Edited version of private advice

Authorisation Number: 1051582388626

Date of advice: 19 September 2019

Ruling

Subject: Share capital return

Question 1

Will the Capital Component of the Distribution constitute a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997) for income tax purposes?

Answer 1

No

Question 2

Will Entity A be required to give a notice under section 45D of the Income Tax Assessment Act 1936 (ITAA 1936), on the basis that the Commissioner has made a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the proposed Capital Component of the Distribution?

Answer 2

No

Question 3

Will Entity A be required to give a notice under section 45D of the ITAA 1936, on the basis that the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the proposed Capital Component of the Distribution?

Answer 3

No

Question 4

Will the partial repayment of the Loan constitute a non-share dividend as defined in subsection 974-120 of the ITAA 1997 for income tax purposes?

Answer 4

No

Question 5

Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit provided to Entity A on the partial repayment of the Loan?

Answer 5

No

This ruling applies for the following period:

x

The scheme commences on:

x

Relevant facts and circumstances

Entity A is incorporated outside Australia and is a 'prescribed dual resident' within the meaning of subsection 6(1) of the ITAA 1936. Entity A's shares have a par value.

Entity A is the head entity of the Group.

Entity B is an Australian resident and is wholly owned by Entity A. Entity B is the head company of an Australian Tax Consolidated Group (TCG).

Entity C is a member of the TCG.

Entity C will pay dividend to Entity B.

Entity B will:

·        pay a dividend to Entity A, and

·        repay a loan owing by it to Entity A (Loan). The Loan is an equity interest within the meaning of Division 974 of the ITAA 1997. Entity B will debit its non-share capital account on repayment of the Loan.

The repayment of the Loan is funded by a new loan under an existing credit facility.

Entity A will make a distribution (Distribution) as follows:

·        pay a dividend to its shareholders (Dividend Component), and

·        return capital to its shareholders (Capital Component). Entity A will debit its share premium account which is within the meaning of the former definition of 'share premium account'.

Reasons for decision

Question 1

The meaning of distribution is set out in section 960-120 of the ITAA 1997. Item 1 of the table in subsection 960-120(1) of the ITAA 1997 provides that a distribution by a company includes ' a dividend, or something that is taken to be a dividend under this Act'.

Amendments to the Corporations Act 2001 (Corporation Act) in 1997 abolished the concept of par value shares and associated concepts of share premium, share premium accounts, and paid-up capital. As a result of these Corporations Act amendments, consequential amendments were made to the taxation laws by the Taxation Laws Amendment (Company Law Review) Act 1998 ('the Act'). These amendments included repealing the definition of share premium account and amending the definition of dividend in subsection 6(1) of the ITAA 1936, and amending subsection 6(4) of the ITAA 1936. These provisions as enacted prior to the amendments contained in the Act will be referred to hereafter as the 'former provisions'.

However, the amendments only have effect from 1 July 1998 for companies that do not have on issue par value shares. For those companies that continue to have par value shares on issue, the former provisions, including the former definition of dividend, continue to apply.

Former subsection 6(1) of the ITAA 1936 provides that a dividend is defined as follows:

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

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

(c)   the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits;

But does not include:

(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), 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 a share premium account of the company;

(e)   moneys paid or credited, or property distributed, by a company by way of repayment by the company of moneys paid up on a share except to the extent that:

(i)         if the share is cancelled or redeemed-the amount of those moneys or the value of that property, as the case may be, is greater than the amount to which the share was paid up immediately before the cancellation or redemption; or

(ii)       in any other case-the amount of those moneys or the value of that property, as the case may be, is greater than the amount by which the amount to which the share was paid up immediately before the repayment exceeds the amount to which the share is paid up immediately after the repayment; or

(f)     a reversionary bonus on a policy of life-assurance;

Under former subsection 6(1)(d) of the ITAA 1936, a distribution will not be a dividend to the extent the amount is debited against an amount standing to the credit of the company's 'share premium account'.

The definition of 'share premium account' was repealed by Schedule 5 of Act No. 63 of 1998. However the former definition of 'share premium account' continues to apply to Entity A. It states:

share premium account in relation to a company, means an account, whether called a share premium account or not, to which the company has, in respect of premiums received by the company on shares issued by it, credited amounts, being amounts not exceeding the respective amounts of the premiums, but does not include:

(a)     where any other amount is included in the amount standing to the credit of such an account-that account; or

(b)     where an amount that has been credited to such an account in respect of a premium received by the company on a share issued by it (not being an amount that has been so credited immediately after the receipt by the company of the premium) could not, at any time before it was so credited, be identified in the books of the company as such a premium - that amount.

In this case the Capital Component is a distribution by Entity A to its shareholders to be debited against its share capital account and therefore excluded from the definition of under the former subsection 6(1)(d) of the ITAA 1936 provided this exclusion is not reversed by the former subsection 6(4) of the ITAA 1936.

In broad terms, former subsection 6(4) of the ITAA 1936 captures agreements or arrangements entered into for the purpose of exploiting the exclusion of distributions from share premium accounts from the definition of 'dividend'. Under such arrangements, shares are issued at a premium and the premiums are distributed as part of the arrangement to other persons.

There is no evidence that Entity A had an arrangement or agreement in place at the time credits arose in its share premium account to subsequently distribute the premiums to another person. It is accepted that former subsection 6(4) of the ITAA 1936 does not apply as the amount to be debited to Entity A's share premium account for the Capital Component is not made under such an arrangement or agreement.

Where the former subsection 6(4) of the ITAA 1936 does not apply and the exclusion in former subsection 6(1)(d) does apply to the Capital Contribution, it is considered that the Capital Component does not meet the definition of dividend in former subsection 6(1) of the ITAA 1936.

It follows that the Capital Component is not a distribution under subsection 960-120(1) of the ITAA 1997 and, therefore the Capital Component is not a frankable distribution under section 202-40 of the ITAA 1997.

Question 2

Subsection 45A(1) of the ITAA 1936 states that this section applies in respect of a company that streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that:

(a)   the capital benefits are, or apart from this section would be, received by shareholders (the advantaged shareholders) who would, in the year of income in which the capital benefits are provided, derive a greater benefit from the capital benefits than other shareholders, and

(b)   it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received, or will receive, dividends.

Implicit in the operation of section 45A of the ITAA 1936 is the 'streaming' of benefits resulting in the provision of different benefits to different shareholders.

The provision of a capital benefit will relevantly include a distribution of share capital or provision of shares in a company. The circumstances in which a shareholder would derive a "greater benefit" from capital benefits are set out in subsection 45A(4) of the ITAA 1936.

In the case of Entity A, the requisite requirement of 'streaming' is not present because the Capital Component will be paid to all shareholders irrespective of their tax profile.

In these circumstances the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to whole or part of the Capital Component and Entity A will not be required to give notice under section 45D of the ITAA 1936.

Question 3

Section 45B of the ITAA 1936 is a specific anti-avoidance provision. The section is designed to prevent companies from effectively distributing company profits as preferentially taxed capital rather than taxable dividends.

Subsection 45B(2) of the ITAA 1936 sets out the conditions under which the Commissioner will make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies. These conditions are:

• there is a scheme under which a person is provided with a capital benefit by a company, and
• under the scheme a person (the relevant taxpayer), who may or may not be the person provided with the capital benefit, obtains a tax benefit, and
• having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into or carried out the scheme or any part of the scheme for a purpose (other than an incidental purpose) of enabling the relevant taxpayer to obtain a tax benefit.

Scheme

The term 'scheme' is defined widely and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan or proposal (subsections 45B(10) of the ITAA 1936 and 995-1(1) of the ITAA 1997). Accordingly, a return of share capital would normally constitute a scheme for the purposes of section 45B of the ITAA 1936.

Therefore, the return of share capital constitute a scheme for the purposes of paragraph 45B(2)(a) of the ITAA 1936, because the return of capital will provide shareholders with a capital benefit.

Tax benefit

Under subsection 45B(9) of the ITAA 1936 the relevant taxpayer obtains a tax benefit if an amount of tax payable or any other amount payable under the ITAA 1936 and ITAA 1997 by the relevant taxpayer would, apart from section 45B of the ITAA 1936, 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 a dividend.

Ordinarily, a return of capital would be subject to the CGT provisions of the income tax law. Unless the amount of the distribution exceeds the cost base of the shares, there will only be a cost base reduction under CGT event G1 (section 104-135 of the ITAA 1997). It is only to the extent (if any) that the distribution exceeds the cost base of the shares that a capital gain arises. By contrast, a dividend would generally be included in the assessable income of a resident shareholder.

In this case, the shareholders of Entity A would obtain a tax benefit from a capital distribution.

Purpose

Subsection 45B(8) of the ITAA 1936 lists the relevant circumstances of the scheme which the Commissioner must have regard to when determining whether or not the requisite purpose exists. The list of circumstances is not exhaustive and the Commissioner may have regard to other circumstances which he regards as relevant.

Based on the facts provided, the relevant circumstances in subsection 45B(8) of the ITAA 1936 do not point to a significant purpose on the part of Entity A for carrying out the scheme for a more than incidental purpose of enabling its shareholders to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to return of capital and Entity A will not be required to give notice under section 45D of the ITAA 1936 of the ITAA 1936.

Question 4

The Loan is an equity interest under section 974-70 of the ITAA 1997.

The Loan meets the definition of non-share equity interest in subsection 995(1) of the ITAA 1997 because it is an equity interest that is not solely a share.

The Loan is a non-share equity interest and its repayment will involve the distribution of money to Entity A as the holder of that interest and therefore there is a non-share distribution in accordance with section 974-115 of the ITAA 1997.

The issue to determine is whether the Loan falls within the meaning of non-share dividend.

Subsection 974-120(1) of the ITAA 1997 provides that all non-share distributions are non-share dividends, subject to subsection 974-120(2) of the ITAA 1997. Subsection 974-120(2) of the ITAA 1997 provides that a non-share distribution will not be a non-share dividend to the extent to which the company debits the distribution against:

(a)   The company's non-share capital account; or

(b)   The company's share capital account.

Paragraph 164-10(1)(a) of the ITAA 1997 provides that a company has a non-share capital account if the company issues a non-share equity interest in the company on or after 1 July 2001. Entity B is taken to have a non-share capital account because the Loan was issued in after 1 July 2001 and the Loan is a non-share equity interest in Entity B.

Subsection 164-20(1) of the ITAA 1997 provides that a company may debit the whole or a part of a non-share distribution against the company's non-share equity account to the extent the distribution is made:

a)     as consideration for the surrender, cancellation or redemption of a non-share equity interest in the company.

b)     in connection with a reduction in the market value of a non-share equity interest that is equivalent to the distribution.

On the facts of this case it is accepted that Entity B will debit its non-share capital account in respect of the partial repayment of the Loan.

In these circumstances, the repayment of the Loan is not a non-share dividend.

Section 974-125 of the ITAA 1997 provides that a non-share capital return is a non-share distribution to the extent to which it is not a non-share dividend.

In this case, the repayment of the Loan is a non-share capital return.

Question 5

Section 45B of the ITAA 1936 is a specific anti-avoidance provision as set out in the reasoning for question 3.

Scheme

The return of share capital constitute a scheme for the purposes of paragraph 45B(2)(a), because the return of capital will provide shareholders with a capital benefit.

Tax benefit

In this case, the shareholder of Entity B would obtain a tax benefit from a capital distribution.

Purpose

Based on the facts provided, the relevant circumstances in subsection 45B(8) of the ITAA 1936 do not point to a significant purpose on the part of Entity B for carrying out the scheme for a more than incidental purpose of enabling Entity A to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to return of capital.