CGT event. 'Taxation Determination TD 2000/10 Income tax: capital gains: what are the CGT consequences for a share holder if a company converts its shares into a larger or smaller number of shares?' states the following:

'1 If a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 254H of the Corporation Law ('C Law") in that:

· the original shares are not cancelled or redeemed in terms of the C Law;

· there is no change in the total amount allocated to the share capital account of the company; and

· the proportion of equity owned by each shareholder in the share capital account is maintained;

· no CGT event happens to the shareholder's original shares for capital gains tax purposes. While there is a change in the form of the original shares, there is no change in their beneficial ownership.

The converted share has the same date of acquisition as the original shares to which they relate.

For shares acquired after 20 September 1985, (post CGT shares), section 112-25 of the Income Tax assessment Act 1997 (ITAA 1997) applies to attribute a proportionate cost base to the converted shares.

Cancelling original share certificates and replacing them with new certificates as a part of any conversion process does not change the result above, unless there is also a cancellation or a redemption of the original shares in terms of the C law.'

Further, the following taxation ruling, 'Taxation Ruling TR 94/30 Income tax: capital gains implications of varying rights attaching to shares' states that a variation in rights attaching to a share does not result in a full disposal of an asset for CGT purposes unless there is a cancellation or redemption of the share. It does not matter if the variation is slight or more significant.

Conclusion

The method of returning the cash payment to you by the non resident company is as a dividend which is taxed on revenue account and not capital account for Australian Taxation Office (ATO) purposes.