Edited version of private advice

Authorisation Number: 1051597432955

Date of advice: 5 December 2019

Ruling

Subject: Share buy back

Question 1

Will any component of the buy-back price for each RPS be a dividend to the Rulee under either 159GZZZP(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or subsection 6(1) and therefore be subject to withholding tax under section 128B(5) as a dividend paid in respect of a non-equity share?

Answer

Yes.

Question 2

Will the Commissioner make a determination under subsection 45A(2) of the ITAA 1936 that section 45C applies in relation to the whole, or part of, the capital benefit provided by AustCo to the Rulee?

Answer

No

Question 3

Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C applies in relation any of the capital benefit arising from the return of capital provided by AustCo to the Rulee?

Answer

No

Question 4

Will any capital gain or loss arising from the disposal of the RPS as a result of the buy-back be disregarded under section 855-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on

1 July 20WW

Relevant facts and circumstances

1.       The Rulee is a foreign resident limited liability company. It is not an Australian resident for Australian income tax purposes.

2.       AustCo is an Australian resident.

3.       AustCo is the head company of a tax consolidated group.

4.       AustCo has ordinary shares and redeemable preference shares (RPS) on issue.

5.       None of the above shares or RPS are listed or traded on the Australian Stock Exchange (ASX).

6.       The Rulee owns all of the ordinary shares and RPS on issue. The RPS are not held as trading stock or otherwise on revenue account.

7.       The RPS are not, and have not been, used by the Rulee in carrying on a business at or through a permanent establishment in Australia.

8.       The RPS do not constitute an option or a right to acquire an asset that is taxable Australian real property (TARP) or a TARP interest.

Terms of the RPS

9.       The RPS were issued for $A each.

10.    The RPS may not be converted into ordinary shares.

11.    The RPS entitles the holder to a cumulative annual dividend at a set rate.

12.    The RPS only give the holder a right to a return of capital upon a winding up and the holder of the RPS has no right to participate in any profits or surplus assets of AustCo.

13.    The RPS do not confer any voting rights on the holder except in limited circumstances including in relation to a proposal that affects rights attached to the RPS.

14.    The RPS rank ahead of ordinary shares in a return of capital, or upon a winding up.

15.    Prior to a certain date, AustCo must Redeem (includes a buy-back) the RPS by paying $B plus any accrued but unpaid dividend amounts owing to the holder of the RPS at that time.

Accounting and tax treatment of the RPS

16.    AustCo accounts for the RPS in its Balance Sheet as a non-current Liability as 'Redeemable preference shares'. The first amount credited to that account was for the issuing of the RPS.

17.    The RPS are 'debt interests' for Australian income tax purposes under Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997).

18.    No amount has ever been transferred to a share capital account of AustCo from another account of AustCo.

Proposed arrangement

19.    AustCo will undertake a buy-back of the RPS in the income year ended 30 June 20XX at $B each.

20.    The purpose of the buy-back of the RPS is to effectively make an early repayment of the intercompany debt represented by all of the RPS on issue.

21.    AustCo will fund the buy-back from an interest bearing intercompany loan from the Rulee.

22.    For accounting purposes, AustCo will account for this transaction by debiting 'Redeemable preference shares' in the balance sheet and crediting an intercompany loan from the Rulee for the amount of the RPS bought back.

23.    The Rulee will waive its rights to any dividends on the RPS that have accrued but remain unpaid as at the date of the buy-back of the RPS.

24.    Interest withholding tax has been, and will be, withheld by AustCo from any payments of dividends to the Rulee and the withheld amounts have been, or will be, remitted to the ATO by the due date.

25.    All RPS bought back by AustCo will be cancelled immediately after registration of the transfer of the RPS to AustCo.

26.    AustCo has no formal dividend policy.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 6(4)

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936 Section 45A

Income Tax Assessment Act 1936 Section 45B

Income Tax Assessment Act 1936 Section 45C

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1936 Division 16K of Part III

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Division 197

Income Tax Assessment Act 1997 Section 202-45

Income Tax Assessment Act 1997 Division 855

Income Tax Assessment Act 1997 Section 960-135

Income Tax Assessment Act 1997 Section 975-300

Reasons for decision

Question 1

Summary

27.    $C of the buy-back price for each RPS will be a dividend to the Rulee under either 159GZZZP(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or subsection 6(1) and will be subject to withholding tax under section 128B(5) of the ITAA 1936 as a dividend paid in respect of a non-equity share.

Detailed reasoning

Dividend under Division 16K of Part III of the ITAA 1936

28.    Share buy-backs are mainly governed by Division 16K of Part III (Division 16K). Division 16K prescribes the income tax consequences of a buy-back of shares for the purchaser and seller.

29.    Subsection 159GZZZK(1) states:

For the purposes of this Division, where a company buys a share in itself from a shareholder in the company:

(a) the purchase is a buy back; and

(b) the shareholder is the seller; and

(c) if:

(i) the share is listed for quotation in the official list of a stock exchange in Australia or elsewhere; and

(ii) the buy-back is made in the ordinary course of trading on that stock exchange;

the buy-back is an on market purchase; and

(d) if the buy-back is not covered by paragraph (c)-the buy-back is an off market purchase.

30.    Accordingly, the buy-back of the RPS from the Rulee by AustCo will be a buy-back under paragraph 159GZZZK(a) and will be an off market purchase under paragraph 159GZZZK(d) as none of the RPS are listed or traded on the ASX.

31.    Subsection 159GZZZP(1) relevantly provides, for an off-market purchase, that the dividend component of the purchase price is the difference between the purchase price and the part (if any) of the purchase price which is debited against amounts standing to the credit of the company's share capital account.

32.    Subsection 159GZZZP(2) provides that the remainder of the purchase price is taken not to be a dividend.

33.    Section 159GZZZM relevantly defines 'purchase price' as follows:

For the purposes of this Division, the purchase price in respect of a buy back of a share is:

(a) if the seller has received or is entitled to receive an amount or amounts of money as a result of or in respect of the buy back-that amount or the sum of those amounts; ...

34.    As AustCo will buy-back each RPS for $B, the purchase price for the purposes of 159GZZZP will be $B per RPS.

35.    Section 975-300 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

1) A company's share capital account is:

(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.

(2) If a company has more than one account covered by subsection (1), the accounts are taken, for the purposes of this Act, to be a single account.

Note: Because the accounts are taken to be a single account (the combined share capital account), tainting of any of the accounts has the effect of tainting the combined share capital account.

(3) However, if a company's *share capital account is *tainted, that account is taken not to be a share capital account for the purposes this Act, other than:

(a) subsection 118-20(6); and

(b) Division 197; and

(ba) paragraph 202-45(e); and

(c) the definition of paid-up share capital in subsection 6(1) of the Income Tax Assessment Act 1936; and

(d) subsection 44(1B) of the Income Tax Assessment Act 1936; and

(e) [repealed]

(f) subsection 159GZZZQ(5) of the Income Tax Assessment Act 1936.

36.    Notwithstanding the RPS were classified as borrowings (a financial liability) for Australian statutory reporting/accounting purposes and constitute 'debt interests' for Australian income tax purposes, the RPS are legal form shares and the amount received by AustCo in consideration for the issue of those shares is share capital.

37.    Therefore, although the subscription funds for the RPS were recorded in a liability account as borrowings, the Commissioner accepts that that account will constitutes a share capital account of AustCo in accordance with paragraph 975-300(1)(b) of the ITAA 1997 on the basis that it was created after 1 July 1998 and the first amount credited to the account was an amount of share capital.

38.    As no amount has ever been transferred to a share capital account of AustCo from another account, AustCo's share capital account is not 'tainted' for the purposes of subsection 975-300(3) of the ITAA 1997.

39.    As only $A of the $B purchase price per RPS will be debited against the amounts standing to the credit of AustCo's share capital account, subsection 159GZZZP(1) will have the effect that the difference of $C of the buy-back consideration per RPS ('the $C') will be treated as a dividend paid to the Rulee by AustCo under Division 16K.

40.    This is consistent with the preferred methodology of calculating the dividend/capital split, the Average Capital per Share method, as given in PS LA 2007/9.

Dividend under subsection 6(1)

41.    Subsection 6(1) relevantly states that a dividend 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;

(c) [repealed...]

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 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; or

(e) moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if:

(i) the company gives the holder of the share a notice when it redeems or cancels the share; and

(ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and

(iii) the amount is debited to the company's share capital account;

except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or

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

Note: Subsection (4) sets out when paragraph (d) of this definition does not apply.

42.    Subsection 6(4) states:

Paragraph (d) of the definition of dividend in subsection (1) does not apply if, under an arrangement:

(a) a person pays or credits any money or gives property to the company and the company credits its share capital account with the amount of the money or the value of the property; and

(b) the company pays or credits any money, or distributes property to another person, and debits its share capital account with the amount of the money or the value of the property so paid, credited or distributed.

43.    As the purchase price for the buy-back of the RPS will be an amount distributed or credited by AustCo to its sole shareholder, the Rulee, the buy-back consideration will also, in the first instance, fall within the definition of a dividend in subsection 6(1). However, the exclusion provided in paragraph 6(1)(d) will have application to exclude that component of the price that is debited to the share capital account. In the context of a share buy-back, Division 16K operates to prescribe the split between the dividend component and share capital component of the buy-back.

44.    Paragraph 6(1)(e) will not apply as AustCo will be buying back, rather than redeeming or cancelling, the RPS.

45.    However, subsection 6(4) can operate to deem certain payments made out of a company's share capital account to be dividends in the hands of the recipient shareholders where there has been an arrangement under which the company has raised share capital from certain shareholders and then uses those funds to distribute to other shareholders.

46.    There is no arrangement where the share capital account of AustCo will be credited by another person in connection with the debiting of the share capital account required to effect the buy-back. Therefore, subsection 6(4) will not apply as an exception to paragraph 6(1)(d) of the definition of dividend.

47.    In summary, $A of each $B buy-back consideration will not constitute a dividend under subsection 159GZZZP or within the meaning of subsection 6(1) and the remaining $C of the buy-back consideration per RPS which will exceed what has been debited to AustCo's share capital account will be a dividend under subsection 159GZZZP or subsection 6(1).

48.    In accordance with subsection 202-45(d) of the ITAA 1997, this dividend will not be frankable as it is a dividend in respect of a non-equity share.

Operation of subsection 159GZZZQ

49.    Subsection 159GZZZQ operates to determine how much consideration is taken to be received in respect of the sale of shares in the case of an off-market share buy-back. It generally provides that an amount taken to be a dividend that is included in the seller's assessable income (disregarding section 128D and section 802-15 of the ITAA 1997) or an eligible non-capital amount will reduce the consideration taken to be received in respect of the sale of the shares by that amount. This rule prevents the amount being included in assessable income as both a dividend and a revenue or capital gain.

50.    In this case, the consideration the Rulee will be taken to have received in relation to their disposal of each RPS, will be reduced by $C, being the amount of the dividend taken to be paid to the Rulee, to $A by the operation of 159GZZZQ.

Non-equity share

51.    A 'non-equity share' means a 'share' that is not an 'equity interest' in the company. A share will not be an equity interest if it is characterised as, or forms part of a larger interest that is characterised as, a debt interest under Subdivision 974-B of the ITAA 1997 (see subsection 6(1) definition of non-equity share that refers to the subsection 995-1(1) of the ITAA 1997 definition of 'non-equity share' which in turn requires consideration of the definition of "equity interest" and Subdivision 974-C of the ITAA 1997).

52.    In the present case, the RPS are debt interests under Subdivision 974-B of the ITAA 1997 and, thus, are not equity interests in AustCo. Accordingly, they are non-equity shares as defined by subsection 995-1(1) of the ITAA 1997.

53.    Thus, the $C is a dividend paid in respect of a non-equity share.

Non-resident withholding tax under Division 11A

54.    Liability to non-resident withholding tax on interest and dividends is determined by Division 11A of Part III.

55.    Subsection 128A(1) provides, for the purposes of Division 11A, that a dividend:

(a) includes part of a dividend; and

(b) (except when used in paragraph (d) of the definition of interest in subsection (1AB)) does not include a dividend paid in respect of a non-equity share.

56.    Subsection 128A(1AB) relevantly provides that, for the purposes of Division 11A, interest includes an amount that is a dividend paid in respect of a non-equity share.

57.    Therefore, for the purposes of Division 11A, the $C is not a dividend, but is interest.

58.    Subsection 128B(2) relevantly provides that section 128B applies to income that:

(a) is derived, on or after 1 January 1968, by a non-resident; and

(b) consists of interest that:

(i) is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country; or ...

59.    Subsection 128B(5) states:

A person who derives income to which this section applies that consists of interest is, subject to subsections (6) and (7), liable to pay income tax upon that income at the rate declared by the Parliament in respect of income to which this subsection applies.

60.    Subsections 128B(6) has regard to situations where the interest is paid in part in respect of the carrying on of business outside Australia. We are not advised that it is relevant in this case. Subsection 128B(7) is applicable to non-resident payers.

61.    Thus, the Rulee will be liable to withholding tax on the $C under subsection 128B(5). The withholding tax will be withheld and remitted to the Commissioner by AustCo (see Withholding by AustCo below).

62.    Section 128D generally applies such that income to which subsection 128B(2) applies is not assessable income and is not exempt income.

63.    Thus, the Rulee will not need to declare the $C per RPS in its assessable income as it will be non-assessable non-exempt income.

Withholding by AustCo

64.    Subsection 6-5(2) of Schedule 1 to the Taxation Administration Act 1953 (TAA) states that:

Under PAYG withholding, amounts are collected in respect of particular kinds of payments or transactions. Usually, someone who makes a payment to you is required to withhold an amount from the payment, and then to pay the amount to the Commissioner.

For a list of the payments and other transactions to which PAYG withholding applies, see Division 10

65.    Subsection 10-5(1) of Schedule 1 to the TAA relevantly provides:

The payments and other transactions covered by PAYG withholding are called withholding payments. They are summarised in the table.

Note: The obligation to pay an amount to the Commissioner is imposed on the entity making the withholding payment (except for items 17, 19, 22 and 27, and 26 (to the extent that it covers subsection 12-390(4))).

66.    Item 18 of the table in subsection 10-5(1) of Schedule 1 to the TAA provides that interest payments to an overseas person are withholding payments, and are covered by section 12-245, which states:

Interest payment to overseas person

An entity must withhold an amount from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936 ) it pays to an entity, or to entities jointly, if:

(a) the recipient or any of the recipients has an address outside Australia according to any record that is in the payer's possession, or is kept or maintained on the payer's behalf, about the transaction to which the interest relates; or

(b) the payer is authorised to pay the interest at a place outside Australia (whether to the recipient or any of the recipients or to anyone else).

For limits on the amount to be withheld, see section 12-300.

67.    Thus, AustCo is required under section 12-245 to withhold an amount from the $C per RPS paid to the Rulee and to pay the amount to the Commissioner.

68.    Subsection 15-10(2) of Schedule 1 to the TAA relevantly provides that the amount to be withheld from a payment under Subdivision 12-F is to be worked out under the regulations.

Question 2

Summary

69.    The Commissioner will not make a determination under subsection 45A(2) that section 45C applies in relation to the whole, or part of, the capital benefit provided by AustCo to the Rulee.

Detailed reasoning

70.    Section 45A is an anti-avoidance provision applicable to streaming arrangements attempting to provide a capital benefit to certain shareholders and dividends to others.

71.    Where the Commissioner makes a written determination under subsection 45A(2) that section 45C applies in relation to the whole or part of the capital benefits, the capital benefits will be treated as unfranked dividends paid out of the company's profits.

72.    Subsection 45A(1) provides:

This section applies in respect of a company that, whether in the same year of income or in different years of income, 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.

However, it does not apply if section 45 applies in relation to the streaming or in the circumstances set out in subsection (5).

73.    Subsection 45A(1) contemplates situations where a company has a number of different shareholders, and the company has the ability to stream different benefits to different shareholders.

74.    Paragraph 45A(3) states that a reference to 'provision of a capital benefit' is a reference to:

...

(b) the distribution to the shareholder of share capital or share premium;

...

75.    The consideration provided by AustCo for the buy-back will constitute the 'provision of a capital benefit' as it will be a distribution to the Rulee, AustCo's shareholder, of share capital.

76.    Subsection 45A(4) provides a non-exhaustive list of circumstances in which a shareholder would derive a greater benefit from capital benefits than another shareholder.

77.    Where the conditions of subsection 45A(4) are met, the Commissioner is authorised to make a determination under subsection 45A(2) that section 45C applies such that any part of the capital benefit provided to the shareholder is an unfranked dividend.

78.    As the Rulee will be the sole shareholder of AustCo at the time of the proposed buy back, section 45A is not relevant to the buy-back by AustCo.

Question 3

Summary

79.    The Commissioner will not make a determination under subsection 45B(3) that section 45C applies in relation any of the capital benefit arising from the return of capital provided by AustCo to the Rulee.

Detailed reasoning

80.    Subsection 45B(1) provides:

(1)   The purpose of this section is to ensure that relevant amounts are treated as dividends for taxation purposes if:

(a)   components of a demerger allocation as between capital and profit do not reflect the circumstances of a demerger; or

(b) certain payments, allocations and distributions are made in substitution for dividends.

81.    For the purpose of this private ruling the relevant purpose of section 45B is to ensure that proceeds of the buy-back paid to the RPS holder are treated as a dividend if that amount (or a part of it) is made in substitution of a dividend. Therefore, it must be considered whether the amount is paid in substitution of a dividend.

82.    Subsection 45B(2) provides:

This section applies if:

(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.

83.    Accordingly, section 45B may apply when a taxpayer obtains a tax benefit as a result of the provision of a capital benefit, which is provided under a 'scheme' (which is defined in subsection 995-1(1) of the ITAA 1997).

84.    The meaning of the term 'provided with a capital benefit' is defined in subsection 45B(5). The Rulee is provided with a capital benefit as it will receive a distribution of share capital from AustCo. Therefore, section 45B applies to the current buy-back of the RPS by AustCo.

85.    Pursuant to subsection 45B(9), a person will obtain a tax benefit where the amount of tax payable (or another amount payable under the Act) would be less than the amount of tax (or other amount) that would have been payable had the capital benefit instead been an assessable dividend.

86.    The buy-back of the RPS provides the Rulee (a non-resident) with a 'tax benefit' as the Australian tax payable on the distribution of the share capital is less than what would be payable if an assessable dividend was paid by AustCo to the Rulee, as such a dividend would be subject to Australian withholding tax (in the case of a dividend paid on a non-equity share, it would be subject to interest withholding tax).

87.    The Commissioner is given the power to make a determination that section 45C applies under subsection 45B(3). In making that determination paragraph 45B(2)(c) provides:

(2) This section applies if:

...

(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.

Meaning of relevant circumstances of scheme

88.    The 'relevant circumstances' are found by reference to subsection 45B(8). However, the list of relevant circumstances is not exhaustive and regard may be had to other circumstances on the basis of their relevance.

89.    In considering the application of section 45B to a share buy-back it is appropriate to seek guidance from Law Administration Practice Statement PS LA 2007/9. Paragraphs 99-110 of PS LA 2007/9 gives some guidance on discerning the nature of the 'purpose' behind the distribution. Paragraphs 99 to 100 and 107 to 108 of PS LA 2007/9 state:

99. Relevantly, section 45B of the ITAA 1936 applies where a 'capital benefit' is provided under a scheme for a 'more than incidental purpose' of conferring a tax benefit. Subsection 45B(5) provides that the provision of a 'capital benefit' includes a distribution of share capital. Subsection 45B(9) provides that a capital benefit constitutes a tax benefit in the hands of the shareholder because it is less onerous tax-wise than a dividend. In other words, the mischief addressed by the section is that of a company distributing capital in substitution for a dividend substantially because of its preferential tax treatment in the hands of shareholders.

100. Speaking practically, to apply section 45B of the ITAA 1936 to a share buy-back requires objective evidence of a substantial tax purpose of substituting share capital for a part of the purchase price which would otherwise be a dividend. Details of the purpose test on which section 45B turns are explained below. Before turning to the test, however, it is appropriate to discuss the character of the buy-back price in the hands of the vendor and, more particularly, whether it can include a distribution of share capital. These are issues that are resolved by Division 16K and which depend in the main on whether the share buy-back is undertaken off-market or on-market.

...

107. The presence of the requisite 'more than incidental' purpose is to be inferred objectively from the circumstances of the arrangement. To facilitate the test and reveal the requisite purpose the section includes a non-exhaustive list of 'relevant circumstances' in subsection 45B(8) of the ITAA 1936 which must be considered in that regard. The relevant circumstances listed therein encompass a range of matters which taken individually or collectively will reveal whether the requisite purpose exists or not. Due to the diverse nature of these circumstances, some may be of little or no weight in ascertaining whether or not the purpose exists. In all cases however, tax officers must consider all of the circumstances and determine whether they tend to, against or are neutral as to the conclusion of a purpose of enabling the relevant taxpayer to obtain a tax benefit. The relevant taxpayer in a buy-back scheme is the vendor shareholder.

108. The circumstances fall into three broad categories which include: the position of the company and its associates in relation to capital and profit (realised and unrealised) and its distribution culture; the tax profiles of the shareholders; and the eight matters from paragraph 177D(b) of the ITAA 1936 that enable the wider tax and non-tax effects of the buy-back scheme to be identified, compared and weighed. The matters in paragraph 177D(b) which are relied on to determine purpose under Part IVA of the ITAA 1936 are included by virtue of paragraph 45B(8)(k) of the ITAA 1936. The Part IVA matters are to be given equal attention with the other matters included in subsection 45B(8). Indeed, the Explanatory Memorandum to section 45B as enacted in 1998 suggested that the Part IVA matters were the core of the purpose test and the other, more specific circumstances included to give 'further guidance' to the operation of the section. So if a share buy-back has been structured for a substantial purpose of distributing share capital preferentially for tax reasons, it should be revealed from reference to circumstances in subsection 45B(8).

90.    Therefore, it is necessary to examine the relevant circumstances.

Paragraph 45B(8)(a) - the extent to which a capital benefit is attributable to capital or profits of the company or its associates

91.    AustCo will be buying back the RPS consistent with the terms upon which they were issued. Of the $B buy-back amount per RPS, $C will be attributable to the profits of the company and will be subject to interest withholding tax, and the remaining $A will be attributable to AustCo's capital.

92.    The purpose of the buy-back of the RPS is to effectively make an early repayment of the intercompany debt represented by all of the RPS on issue, prior to the final redemption date and is to be funded from an interest bearing intercompany loan from the Rulee.

93.    These circumstances do not support a conclusion that the return of capital is attributable to the profits of AustCo.

Paragraph 45B(8)(b) - pattern of distribution of dividends

94.    Dividends have accumulated and been paid on the RPS in accordance with the terms on which they were issued. Accordingly, this factor is of no utility in deciding whether section 45B applies to the present circumstances.

Paragraph 45B(8)(c) - capital losses that would not be used at the end of the relevant income year

95.    The Rulee is the relevant taxpayer when considering this factor and is a non-resident and section 855-10 of the ITAA 1997 will operate to disregard the gain (see Question 4). Therefore, this factor is of no assistance.

Paragraph 45B(8)(d) - whether ownership interests in the company or its associates are pre-CGT assets

96.    There are no pre-CGT interests - this paragraph is not relevant.

Paragraph 45B(8)(e) - whether the relevant taxpayer is non-resident

97.    The relevant taxpayer here is a non-resident (the Rulee).

98.    The tax profile of the Rulee as the sole shareholder in AustCo and a non-resident would suggest that the Rulee would have a preference for a tax-free return of capital (as opposed to a dividend subject to withholding tax). However, this factor (when considered either alone or in combination with other factors) is not sufficient to determine that section 45B applies to the scheme.

Paragraph 45B(8)(f) - whether the cost base of the relevant ownership interest is not substantially less than the value of the capital benefit

99.    The relevant taxpayer (the Rulee) is receiving their cost base amount (face value of the RPS) plus the $C dividend component (which is subject to interest withholding tax)- so this factor does not assist in determining whether to apply section 45B. At best this factor is neutral.

Paragraph 45B(8)(h) - whether the interest held by the relevant shareholders after the provision of share capital is the same as the interest that would have been held if an equivalent dividend had been paid

100. The buy-back of the RPS will reduce the Rulee's RPS holding in AustCo. This will then reduce the Rulee's share of any dividend from the RPS (if a dividend were to be declared on the RPS). This factor does not support a conclusion that the requisite purpose exists.

101. Paragraphs 45B(8)(i) and 45B(8)(j) are not relevant as the buy-back of the RPS will not involve the provision of ownership interests or an increase in the value of ownership interests, and the buy-back is not a demerger.

Paragraph 45B(8)(k) - any other matters in subsection 177D(2)

102. Paragraph 45B(8)(k) requires consideration of any of the matters referred to in subsection 177D(2) which are concerned with the manner in which the scheme is carried out and the form and substance of the scheme.

103. The Commissioner accepts that the matters referred to in subsection 177D(2) do not support a conclusion as to a purpose of enabling the Rulee to obtain a tax benefit in relation to the buy-back of the RPS.

104. Having regard to all of the circumstances of the scheme, it is not concluded that AustCo or the Rulee entered into the scheme for the purposes of enabling the Rulee to obtain a tax benefit. Accordingly, the Commissioner will not make a determination under subsection 45B(3) that section 45C applies in relation to any of the capital benefit arising from the return of capital provided by AustCo.

Question 4

Summary

105. Any capital gain or loss arising from the disposal of the RPS as a result of the buy-back will be disregarded under section 855-10 of the ITAA 1997.

Detailed reasoning

106. Division 855-A of the ITAA 1997 gives circumstances in which a capital gain or loss may be disregarded by a foreign resident. Section 855-10 of the ITAA 1997 states:

(1) Disregard a *capital gain or *capital loss from a *CGT event if:

(a) you are a foreign resident, or the trustee of a *foreign trust for CGT purposes, just before the CGT event happens; and

(b) the CGT event happens in relation to a *CGT asset that is not *taxable Australian property.

107. The RPS is a CGT asset, pursuant to section 108-5 of the ITAA 1997, and the disposal of the RPS is CGT Event A1, pursuant to section 104-10 of the ITAA 1997 as there will be a change in the legal and beneficial ownership of the RPS from the Rulee to AustCo.

108. As the Rulee is a foreign resident, paragraph 855-10(1)(a) of the ITAA 1997 is satisfied.

109. To satisfy paragraph 855-10(1)(b) it must be determined that the RPS are not taxable Australian property. In this regard, section 855-15 of the ITAA 1997 provides when assets are taxable Australian property.

110. The RPS are:

1. Not taxable Australian real property as defined by section 855-20;
2. Not an option or right to acquire a CGT asset;
3. Not, and have not been, used by the Rulee in carrying on a business at or through a permanent establishment in Australia; and
4. Not a CGT asset covered by subsection 104-165(3).

111. The RPS must be 'membership interests' in AustCo to be indirect Australian real property interests: section 855-25 of the ITAA 1997.

112. Subsection 995-1(1) of the ITAA 1997 provides that 'membership interest' in an entity has the meaning given by section 960-135, which states:

If you are a *member of an entity:

(a) each interest, or set of interests, in the entity; or

(b) each right, or set of rights, in relation to the entity;

by virtue of which you are a member of the entity is a membership interest of yours in the entity.

Note: In conjunction with subsection 960-130(3), this means that a debt interest is not a membership interest.

Example: A member of a company holds a finance share in a company that is a debt interest and some other shares in the company that are not debt interests. Only the other shares are membership interests in the company. The finance share is not, because the member is not a member of the company because of that share (see subsection 960-130(3)).

113. Section 960-130 of the ITAA 1997 provides that an entity will be a member of a company if they are 'a member of the company or a stockholder in the company'. Subsection 960-130(3) of the ITAA 1997 provides that an entity is not a member of another entity just because the entity holds one or more interests or rights relating to the other entity that are debt interests.

114. As the Rulee holds ordinary shares in AustCo, they are a member of AustCo. However, the RPS are debt interests, as discussed earlier, so are not membership interests as defined by section 960-135. Thus, the RPS are not indirect Australian real property interests as defined by section 855-25.

115. As the RPS do not fit within any item within section 855-15 of the ITAA 1997, they are not taxable Australian property and paragraph 855-10(1)(b) is satisfied. Thus, any capital gain or loss arising from the disposal of the RPS as a result of the buy-back will be disregarded under section 855-10.