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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012514980306

Ruling

Subject: Application of section 45B of the ITAA 1936 to a share capital return

Question

Can the Commissioner confirm that he will not make a determination under section 45B of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C of the ITAA 1936 will apply to the proposed return of share capital from Company X to its shareholders? 

Answer

The commissioner confirms that he will not make a determination under section 45B of the ITAA 1936 that section 45C of the ITAA 1936 will apply to the proposed return of share capital from Company X to its shareholders.

This ruling applies for the following period:

01 January 2013 to 31 December 2013

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

    1. Company X was incorporated by Company M's management and then used as a takeover vehicle to acquire Company M's business.

    2. The Company M's takeover involved its own management team and several other entities.

    3. Immediately after the takeover Company X consolidated for tax purposes.

    4. Company X decided to enter into a sale and lease back of one of its properties.

    5. The decision to sale and lease back is to relieve funding pressures caused by other debt commitments.

    6. Because of the quantum of cash which the sale and leaseback would generate, it has been decided in addition to repaying some debt, to return funds to shareholders. The actual amount returned will be a function of the sale price of the property, as well as working capital and debt requirements of the group.

    7. At the end of the financial year period, 100% of any prevailing book profits in the consolidated group will be declared to shareholders as dividends. The balance of the proceeds from the sale and leaseback will be a return of share capital.

Accounting journals on declaration/ payment of dividend and capital return

    8. When Company X declares 100% of its end of period profits as a dividend, the accounting entry to process on its financial statements will be:

    Dr Retained earnings

    Cr Dividend payable

    9. When the dividend is actually paid, the accounting entry will be:

    Dr Dividend payable

    Cr Bank

    10. The return of capital will be accounted for as follows:

    Dr Share capital

    Cr Bank

Other matters

    11. Company X's share capital account is not tainted within the meaning of Division 197 of the ITAA 1997.

    12. Company X's shares are all post-CGT shares.

    13. All Company X's shareholders are resident.

    14. Company X is permitted to return share capital under its constitution.

Relevant legislative provisions

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

Reasons for decision

    1. 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).

    2. 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.


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