Edited version of your written advice

Authorisation Number: 1013090082608

Date of advice: 21 September 2016

Ruling

Subject: Distributions by a liquidator

Question

Is a capital gain, which is reduced to nil pursuant to Subdivision 768-G of the Income Tax Assessment Act 1997 (ITAA 1997), an amount that is included in the extended meaning of income as defined in subsection 47(1A) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

This ruling applies for the following period

1 July 20XX to 30 June 20YY

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

Company X is an Australian resident company which owns shares in two foreign resident companies: Company B and Company C.

Company X proposes to sell its shares in Company B and Company C and the company will then be liquidated under a members' voluntary liquidation.

Company X satisfies the requirements in Subdivision 768-G of the ITAA 1997 for the capital gain to be reduced by the foreign business assets percentage.

The foreign business asset percentage of both Company B and Company C is 100% and the capital gain will therefore be reduced to nil.

It is anticipated that the final payment by the liquidator to the shareholder of Company X will include the net capital gain on sale of the shares in Company B and Company C.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 47

Income Tax Assessment Act 1936 subsection 47(1)

Income Tax Assessment Act 1936 subsection 47(1A)

Income Tax Assessment Act 1997 Subdivision 768-G

Income Tax Assessment Act 1997 section 768-505

Income Tax Assessment Act 1997 subsection 768-505(1)

Income Tax Assessment Act 1997 subsection 768-505(2)

Reasons for decision

Question

Summary

A capital gain, which is reduced to nil pursuant to Subdivision 768-G of the ITAA 1997, will not be 'income' derived by Company X for the purposes of subsection 47(1A) of the ITAA 1936.

Detailed reasoning

Subsection 47(1) of the ITAA 1936 provides that distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company, other than income which has been properly applied to replace a loss of paid-up share capital, shall be deemed to be dividends paid to the shareholders by the company out of profits derived by it.

In the current circumstances, Company X will be liquidated following the sale of shares that it holds in Company B and Company C. It is expected that part of the final payment by the liquidator to the shareholder of Company X will include any net capital gain arising from the sale of its shares in Company B and Company C. The question at issue is whether any capital gain from the sale of these shares, which is reduced to nil pursuant to Subdivision 768-G of the ITAA 1997, will be an amount that is included in the extended meaning of income as defined in subsection 47(1A) of the ITAA 1936.

In this regard, subsection 47(1A) of the ITAA 1936 relevantly provides that a reference in subsection 47(1) to 'income derived by the company' includes a reference to:

(a) An amount (except a net capital gain) included in the company's assessable income for a year of income; or

(b) A net capital gain that would be included in the company's assessable income for a year of income if the ITAA 1997 required a net capital gain to be worked out in accordance with the following method statement.

Method Statement

Step 1. Work out each capital gain (except a capital gain that is disregarded) that the company made during that year of income. Do so without indexing any amount used to work out the cost base of the CGT asset.

Step 2. Total the capital gains worked out under step 1. The result is the net capital gain for that year of income.

In the current circumstances, paragraph 47(1A)(b) of the ITAA 1936 and the application of the Method statement is of primarily relevance.

In this regard, the first step of the Method Statement involves working out each capital gain (except a capital gain that is disregarded) that the company has made during that year of income.

With this in mind, it is initially noted that CGT event A1 will happen as a consequence of the disposal of these shares in Company B and Company C. Company X would therefore need to determine whether it has made a 'capital gain' (or capital loss) from the sale of these share which is calculated in accordance with section 100-45 and subsection 104-10(4) of the ITAA 1997.

In this case however, any capital gain or capital loss made by Company X will be reduced to nil in accordance with subsections 768-505(1) and 768-505(2) of the ITAA 1997 which specifically state:

768- 505(1) The *capital gain or *capital loss a company (the holding company) that is an Australian resident makes from a *CGT event that happened at a particular time (the time of the CGT event) to a *share in a company (the foreign disposal company) that is a foreign resident is reduced if:

(a) the holding company held a *direct voting percentage of 10% or more in the foreign disposal company throughout a 12 month period that:

(i) began no earlier than 24 months before the time of the CGT event; and

(ii) ended no later than that time; and

(b) the share is not:

(i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936); or

(ii) a widely distributed finance share (within the meaning of that Part); and

(c) the CGT event is CGT event A1, B1, C2, E1, E2, G3, J1, K4, K6, K10 or K11.

768- 505(2) The gain or loss is reduced by the *active foreign business asset percentage (see sections 768-510, 768-530 and 768-535) of the foreign disposal company in relation to the holding company at the time of the CGT event.

Because the capital gain made from the disposal of its shares in Company B and Company C will be reduced to nil under section 768-505 of the ITAA 1997, it is considered that Company X will not make a 'capital gain' for the purposes of Step 1 of the Method Statement or a 'net capital gain' under paragraph 47(1A)(b) of the ITAA 1936.

For completeness, it is also noted that the reduced net capital gain would also not constitute an amount (except a net capital gain) included in the company's assessable income for a year of income (paragraph 47(1A)(a) of the ITAA 1936).

Consequently, any capital gain, which is reduced to nil pursuant to Subdivision 768-G of the ITAA 1997, will not be 'income derived by a company' as defined in subsection 47(1A) of the ITAA 1936.