Edited version of your private ruling

Authorisation Number: 1012513528357

Ruling

Subject: Proposed return of capital

Question 1

Will the capital component of the proposed in-specie distribution constitute a dividend as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and be subject to dividend withholding tax pursuant to section 128B of the ITAA 1936?

Answer

No

Question 2

Will the Commissioner make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital component of the proposed in-specie distribution?

Answer

No

Question 3

Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital component of the proposed in-specie distribution?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

Company X

1. Company X carries on a business in a foreign country.

2. Company X is a public company limited by shares and resident of Australia for income tax purposes.

3. All of the shares in Company X are ordinary shares and were acquired by their respective holders on or after 20 September 1985.

4. Company X is not a head entity or a member of a tax consolidated group for Australian taxation purposes.

5. Prior to the proposed restructure, Company X was dual listed.

6. Currently:

· all of Company X's income-producing assets are owned by wholly-owned foreign incorporated subsidiaries of Company X;

· Company X's foreign incorporated subsidiaries are residents of a foreign country for income tax purposes; and

· Company X's foreign incorporated subsidiaries only hold assets from a foreign country.

The restructure

7. The restructure scheme involves the following steps:

(a) the incorporation of a new holding company, Company Y;

(b) the exchange, by Company X's existing shareholders, of their shares in Company X for equivalent shares in Company Y;

(c) the exchange, by Company X's existing option holders of their options in Company X for equivalent options in Company Y;

(d) the listing of Company Y;

(e) the sale, by Company X of the shares in its foreign subsidiaries (who only hold foreign assets) to Company Y; and

(f) the in-specie distribution of the receivable (provided by Company X to Company Y to finance step (e)) by Company X to Company Y.

8. The restructure will remove Company X from the group's holding structure to ensure an entirely foreign owned company structure.

Sale of foreign subsidiaries

9. As per the restructure outlined above, Company X is now a 100% subsidiary of Company Y and intends to sell its foreign subsidiaries to Company Y.

10. The sale of the foreign subsidiaries from Company X to Company Y will be financed by way of a loan from Company X to Company Y. The face value of the loan will equal the consideration paid for the shares in the foreign subsidiaries.

11. The sale of the foreign subsidiaries will take place on an arms-length basis, that is, the consideration paid by Company Y to Company X for their acquisition will be equal to the combined market value of the foreign subsidiaries on the date of sale.

12. The sale consideration will be calculated by using a one-day volume weighted average price of Company X's share price on the ASX on the sale date.

13. A receivable will be recorded as an asset on the balance sheet of Company X to account for the loan provided to Company Y. The market value of the foreign subsidiaries will be based on the sale consideration as per paragraph 12.

14. The applicant has advised that the cost base of Company X's investment in the foreign subsidiaries will reflect the inter-company loan balance which Company X has lent to the foreign subsidiaries.

15. The difference between the market value received for the disposal of the shares of the foreign subsidiaries and the cost base of these shares will be recorded as a gain in the accounts of Company X. The effect of this will be a credit to retained earnings (accumulated losses).

Proposed in-specie distribution

16. After the sale by Company X of the shares in its foreign subsidiary to Company Y, a receivable of the sale consideration will be recorded in the accounts of Company X.

17. The maintenance of such a significant receivable in the accounts of the Australian subsidiary of Company Y will not accord with the intention of the restructure which is to ensure an entirely foreign owned company structure. Therefore, to distribute these funds, Company X will make an in-specie distribution to its sole shareholder, Company Y, of the receivable.

18. For accounting purposes, the in-specie distribution will contain two components:

· A capital return, being the amount of the distribution determined by management to be a return of capital to Company X's shareholder; and

· A dividend, being the amount of the distribution which represents a distribution of the underlying profits of Company X.

19. The capital return will represent the amount of the proposed in-specie distribution not declared to be a dividend.

20. For income tax purposes, the dividend component of the proposed in-specie distribution will be distributed by Company X as an unfranked dividend. This is because Company X has no Australian sourced profits upon which it has paid Australian tax and therefore has not generated Australian franking credits (as such the franking account balance of Company X on the date of sale will be nil).

21. The applicant has advised that this unfranked dividend component will be declared Conduit Foreign Income (CFI) of Company X, and, on this basis, will be exempt from Australian dividend withholding tax (pursuant to section 802-15 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Other matters

22. The share capital account of Company X is not tainted within the meaning of Division 197 of the ITAA 1997.

23. Company X has not previously distributed share capital, share premiums or dividends to its shareholders, and has not issued bonus shares.

24. All parties to the proposed return of capital are dealing with each other on an arms-length commercial basis, with fair market value consideration.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Section 45A

Income Tax Assessment Act 1936 Subsection 45A(2)

Income Tax Assessment Act 1936 Paragraph 45A(3)(b)

Income Tax Assessment Act 1936 Section 45B

Income Tax Assessment Act 1936 Subsection 45B(2)

Income Tax Assessment Act 1936 Paragraph 45B(2)(a)

Income Tax Assessment Act 1936 Paragraph 45B(2)(b)

Income Tax Assessment Act 1936 Paragraph 45B(2)(c)

Income Tax Assessment Act 1936 Subsection 45B(3)

Income Tax Assessment Act 1936 Subsection 45B(8)

Income Tax Assessment Act 1936 Section 45C

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1997 Division 197

Income Tax Assessment Act 1997 Section 197-50

Income Tax Assessment Act 1997 Section 975-300

Income Tax Assessment Act 1997 Subsection 975-300(3)

Reasons for decision

Question 1

Summary

The capital component of the proposed in-specie distribution (the 'proposed return of capital') will not be a dividend as defined in subsection 6(1) of the ITAA 1936 nor be subject to dividend withholding tax pursuant to section 128B of the ITAA 1936.

Detailed reasoning

Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividends, as defined in subsection 6(1) of the ITAA 1936, paid to the shareholders out of profits derived by the company from any source (if the shareholder is a resident of Australia) and from an Australian source (if the shareholder is a non-resident of Australia).

The term 'dividend' is defined in subsection 6(1) of the ITAA 1936 and includes any distribution made by a company to any of its shareholders. However, paragraph (d) specifically excludes a distribution from the definition of 'dividend' if the amount of the distribution is debited against an amount standing to the credit of the company's share capital account.

The term 'share capital account' is defined in section 975-300 of the ITAA 1997 as an account which the company keeps of its share capital, or any other account created after 1 July 1998 where the first amount credited to the account was an amount of share capital.

Subsection 975-300(3) of the ITAA 1997 states that an account is not a share capital account, except for certain limited purposes, if it is tainted. Section 197-50 of the ITAA 1997 states that a share capital account is tainted if an amount to which Division 197 of the ITAA 1997 applies is transferred to the account and the account is not already tainted.

The proposed return of capital will be debited entirely against the amount standing to the credit of Company X's share capital account. As the share capital account of Company X is not tainted within the meaning of Division 197 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 will apply. Accordingly, the proposed return of capital will not be a dividend as defined in subsection 6(1) of the ITAA 1936. As such, the non-resident shareholder of Company X will not be liable for dividend withholding tax, pursuant to section 128B of the ITAA 1936, on the proposed return of capital.

Question 2

Summary

The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the proposed return of capital.

Detailed reasoning

Section 45A of the ITAA 1936 applies where capital benefits are streamed to some shareholders (the Advantaged Shareholders), who would derive a greater benefit from the receipt of capital than other shareholders (the Disadvantaged Shareholders) and these Disadvantaged Shareholders receive, or are likely to receive, dividends.

A reference to the 'provision of a capital benefit to a shareholder in a company' is defined in paragraph 45A(3)(b) of the ITAA 1936 to include the distribution to the shareholder of share capital.

In the present case, Company X will provide its shareholders with a 'capital benefit' as defined in paragraph 45A(3)(b) of the ITAA 1936 when Company X pays the proposed return of capital to its shareholder. As Company X has only one shareholder, being Company Y who owns ordinary shares, it cannot be said that Company X is streaming capital benefits to Company Y in favour of other shareholders. Therefore section 45A of the ITAA 1936 will not apply to the proposed return of capital. Accordingly, the Commissioner will not make a determination under subsection 45A(2) that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the proposed return of capital.

Question 3

Summary

The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the proposed return of capital.

Detailed reasoning

Section 45B of the ITAA 1936 applies where certain capital payments, including a return of capital, are paid to shareholders in substitution for dividends. It allows the Commissioner to make a determination that section 45C of the ITAA 1936 applies to a capital benefit. Specifically, the provision applies where:

· there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936);

· under the scheme a taxpayer (the relevant taxpayer), who may or may not be the person provided with the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936); and

· having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling the relevant taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936).

Where the requirements of subsection 45B(2) of the ITAA 1936 are met, subsection 45B(3) of the ITAA 1936 empowers the Commissioner to make a determination that section 45C of the ITAA 1936 applies in relation to a capital benefit.

Based on the information provided and having regard to the relevant circumstances and criteria in section 45B(8) of the ITAA 1936, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the proposed return of capital amount.