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Edited version of private advice
Authorisation Number: 1051959747760
Date of advice: 9 March 2022
Ruling
Subject:Capital management - share capital return
Question 1
Will any part of the return of capital be a dividend as defined in section 6(1) of the ITAA 1936?
Answer
No.
Question 2
Will the Commissioner make a determination under paragraph 45B(3)(b) that section 45C applies in relation to the whole or any part of the return of capital?
Answer
No.
This ruling applies for the following period:
The income year ended 30 June 20XX
The scheme commences on:
DD MM YYYY
Relevant facts and circumstances
Company A is a private Australian company with few shareholders. Company A is the head company of the Company tax consolidated group (Company TCG).
The Company TCG funded the development of the business through a mixture of debt and equity injections. The business is now profitable and has been operating for many years.
The Company TCG does not have a formal written dividend or cash distribution policy.
In practice, the dividend policy of the Company TCG is to pay fully franked dividends regularly.
Proposed return of capital and special dividend
Company A proposes to make a total cash repatriation from Company A to its shareholders including a return of capital and special fully franked dividend components.
The return of capital will be accounted for by debiting Company A's share capital account
The proposed return of capital will not involve a reduction in the number of shares on offer. The capital return will be effected via shareholder resolution and will be undertaken under section 256B and 256C of the Corporations Act 2001 (Cth).
Other matters
Company A only has ordinary shares on issue.
All Company A shareholders will each receive the return of capital in proportion to their shareholdings.
Company A's share capital account is not tainted for Australian income tax purposes.
Reasons for decision
Question 1
Paragraph (d) of the definition of dividend in subsection 6(1) of the ITAA 1936 applies. Accordingly, in the circumstances of Company A's proposed repatriation consisting of the return of share capital and a fully franked special dividend, no part of the proposed return of capital amount will be considered a dividend as defined in section 6(1) of the ITAA 1936.
Question 2:
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.
It is considered that the return of capital will provide shareholders with a capital benefit and that the shareholders of Company A will obtain a tax benefit from a capital distribution.
Based on the facts provided, 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.