Edited version of your written advice

Authorisation Number: 1012924686504

Date of advice: 10 December 2015

Ruling

Subject: Interest forgiveness and capital reduction

Question 1

Will the proposed forgiveness of interest receivable from Parent be a dividend as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will the proposed return of capital undertaken by the Company be a dividend as defined in subsection 6(1) of the ITAA 1936?

Answer

No

Question 3

Will the Commissioner make a determination under subsections 45A(2) or 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat all or part of the proposed return of capital as a dividend?

Answer

No

This ruling applies for the following periods:

2015 income year

The scheme commences on:

The schemes will commence when the forgiveness of interest and the capital reduction occur.

Relevant facts and circumstances

The Taxpayer Company is an Australian incorporated company which has ceased trading and is proposing to wind-up and be deregistered. The Company is wholly owned by a foreign listed company (Parent). As part of the winding-up process the Company proposes to forgive an amount of interest owing to it by the Parent and to make a return of share capital to the Parent that will be wholly debited to the Company's untainted share capital account. At the time of the return of capital the Company will have no profits.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1) definition of 'dividend',

Income Tax Assessment Act 1936 subsection 45A(2), and

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

Reasons for decision

Question 1

Summary

No, the proposed forgiveness of interest receivable from Parent will not be a dividend as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

The term 'dividend' as defined in subsection 6(1) includes:

(a) any distribution made by a company to any of its shareholders, whether in money or other property; and

(b) any amount credited by a company to any of its shareholders as shareholders;

The forgiveness of the interest owed by Parent to the Company would amount to a credit in the absence of any distribution. However, this amount is credited to Parent as a debtor rather than in its capacity as a shareholder.

For this reason, the proposed forgiveness of interest will not be a dividend as defined in subsection 6(1).

Question 2

Summary

No, the proposed return of capital undertaken by the Company will not be a dividend as defined in subsection 6(1) of the ITAA 1936.

Detailed reasoning

The term 'dividend' as defined in subsection 6(1) includes:

(a) any distribution made by a company to any of its shareholders, whether in money or other property; and

(b) any amount credited by a company to any of its shareholders as shareholders;

Among the exclusions from this definition, paragraph (d) is relevant to the facts:

(d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company;

Section 975-300 of the ITAA 1997 defines 'share capital account' as:

(a) an account that the company keeps of its share capital; or

(b) any other account (whether or not called a share capital account) that satisfies the following conditions:

(i) the account was created on or after 1 July 1998;

(ii) the first amount credited to the account was an amount of share capital.

The applicant has stated that 'the return of capital will be debited entirely against an amount standing to the Credit of the Company's share capital account.'

They further state that this account has not been tainted within the meaning of Division 197 of the ITAA 1997. Therefore, the proposed return of capital will not be a dividend under subsection 6(1).

Question 3

Summary

A determination will not be made under subsections 45A(2) or 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat all or part of the proposed return of capital as a dividend.

Detailed reasoning

Sections 45A and 45B are two anti- avoidance provisions which, if they apply, allow the Commissioner to make a determination that section 45C applies to treat all or part of the return of capital amount received by shareholders as an unfranked dividend paid by a company out of profits to the shareholder.

Section 45A - streaming of dividends and capital benefits

Section 45A applies in circumstances where capital benefits are streamed to certain shareholders who derive a greater benefit from the receipt of capital (the advantaged shareholders) and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends.

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

The Company is proposing a return of capital to its sole shareholder. As there are no disadvantaged shareholders section 45A will not apply.

Section 45B

Subsection 45B(2) provides that section 45B 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.

Paragraphs (a) and (b) will be satisfied as there is a scheme in the proposed return of capital which provides Parent with a tax benefit.

In applying paragraph (c) the relevant circumstances were considered and it does not lead to a conclusion that the return of capital is being carried out for the purpose of enabling Parent to obtain a tax benefit.

For this reason section 45C will not deem the return of capital, or part of it, to be an unfranked dividend.