Edited version of your private ruling

Authorisation Number: 1012552447473

Ruling

Subject: Capital reduction and cancellation

Question 1

Is the proposed return of capital of Company A's redeemable preference shares the payment of a dividend under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will the Commissioner make a determination under section 45A of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or part of the proposed capital reduction and cancellation of Company A's redeemable preference shares?

Answer

No.

Question 3

Will the Commissioner make a determination under section 45B of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or part of the proposed capital reduction and cancellation of Company A's redeemable preference shares?

Answer

No.

This ruling applies for the following periods:

1 July 2013 to 30 June 2014

Relevant facts and circumstances

Company A is an Australian company.

Company A issued redeemable preference shares. The redeemable preference shares are treated as debt instruments for accounting purposes and classified as equity interests for tax purposes.

The board of Company A determined that Company A had excess equity capital.

Company A is proposing to undertake a partial capital reduction and cancellation of an amount of the preference shares issued.

Relevant legislative provisions

Subsection 6(1) of the Income Tax Assessment Act 1936

Section 45A of the Income Tax Assessment Act 1936

Subsection 45A(1) of the Income Tax Assessment Act 1936

Section 45B of the Income Tax Assessment Act 1936

Subsection 45B(2) of the Income Tax Assessment Act 1936

Subsection 45B(3) of the Income Tax Assessment Act 1936

Section 45C of the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Summary

Is the proposed return of capital of Company A's redeemable preference shares the payment of a dividend under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Detailed reasoning

The term 'dividend' in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders. However, this broad definition is confined by paragraphs (d) to (f) which expressly exclude certain items from being a dividend for income tax purposes.

Paragraph (d) of the dividend definition provides an exception for moneys paid or credited by a company to a shareholder, where the amount is debited against an amount standing to the credit of the share capital account of the company.

The applicant states that the principal amount of the redeemable preference shares was credited to a redeemable preference share liability account at the time of issue with the proposed return of capital of an amount resulting in a debit to the same account.

'Share capital account' is defined in section 975-300 of the Income Tax Assessment Act 1997 (ITAA 1997) as an account in which the company keeps its share capital, or any other account created on or after 1 July 1998 where the first amount credited was an amount of share capital.

It is accepted that the 'account' fits the definition of 'share capital account'. Therefore, an amount debited to the redeemable preference share liability account will not meet the definition of a dividend under section 6(1) of the ITAA 1936.

Question 2

Summary

Will the Commissioner make a determination under section 45A of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or part of the proposed capital reduction and cancellation of Company A's redeemable preference shares?

Detailed reasoning

Subsection 45A(1) of the ITAA 1936 states that the section 45A applies in respect of a company that streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that:

§ The capital benefits are received by shareholders (the advantaged shareholders) who would, in the year of income in which the capital benefits are provided, derive a greater benefit from the capital benefits than other shareholders; and

§ It is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received, or will receive, dividends.

The meaning of 'provision of capital benefit' is defined under subsection 45A(3) of the ITAA 1936. Subsection 45A(4) sets out the circumstances in which a shareholders would derive a 'greater benefit from capital benefits' than another shareholder.

Although there is a 'provision of capital benefit' in the present case, the Commissioner is of the view that there is no 'streaming' of capital benefits and dividends in the present case under section 45A. Therefore, the Commissioner will not to make a determination under subsection 45A(2) of the ITAA 1936 that section 45C applies to the proposed capital reduction and cancellation of the redeemable preference shares.

Question 3

Summary

Will the Commissioner make a determination under section 45B of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or part of the proposed capital reduction and cancellation of Company A's redeemable preference shares?

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 applies to a capital benefit.

Section 45B 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, 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 the relevant taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936).

The proposed capital reduction and cancellation of redeemable preference shares is a 'scheme' for the purposes of section 45B.

As Company A will be returning the subscription price in respect of an amount of the redeemable preference shares paid by the holders under the proposed arrangement, there will be a 'provision of a capital benefit' as defined by paragraph 45B(5)(b) of the ITAA 1936.

Also, the redeemable preference share holders will have obtained a tax benefit, within the meaning of subsection 45B(9) of the ITAA 1936, as the amount of tax payable from the treatment of a return of capital under the capital gains and losses provisions would, apart from the operation of section 45B of the ITAA 1936, be less than the amount that would be payable if the distribution had instead been a dividend.

For the purposes of paragraph 45B(2)(c), the Commissioner is required to consider the 'relevant circumstances' set out in subsection 45B(8) to determine whether any part of the scheme would be entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit. Having regard to the relevant circumstances of the scheme, it cannot be concluded that the scheme is proposed to be entered into for a more than incidental purpose of enabling a taxpayer to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination under subsection 45B(3) that section 45C applies to the proposed capital reduction and cancellation of the redeemable preference shares.