Edited version of your private ruling

Authorisation Number: 1012564311068

Ruling

Subject: Return of Capital

Question 1

Will the Commissioner make a determination under paragraph 45B(3)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C of the ITAA 1936 applies in relation to the whole or part of the return of capital?

Answer

No

Question 2

Will the Commissioner make a determination under subsection 45C(3) of the ITAA 1936 for a franking debit to arise in Company B's franking account?

Answer

No

This ruling applies for the following periods:

xx/xx/xxxx

The scheme commences on:

xx/xx/xxxx

Relevant facts and circumstances

Background

Structure of Company B

Company B is the holding company of the Company B group and is a company incorporated overseas. However, it is a resident of Australia for income tax purposes as both its business and central management and control are located in Australia.

Company B indirectly owns all of the shares in Company C, the holding vehicle for the various operating subsidiaries of the group, and Company D, the borrower for the group.

Company B is the head company of the tax consolidated group of which Company C and Company D are members.

Financial Performance

The consolidated financial statements of the group have been provided by Company B.

Group restructure

In xxxx, Company B group was restructured. This involved both a corporate reorganisation and a restructure of the borrowings of the group.

At the time of the restructure Company B was experiencing financial difficulties. In particular, the group had a significant amount of debt. Total debt at that time was approximately $xxxm.

The restructure of the group involved a number of steps which ultimately resulted in:

· a new tax consolidated group being established with Company B as head company of the group (Company C and Company D became members of the consolidated group);

· the debt of the group being reduced to approximately $xxxm; and

Current refinancing

Company B group has just completed a refinancing of its borrowing arrangements.

Under the new borrowing arrangements, the debt that was previously held by over xx lenders has been refinanced by the issue of new debt under a loan facility agreement. The amount raised under the agreement is $xxxm .

The new agreement was entered into on xx/xx/xxxx with $xxxm drawn down at that time. The $xxxm borrowed under the new agreement has been used to repay the existing lenders.

The number of lenders under the new agreement will be significantly less than the previous number of lenders.

Cash in excess of operational requirements

As at xx/xx/xxxx, Company B group had approximately $xx of available cash.

This amount has three main sources, being:

· approximately $xxm of cash generated from the group's ongoing business activities;

· approximately $xxm from the repayment of a loan in connection with the disposal of a subsidiary; and

· approximately $xxm from existing cash on the balance sheet when the group was acquired in xxxx.

Of this excess cash, the Company B group proposes to return $xx to its shareholders in the form of a fully franked dividend and a return of capital.

Dividend

Company B Group has not, to date, paid any dividends to its shareholders. This position is stated to be as a result of the significant amount of debt of the previous group and the interest payable on that debt.

Company B group expects to pay (fully franked) dividends in future income years.

Return of Capital

It is expected that the return of capital will be approximately $xx.

Share capital account

Company B states that it does not have a tainted share capital account (under Division 197).

Disposal of shares in a subsidiary

The applicant states that all parties to the return of capital are dealing with each other on arm's length terms and for fair market value consideration. The applicant also states that all payments, receipts, assets and liabilities under the capital return are denominated in Australian dollars.

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)(c).

Income Tax Assessment Act 1936 subsection 45B(3).

Income Tax Assessment Act 1936 paragraph 45B(3)(b).

Income Tax Assessment Act 1936 subsection 45B(5).

Income Tax Assessment Act 1936 paragraph 45B(5)(b).

Income Tax Assessment Act 1936 subsection 45B(8).

Income Tax Assessment Act 1936 paragraph 45B(8)(a).

Income Tax Assessment Act 1936 paragraph 45B(8)(b).

Income Tax Assessment Act 1936 subsection 45B(10).

Income Tax Assessment Act 1936 section 45C.

Income Tax Assessment Act 1936 subsection 45C(3).

Income Tax Assessment Act 1936 section 318.

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

Income Tax Assessment Act 1997 subsection 995-1(1).

Reasons for decision

Issue 1 Question 1

Will the Commissioner make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole or part of the return of capital?

Summary

1. Subsection 45B(2) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that section 45B of the ITAA 1936 will apply where:

(a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and

(b) under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and

(c) 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 a taxpayer (the relevant taxpayer) to obtain a tax benefit.

Scheme

2. A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) (Subsection 45B(10) of the ITAA 1936). That definition is widely drawn and includes any arrangement, scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

3. The proposed return of capital outlined in the applicants ruling request dated xx/xx/xxxx constitutes a scheme for the purposes of section 45B of the ITAA 1936.

Capital Benefit

4. A 'capital benefit' is defined in subsection 45B(5) of the ITAA 1936 and refers to a distribution of share capital or share premium (paragraph 45B(5)(b) of the ITAA 1936).

5. The return of capital proposed by the applicant involves the provision of a capital benefit for the purposes of subsection 45B(5) of the ITAA 1936.

Tax Benefit

6. A tax benefit is obtained under the scheme if an amount of tax payable by the relevant taxpayer would, apart from the operation of section 45B of the ITAA 1936, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the capital benefit had been an assessable dividend.

7. The return of capital will reduce the cost base of Company B's ownership interests. This constitutes a tax benefit for the purposes of section 45B of the ITAA 1936.

Relevant Circumstances

8. As all other criteria are satisfied, the last limb of subsection 45B(2) of the ITAA 1936 requires determining whether, having regard to the relevant circumstances of the scheme, it would be concluded that the person, who entered into or carried out the scheme or any part of the scheme did so for a purpose (not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit.

9. Subsection 45B(8) of the ITAA 1936 lists the relevant circumstances of a scheme which the Commissioner must have regard to when determining whether or not the requisite purpose exists. The list of circumstances is not exhaustive and the Commissioner may have regard to other circumstances which he regards as relevant. Paragraphs 45B(8)(a) and 45B(8)(b) of the ITAA 1936 are relevant for the purposes of determining the requisite purpose pursuant to paragraph 45B(2)(c) of the ITAA 1936.

Paragraph 45B(8)(a): attribution

10. Paragraph 45B(8)(a) of the ITAA 1936 considers the extent to which the capital benefit is attributable to capital and profits (realised and unrealised) of the company or an associate of the company. The implication of this inquiry is that despite a distribution taking the form of share capital it can be ascribed in fact to either the company's share capital or the profits of the company or its associates.

11. The distribution of share capital was funded from the repayment of a loan in connection with the disposal of a majority of its shares in the subsidiary, and cash on the balance sheet acquired with the group in xxxx.

12. Accordingly, the circumstances do not incline towards the requisite purpose.

Paragraph 45B(8)(b): pattern of distributions

13. Paragraph 45B(8)(b) of the ITAA 1936 directs attention to the patterns of distributions of dividends, bonus shares and returns of capital or share premium by the company or an associate (within the meaning in section 318 of the ITAA 1936) of the company. The inference is that an interruption to the normal pattern of profit distribution and replacement with a distribution of capital may suggest dividend substitution.

14. The current Company B group formed in xx/xxxx. Since this date there have been no distributions or returns of capital.

15. The applicant submits that

no dividends were paid by the former group for a number of years (since xxxx). This position had largely arisen as a result of the significant amount of debt of the previous group and the interest payable on that debt

16. Accordingly, this circumstance does not incline towards the requisite purpose.

Conclusion

17. On the basis of the arrangement as described, the Commissioner has formed the view that the requisite purpose is not present, such that the capital benefits being provided to Company B shareholders are not being provided for a more than incidental purpose of obtaining a tax benefit.

18. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole, or any part, of the capital benefit being provided to Company B shareholders under the scheme.

Question 2

Will the Commissioner make a determination under subsection 45C(3) of the ITAA 1936 for a franking debit to arise in Company B's franking account?

Summary

No. The Commissioner will not make a further determination pursuant to subsection 45C(3) of the ITAA 1936 because subsection 45B(3) of the ITAA 1936 will not apply to the scheme.