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Edited version of your written advice
Authorisation Number: 1051424378268
Date of advice: 13 September 2018
Ruling
Subject: Capital return
Question 1
Will any part of the Capital Return (that is debited against the share capital account) made by Company A to shareholders be treated as a dividend within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
No
Question 2
Will the Commissioner make a determination under paragraph 45B(3)(b) of the ITAA 1936 and thereby impose a debit to the franking account of the company under subsection 45C(3) of the ITAA 1936 in respect of the Capital Return?
Answer
No
This ruling applies for the following periods:
Year ended 31 December 2019
The scheme commences on:
1 January 2019
Relevant facts and circumstances
Company A intends to make a distribution to its shareholders.
The distribution will consist of a Capital Return and a Dividend.
The Capital Return will be undertaken as an equal reduction of capital in accordance with section 256B of the Corporations Act 2001.
Company A will debit the entire Capital Return to its share capital account.
Company A’s share capital account (as defined in section 975-300 of the Income Tax Assessment Act 1997 (ITAA 1997)) is not tainted (within the meaning of Division 197 of the ITAA 1997).
Relevant legislative provisions
Income Tax Assessment Act 1936 subsection 6(1)
Income Tax Assessment Act 1936 section 45C
Reasons for decision
Question 1
The term dividend is defined in subsection 6(1) of the ITAA 1936 to include any distribution made by a company to any of its shareholders. However, paragraph (d) specifically excludes a distribution from the definition of ‘dividend’ if the amount of the distribution is debited against an amount standing to the credit of the share capital account of the company.
A share capital account is defined in section 975-300 of the ITAA 1997 as an account which the company keeps of its share capital or any other account created after 1 July 1998 where the first amount credited to the account was an amount of share capital.
Subsection 975-300(3) of the ITAA 1997 states that an account is generally taken not to be a share capital account if it is tainted. Section 197-50 of the ITAA 1997 states that a share capital account is tainted if an amount to which Division 197 of the ITAA 1997 applies, is transferred to the account and the account is not already tainted.
As the Capital Return will be debited against Company A’s share capital account, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 will apply. The applicant has advised that Company A’s share capital account is not tainted within the meaning of Division 197 of the ITAA 1997. Accordingly, the return of capital is not a dividend as defined in subsection 6(1) of the ITAA 1936.
Question 2
The Commissioner will not make a determination under paragraph 45B(3)(b) that section 45C should apply to the whole, or a part of the capital benefit, therefore the Commissioner will not make a determination under subsection 45C(3) of the ITAA 1936.