Edited version of your written advice

Authorisation Number: 1012994718555

Date of advice: 8 April 2016

Ruling

Subject: Proposed distribution involving return of capital and payment of dividend

Question

Will the Commissioner not make a determination under section 45B of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of the whole or a part of the capital benefit such that the Commissioner will not make a determination under subsection 45C(3) of the ITAA 1936 for a franking debit to arise in Company X's franking account in respect of the capital benefit?

Answer

Yes

This ruling applies for the following periods:

1 July 20YY to 30 June 20ZZ

The scheme commences on:

The day the Company X makes the proposed distribution

Relevant facts and circumstances

1. Company X was formed in the 20XX income year. Since that time, Company X has paid dividends for most of the years but has not returned any capital to its shareholders.

2. Company X proposes to make a part-dividend, part-capital return (proposed distribution) of $x to its shareholders in the 20ZZ income year.

3. In the accounts of Company X, the amount of the dividend will be debited to retained earnings and the amount of the return of capital will be debited to the share capital account.

4. The proposed distribution will be implemented to achieve the Company X's objective of re-balancing its debt and equity mix and re-aligning its gearing ratio in accordance with its target levels by increasing its debt.

Relevant legislative provisions

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

Reasons for decision

Pursuant to subsection 45C(3) of the ITAA 1936, if the Commissioner makes a determination under section 45B for the whole or part of a capital benefit and makes a further written determination that the capital benefit was paid for a purpose of avoiding franking debits arising from the distribution of the company, a franking debit of the company may arise in respect of the capital benefit.

Subsection 45B(2) of the ITAA 1936 provides that section 45B applies if:

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

(b) under the scheme a taxpayer, who may or may not be the person provided with 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 persons who entered into or carried out the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit.

Based on the information provided by the applicant, paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are satisfied. Paragraph 45B(2)(c) of the ITAA 1936 is not satisfied because the required element of purpose is not present.

Accordingly, the Commissioner will not make a determination under section 45B of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the capital benefit.

The Commissioner can only make a determination under subsection 45C(3) of the ITAA 1936 for a franking debit to arise if the Commissioner has made a determination under section 45B of the ITAA 1936 in respect of the capital benefit arising in connection with the proposed distribution.

On this basis, the Commissioner will not make a determination under subsection 45C(3) of the ITAA 1936 for a franking debit to arise in Company X's franking account in respect of the capital benefit.