Edited version of private advice

Authorisation Number: 1051645786848

Date of advice: 16 March 2020

Ruling

Subject: Return of capital

Question 1

Is any part of the proposed return of capital a 'dividend', as defined in section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and for the purposes of section 44 of that Act?

Answer 1

No.

Question 2

Will the Commissioner make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of that Act applies to the whole or part of the proposed return of capital?

Answer 2

No.

Question 3

Will the Commissioner make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of that Act applies to the whole or part of the proposed return of capital?

Answer 3

No.

This ruling applies for the following period:

Income years ending 30 June 20XX and 30 June 20XX

The scheme commences on:

The date of payment

Relevant facts and circumstances

Head Co and Sub Co are Australian residents for income tax purposes.

Head Co is the head company of an income tax consolidated group comprising itself and its wholly-owned subsidiary, Sub Co.

Head Co will return capital to its shareholders and it is intended to be an extraordinary distribution.

To fund the return of capital, Sub Co will return its capital to Head Co.

To effect these returns of capital, Head Co and Sub Co will each debit the full amount of the capital return against their respective share capital accounts.

Head Co's share capital account is not tainted for the purposes of the share capital tainting provisions in Division 197 of the Income Tax Assessment Act 1997 (ITAA 1997).

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 45A

Income Tax Assessment Act 1936 section 45B

Reasons for decision

Question 1

Subsection 44(1) of the ITAA 1936 states that the assessable income of a shareholder in a company includes, if the shareholder is a resident:

                 (i)                 dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

                 (ii)                 all non-share dividends paid to the shareholder by the company.

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 and any amount credited by a company to its shareholders. However, paragraph (d) of the definition of 'dividend' excludes a distribution that is debited against an amount standing to the credit of the share capital account of the company.

The return of capital will be paid from Head Co's share capital account.

Accordingly, the return of capital is not a 'dividend' under subsection 6(1) and will not be assessable income for Head Co's shareholders under subsection 44(1).

Question 2

The purpose of section 45B of the ITAA 1936 is to ensure that relevant amounts are treated as dividends for taxation purposes if certain payments, allocations and distributions are made in substitution for dividends (subsection 45B(1)).

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

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

(b)     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

(c)     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

Subsection 45B(10) provides that 'scheme' for the purposes of section 45B has the meaning given in subsection 995-1(1) of the ITAA 1997. That definition is widely drawn and includes any arrangement, scheme, plan proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Tax benefit

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

Purpose

For the purposes of paragraph 45B(2)(c), the Commissioner is required to consider the relevant circumstances set out in subsection 45B(8) to determine whether any part of the scheme was entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit.

Based on the facts provided, the Commissioner will not make a determination under paragraph 45B(3)(c) that section 45C applies in relation to the return of capital.

Question 3

Section 45A of the ITAA 1936 applies where a company streams 'capital benefits' to shareholders (the advantaged shareholders) who derive a greater benefit from the receipt of share capital, and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends.

Although Head Co will provide its shareholders with a 'capital benefit' (as defined in paragraph 45A(3)(b)) via the proposed return of capital, the capital benefit will be provided to all of the shareholders in direct proportion to their individual shareholding. The circumstances of the scheme do not indicate that there is a 'streaming' of capital benefits to disadvantaged shareholders and of dividends to disadvantaged shareholders.

Accordingly, the Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the whole, or any part, of the return of capital.