Edited version of private advice

Authorisation Number: 1051931333331

Date of advice: 9 December 2021

Ruling

Subject: Determination under section 45B(3) of the Income Tax Assessment Act 1936 in relation to a return of capital

Question

Will the Commissioner make a determination under subsection 45B(3) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C applies to the whole or a part of the proposed return of share capital by the Company to its Shareholder?

Answer

No.

This ruling applies for the following period:

An income year

The scheme commences on:

During that income year

Relevant facts and circumstances

The Company is an Australian company, wholly-owned by a foreign company (the Shareholder).

The Company and its wholly-owned Australian subsidiaries form part of an Australian income tax consolidated group. The Company is the head company.

Some of the wholly-owned subsidiaries of the Company carry on similar businesses (the Business).

Following a change in the ownership structure of the Shareholder, the new parent company of the group determined that the Business was not aligned with the group strategy and the Business assets were sold.

The profit from the sale of the Business assets was distributed by the Company to its Shareholder as fully franked dividends.

The Company now proposed to undertake an equal reduction of share capital under subsection 256B(1) of the Corporations Act 2001 (Corporations Act) by returning to its Shareholder the capital component of the proceeds from the sale of the Business assets.

The reasons for the capital reduction is to return the share capital contributed by the Shareholder used to finance the Business over the years and to return the surplus capital given that it is now in excess of the Company's operational requirements following the sale of the Business assets.

The Company has not paid any dividend nor undertaken any return of share capital in the past (with the exception of the recent dividend declared and paid).

The Company and its income tax consolidated group have significant prior year losses at the time of the proposed transaction.

The Company's proposed return of share capital will comply with the requirements of section 256B of the Corporations Act.

The amount of the return of share capital will be fully debited from the Company's share capital account, which is not tainted pursuant to section 197-50 of Income Tax Assessment Act 1997 (ITAA 1997).

The Shareholder does not, directly or indirectly, hold or have any interests in, or rights to, any taxable Australian property as defined in section 855-15 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 paragraph 45B(1)(b)

Income Tax Assessment Act 1936 subsection 45B(2)

Income Tax Assessment Act 1936 subsection 45B(3)

Income Tax Assessment Act 1936 paragraph 45B(5)(b)

Income Tax Assessment Act 1936 subsection 45B(8)

Income Tax Assessment Act 1936 subsection 45B(9)

Income Tax Assessment Act 1936 subsection 45B(10)

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1936 subsection 45C(1)

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1997 section 197-50

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 855-25

Income Tax Assessment Act 1997 subsection 995-1(1)

Corporations Act 2001 subsection 256B

Corporations Act 2001 subsection 256B(1)

Corporations Act 2001 subsection 256C(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1936 unless otherwise stated.

Subsection 45B(2) applies because the Company's proposed return of capital to its Shareholder constitutes a scheme for the purposes of section 45B,that provides its Shareholder with a capital benefit under paragraph 45B(5)(b) by way of a distribution of share capital.

From a non-resident shareholder's perspective, the reduction of share capital would not result in any liability to dividend withholding tax under Division 11A of Part III. As such, under the scheme, the Shareholder will obtain a tax benefit.

Subsection 45B(8) sets out the relevant circumstances of a scheme which the Commissioner must consider when determining whether or not the scheme was entered into or carried out for a more than incidental purpose of enabling the relevant taxpayer to obtain a tax benefit (the requisite purpose).

Paragraph 45B(8)(k) also requires the factors in subsection 177D(2) to be considered.

The matters set out in subsection 177D(2) are required to be considered to determine 'the dominant purpose' test in Part IVA. However, in the context of section 45B, these matters facilitate the 'more than incidental purpose test' and do not introduce a different purpose test.

Conclusion

Under subsection 45B(2) the Commissioner concludes that:

•         there is a scheme (being the proposed return of capital)

•         the scheme results in the Shareholder being provided with a capital benefit (being the return of capital) by the Company

•         the Shareholder will obtain a tax benefit because the reduction of share capital will not result in any liability to dividend withholding tax.

However, having considered the relevant circumstances in subsection 45B(8) neither the Company nor the Shareholder entered into or carried out the scheme for a more than incidental purpose of enabling the Shareholder to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination under subsection 45B(3) that section 45C applies in relation to the whole, or a part, of the capital benefit.