Edited version of your written advice

Authorisation Number: 1012814323281

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Ruling

Subject: Streaming of dividends and capital benefits

Question 1

Will the Commissioner make a determination under either subsection 45A(2) or subsection 45B(3) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C of the ITAA 1936 applies to a repayment of the proposed 'At-call' loan, deeming the distribution of capital to be an unfranked dividend in the return of income for the year in which all or part of the loan is repaid?

Answer

No

This ruling applies for the following periods

1 July 2014 to 30 June 2025

The scheme commences on

1 July 20ZZ

Relevant facts and circumstances

BACKGROUND

1. Red Pty Ltd (Red) is the head company of a consolidated group.

2. Red is a unit holder of the Blue Trust.

3. You state that the Blue Trust and Red are part of the Rainbow Group of entities.

4. For the year ended 30 June 20ZZ, Red:

a. had retained earnings

b. made no capital distributions to the unit holders of the Blue Trust, and

c. did not have any carried forward capital losses.

Existing loan from the Blue Trust to Red

5. On a specific date in 2005, Red (as borrower) entered into a loan agreement with the Trustee for the Blue Trust (as lender). The key terms of the loan agreement are that:

a. Red may request the Blue Trust to lend money to it

b. the Blue Trust is not obliged to lend money to Red

c. the term of each loan debt is for a period of X years, and

d. no interest shall be payable on any loan debt unless an interest notice is served by the Blue Trust on Red.

6. Prior to entering into this loan agreement, Red had obtained an At-Call loan from the Blue Trust of $ million, which was treated as a debt interest until 20YY.

7. This $ million was repaid and a new loan for the same amount was made to Red from the Blue Trust on a specific date in 2005, and:

a. the term of the loan was X years

b. the loan was interest free, and

c. the borrowed funds have been used by Red in the course of carrying on its business.

8. Red has not made any principal or interest payments on the loan from the Blue Trust. As such, the amount currently outstanding is the full $ million initially borrowed.

9. Although Red intended to repay the loan by the expiration date of the agreement, being a specific date in 2015, it has now determined that it needs further funding from the Blue Trust.

Proposed at-call loan from the Blue Trust to Red

10. It is proposed that prior to the expiration of the current loan, the existing $ million loan from the Blue Trust be converted into an At-call loan.

11. The existing loan is a debt interest that once converted, will become an equity interest for the purposes of Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997).

12. Due to the requirements in section 164-10 of the ITAA 1997, Red will establish a non-share capital account on the day on which the new At-Call loan is made. The $ million will be credited to this account to represent the balance of the loan from the Blue Trust.

Assumption(s)

13. For the purposes of this ruling, the taxpayers have agreed for the Commissioner to make the assumption that a loan repayment will be made in each income year until the At-call loan is repaid in full.

Relevant legislative provisions

Subsection 177A(1) of the Income Tax Assessment Act 1936

Section 45A of the Income Tax Assessment Act 1936

Section 45B of the Income Tax Assessment Act 1936

Section 45C of the Income Tax Assessment Act 1936

Further issues for you to consider

Anti-avoidance rules

Part IVA is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Reasons for decision

14. In 1998 amendments were made to the Corporations Act 2001 (Corporations Act) which removed some of the then existing restrictions on share capital reductions by companies. A consequence of these amendments was that it became easier for companies to make capital distributions to shareholders.

15. As a result of the changes to the Corporations Act, sections 45A, 45B and 45C of the ITAA 1936 were introduced as anti-avoidance provisions to prevent companies from distributing profits to shareholders as preferentially tax capital distributions rather than dividends.

Streaming of dividends and capital benefits

16. Section 45A of the ITAA 1936 applies where capital benefits are streamed to certain shareholders¹ who derive a greater benefit from the receipt of capital and it is reasonable to assume that the other shareholders² have received (or will receive) dividends.

17. The Commissioner may make a determination in writing that section 45C of the ITAA 1936 applies to whole or part of the capital benefit pursuant to subsection 45A(2).

18. Subsection 45A(3) of the ITAA 1936 provides that the term 'provision of a capital benefit' refers to the following:

a. the provision of shares in the company to the shareholder

b. the distribution of share capital or share premium to the shareholder, or

c. something that is done in relation to a share that increases the value of a share held by the shareholder.

Schemes to provide certain benefits

19. Subsection 45B(1) of the ITAA 1936 provides that the purpose of section 45B is to ensure that relevant amounts are treated as dividends if certain payments, allocations and distributions are made in substitution for dividends.

20. In relation to capital benefits, subsection 45B(2) of the ITAA 1936 provides that 45B will apply if:

a. there is a scheme under which a person is provided with a capital benefit by a company

b. a taxpayer (the relevant taxpayer) obtains a tax benefit (this taxpayer may or may not be the person who is provided with the capital 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 the taxpayer (the relevant taxpayer) to obtain a tax benefit.

21. A 'scheme' is defined in subsection 177A(1) of the ITAA 1936 as:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable by legal process; and

(b) any scheme, plan, proposal, action, course of action or course of conduct.

22. Subsection 45B(5) of the ITAA 1936 provides that a person will be 'provided with a capital benefit' if:

a. they are provided with an ownership interest in a company

b. they receive distributions in share capital or share premium, or

c. something is done that increases the value of their ownership interest (which may or may not be the same ownership interest).

23. Subsection 45B(7) of the ITAA 1936 further states that a non-share distribution to an equity holder will be taken to be a distribution of share capital to the equity holder to the extent to which it is a non-share capital return.

24. In relation to capital benefits, the meaning of the term 'tax benefit' is provided by subsection 45B(9) of the ITAA 1936, which states:

A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, 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.

25. Paragraph 45B(2)(c) of the ITAA 1936 requires the Commissioner to consider the 'relevant circumstances' of the scheme as set out in subsection 45B(8) of the ITAA 1936. A consideration of these circumstances determines whether any part of the scheme will be entered into for a purpose, other than an incidental purpose, of enabling the relevant taxpayer to obtain a tax benefit. Each of the circumstances must be considered in order to determine whether or not, individually or collectively, they reveal the existence of the requisite purpose.

26. The test of purpose is an objective one. The question is whether it would be concluded that a person who enters into or carries out the scheme does so for the purpose of obtaining a tax benefit for the relevant taxpayer in respect of the capital benefit. The purpose does not have to be the most influential or prevailing purpose, but it must be more than an incidental purpose.

27. The relevant circumstances contained in subsection 45B(8) of the ITAA 1936 cover the circumstances of the company and the tax profile of the shareholders. The relevant circumstances covered by paragraphs 45B(8)(a) to 45B(8)(k) of the ITAA 1936, are considered below.

Effect of determinations under section 45A and 45B for capital benefits

28. Section 45C of the ITAA 1936 broadly provides that if the Commissioner makes a determination under subsections 45A(2) or 45B(3) of the ITAA 1936, the amount of the capital benefits is taken to be paid out of company profits and to be an unfranked dividend that is paid by the company to the shareholder or relevant taxpayer at the time the capital benefit is provided.

Application to your circumstances

29. It is proposed that the current $ million loan from the Blue Trust to Red will be converted to an At-Call loan in the year ended 30 June 2015. This satisfies the broad definition of a scheme pursuant to section subsection 177A(1) of the ITAA 1936.

30. The scheme satisfies paragraph 45B(2)(b) of the ITAA 1936 as the Blue Trust will receive a capital benefit as the loan repayment from Red will be a return of non-share equity.

31. With regards to the relevant circumstances applicable to this scheme as provided by subsection 45B(8) of the ITAA 1936:

a. the repayments represent a return of loan capital to the Blue Trust rather than a distribution of profits

b. Red did not make any capital distributions to shareholders in the year ended 30 June 20ZZ

c. Red does not have a capital loss in the year ended 30 June 20ZZ

d. Red and the Blue Trust are Australian residents

e. the cost base of the ownership interest is not substantially less than the value of the loan repayment because a loan repayment made by Red will have an equal effect in reducing the outstanding loan from the Blue Trust

f. the repayment of loan capital does not involve the issue or shares or the change in the rights of shares, and

g. there are no other factors as provided by subsection 177D(2) that are present in this scheme

32. Having regard to the relevant circumstances, the Commissioner considers that scheme was not entered into for the purpose of enabling the relevant taxpayer to obtain a tax benefit, and the capital repayments made by Red to the Blue Trust should not be treated as unfranked dividends

33. Accordingly, the Commissioner will not make a determination under either subsection 45A(2) or subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the loan repayments.

¹ known as the advantaged shareholders.

² known as the disadvantaged shareholders.