Edited version of private advice

Authorisation Number: 1052032085762

Date of advice: 29 September 2022

Ruling

Subject: Share capital account

Question 1

Is the Additional Paid in Capital Account (APIC) to which the Contribution Amount was credited a share capital account of Company A for the purposes of section 975-300(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

If the APIC account is a share capital account of Company A for the purposes of section 975-300(1) of the ITAA 1997, will the Capital Component of the Proposed Distribution constitute a dividend for the purposes of section 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

(As the APIC account is not a share capital account (see answer to question 1 above)) Yes, the Capital Component of the Proposed Distribution will constitute a dividend for the purpose of section 6 of ITAA 1936.

Question 3

If the APIC account is not a share capital account of Company A for the purposes of section 975-300(1) of the ITAA 1997, did the Contribution result in Company A having a non-share capital account for the purposes of section 164-10 of ITAA 1997 in respect of which the Contribution Amount was credited?

Answer

No

Question 4

If the Contribution resulted in Company A having a non-share capital account for the purposes of section 164-10 of ITAA 1997 to which the Contribution Amount was credited, will the Capital Component of the Proposed Distribution constitute a non-share capital return?

Answer

No (as the contribution did not result in Company A having a non-share capital account see Question 3 above)

This ruling applies for the following periods:

Income tax year ended 31 December 20XX

Income tax year ended 31 December 20XX

Income tax year ended 31 December 20XX

Income tax year ended 31 December 20XX

Income tax year ended 31 December 20XX

Income tax year ended 31 December 20XX

Relevant facts and circumstances

This private ruling is based on the facts stated in the description of the scheme that is set out below, including the following document, or relevant parts, which are to be read with the description.

The Copy of the financial Statements of Company A provided to the Commissioner on DD MM YYYY.

The Contribution Agreement provided to the Commissioner on DD MM YYYY.

Assignment of Branch Assets and Assumptions of Branch Liabilities Agreement provided to the Commissioner on DD MM YYYY.

If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.    Company A was incorporated in 20YY with share capital of $X consisting of X ordinary $X shares issued to Company B as sole shareholder.

2.    Prior to the incorporation of Company A, Company B (its sole shareholder) operated via a branch (or permanent establishment) in Australia.

3.    On the DD MM YYYY Company B assigned all its Australian branch assets to Company A and Company A assumed all its Australian branch liabilities pursuant to a Contribution Agreement and Assignment of Branch Assets and Assumption of Branch Liabilities Agreement (of same date) (with Company B ceasing all Australian branch operations thereafter).

4.    Both agreements refer to the CLS-AB proforma balance sheet "attached hereto as Exhibit A" as specifying (or containing details of) thebranch assets assigned and branch liabilities assumed (and as incorporated herein as an integral part hereto (of the agreement(s)). No copy of Exhibit A hasbeen provided to the Commissioner with Company A (applicant) having confirmed it is unable to provide Exhibit A of the contribution Agreement and Assignment Agreement.

5.    Company A (applicant) has advised that the net book value of Company B's Australian branch assets (or amount by which the book value of the branch assets exceeded the book value of the branch liabilities) was over AUD$6 million (the Contribution Amount) and this amount was credited to a general ledger account named "Additional Paid In Capital" ("APIC") and recorded as share capital of Company A for accounting purposes.

6.    The recording of the Contribution Amount of over AUD$6 million as share capital of Company A for accounting purposes can be seen from the audited financial statements of the Company A.

7.    The financial statements disclose that the Australian branch assets assigned consisted of property plant & equipment, trade receivables and related party loans and the branch liabilities assumed consisted of trade payables and related party loans but do not disclose the book value amount at which each asset was assigned and each liability was assumed (apart from the property plant & equipment).

8.    The Company A Statement of Financial Position records Share Capital at the Contribution Amount with Note Contributed Equity advising that this amount consists of ordinary $X shares comprising the X ordinary $X shares of $X issued to Company B on incorporation plus the Contribution Amount net branch asset Contribution Amount in respect of which it (incorrectly) assumed ordinary $X shares had (also) been issued.

9.    The (incorrect) assumption that ordinary $X shares had been issued to Company B for the Contribution Amount was repeated in the audited financial statements for years. It was not corrected until over X years later where (after an internal accounting review) the number of ordinary issued $X shares was reduced to X but the amount of Share Capital remained the same with the Contributed Equity note to the financial statements advising it consisted of X ordinary shares paid up to that amount.

10.  Company A has not returned any share capital since the Contribution Amount was made (recorded) and no amounts (other than the Contribution Amount) have been credited to the APIC account and recorded as Share Capital for accounting purposes.

11.  Company A prepares its annual financial statements in accordance with Australian accounting standards (on the basis of DD MM year-end) and the financial statements throughout the income year (or for monthly reporting purposes) are maintained or prepared in accordance with XXXX.

Changes in ownership since incorporation

12.  On incorporation of Company A all the (X ordinary $X) shares were issued to (held by) Company B as sole shareholder (and contributor of the net branch assets) with the ultimate holding company being Company C.

13.  Subsequently, Company C sold X% of the shares in its services business companies (including Company B and its wholly owned subsidiary Company A) to Company D resulting in the name change to Company B and Company A (respectively).

14.  Company B sold all the shares in Company A to Company E and then Company E sold all the shares in Company A to Company F.

15.  Company G acquired all the shares in its services business companies from Company D and Company C. This transaction resulted in Company B, Company E, Company F and Company A all becoming wholly owned subsidiaries of Company G as the ultimate holding company.

16.  Company F (the immediate sole shareholder company of Company A having acquired all the shares) migrated its place of management and was renamed.

17.  Company F, as the sole shareholder of Company A, is not (and has never been) a tax resident in Australia nor has it operated through an Australian permanent establishment.

Proposed Distribution

18.  Company A intends to repatriate surplus funds to Company F (its sole shareholder) and is proposing to pay a distribution (Proposed Distribution) of which some will be a fully-franked dividend and the remainder (Capital Component) will be debited to the APIC account (or share capital account for accounting purposes). These figures are based on Company A's most recent audited financial statements and are provided by way of indication. The amount actually distributed as a (fully) franked dividend and/or debited to the APIC account under the Proposed Distribution may vary from the figures provided albeit any variation will be minor.

19.  No shares will be redeemed or cancelled as part of the distribution of the Capital Component. The Proposed Distribution is expected to occur (after which the intention is for Company A to be deregistered).

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Company A.

This is to explain how we reached our decision. This is not part of the private ruling.

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997), unless specified otherwise.

Question1

The term 'share capital account' is defined by section 975-300 as follows:

Section 975-300 Meaning of share capital account

(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 of 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 ITAA 36; and

(d) subsection 44(1B) of the ITAA 36; and

(e) (Repealed by No 79 of 2007)

(f) subsection 159GZZZQ(5) of the ITAA 36

There is no statutory definition of the term "share capital" (of an amount of "share capital") in the ITAA 1997 (section 975-300). Taxation Ruling TR 2012/5: Section 254T of the Corporations Act 2001 and the assessment and franking of dividends paid from 28 June 2010 states atparagraph 23:

"The references in section 975-300 to "share capital" are references to a company's share capital for company law purposes".

There is also no statutory definition of the term "share capital" for Corporations Act 2001 ("CA 2001") (Chapter 2H-Shares and Chapter 2J-Transactions affecting share capital)purposes and therefore the ordinary meaning of the term, as supported by case law, legal commentary and Explanatory Memoranda (and as discussed in Taxation Ruling TR 2012/1: Retail premiums paid to shareholders where share entitlements are not taken up or are not available at paragraphs 35 to 50) applies.

The question of whether an amount (of money or property) contributed to an Australian (CA 2001) incorporated company by a shareholder (holding fully paid-up shares in the company) may be treated as forming part of the share capital of the company for CA 2001 and income tax (section 975-300) purposes where no (new) shares are issued by the company in exchange, is one that has been raised on an intermittent basis since the Company Law Review Act 1998 changes to the Corporations Law and Taxation Laws Amendment (Company Law Review) Act 1998 changes to the ITAA.

The issue is not whether a shareholder can make such a payment (contribution) to the company (otherwise than in exchange for shares) as clearly shareholders can and do make such payments as evidenced (for example) by Taxation Determination TD 2014/14: Are capital support payments deductible under section 8-1, section 40-880, ss230-15(2) or ss230-15(3). [1] Rather the issue is what is the character of such a contribution (receipt) in the recipient (Australian CA 2001 incorporated) company's hands or whether the amount can be treated as forming part of the issued share capital of the company for CA 2001 and income tax (section 975-300) purposes if no shares are issued by the company in exchange for the contribution.

The making of a capital contribution to the share capital of a company without an issue of shares in exchange (or the making of non-scrip capital contributions to share capital by shareholders) is simply not contemplated by the CA 2001. This is clear from section 117 Applying for Registration (that requires details of the number and class of shares to be issued to each shareholder and amount to be paid for (on) each share (that is, whether fully or partly paid)), section 169 Register of Members, section 178A Notice of change to members register (proprietary companies) (ASIC Form 484); section 254X Notice to ASIC of share issue (ASIC Form 484) and the fact there is no ASIC form for advising of such "non-scrip capital contributions to share capital" by shareholders, all of which evidence that "share capital" (as contemplated by CA 2001) is that which is received by a company in exchange for the issue of shares. It is also clear from the fact "non-scrip capital contributions to share capital"may be said to undermine the information transparency objectives of the CA 2001 and provisions relating to takeover thresholds and capital reductions (provisions about ensuring equal reduction to share capital). This is especially so where the company has 2 or more shareholders as to allow a capital contribution by one of them to be treated as forming part of the share capital of the company without an issue of shares being made in exchange, does not increase that (contributing) shareholder's proportional rights to a return (or aliquot share) of that share capital, with the difficulties or problems here increasing where there are more than one class of shares (equity interests) on issue to 2 or more shareholders.

The question therefore is one that can only arise or be (sensibly) considered in respect of a sole shareholder company with only one class of shares (equity interests) on issue (as was the case in Aurizon Holdings Limited v Commissioner of Taxation2022 ATC 20-824;[2022] FCA 368).

The Aurizon Holdings Limited v Commissioner of Taxation2022 ATC 20-824;[2022] FCA 368 case (Aurizon case) involved the restructuring required to implement the initial public offering (IPO) of the (former) Queensland government owned rail freight and logistics business (QR Limited) that listed on the ASX on 22 November 2010. This restructuring was carried out in accordance with various directions issued by the Treasurer under sections 9 and 11 of the Infrastructure Investment (Asset Restructuring and Disposal) Act 2009 (Qld) (the IPO being a "declared project" for the purposes of this Act) and included the following steps:

▪ 14 September 2010 the incorporation of a new holding company, QR National Limited (renamed Aurizon Holdings Ltd) with 2 fully paid ordinary $1.00 shares issued to the Queensland government (as sole shareholder);

▪ 21 September 2010 the transfer (by the Queensland government) of all the shares in QR Limited (the operating entity) to Aurizon Holdings Ltd in return for the issue of 98 fully-paid ordinary shares to the Queensland government in exchange;

▪ 6 October 2010 the 100 ordinary issued shares held in Aurizon Holdings Ltd by the Queensland government were split into 2,440,000,000 ordinary shares. This was done so that it could be stated in the QR National Limited Share Offer Document that issued on the 8 October 2010, that 2,440,000,000 ordinary issued shares in Aurizon Holdings Ltd (as held by the Queensland government) were available for sale to the public (at prices ranging from $2,50 to $3.00 per share);

▪ 19 November 2010 the assignment by the Queensland government (as sole shareholder) of a $4,388,252,244 receivable asset to Aurizon Holdings Ltd for no consideration (referred to as the "State Contribution"). This receivable asset was owed to the Queensland government (and now to Aurizon Holdings Ltd) by QR Limited (the operating entity) and wholly owned subsidiary of Aurizon Holdings Ltd.[2] Aurizon Holdings Ltd recorded the assignment (or State Contribution) by debiting a receivable asset $4,388,252,224 and crediting a "Capital Distribution Account" by the same amount. Although no additional shares were issued by Aurizon Holdings Ltd to the Queensland government for the assignment (as originally planned) the company (in accordance with paragraphs 6 and 7 of the Treasurer's November Direction and AASB Interpretation 1038 Contributions made by owners to wholly-owned public sector entities) treated the $4,388,252,224 Capital Distribution Account as forming part of its contributed equity or share capital for accounting (financial statement) purposes.

Due to the uncertain status of the State Contribution for income tax and CA 2001 purposes, Aurizon Holdings Limited sought declarations under section 39B(1A)(c) Judiciary Act 1903 and section 21 Federal Court of Australia Act 1976 on whether the $4,388,252,224 amount (credited to the Capital Distribution (Share Capital) Account for accounting purposes) formed part of its share capital account for section 975-300 purposes (irrespective of the fact no shares had been issued in return for the amount).

It was contended by Aurizon that the State Contribution was share capital on the basis any money or property contributed by a shareholder (in that capacity) to a company, where not made as a loan or gift, is share capital. In the alternative it was submitted that the State Contribution was share capital on the basis it was sufficiently connected to or capable or being regarded as consideration for (or as adjusting the consideration for) the earlier issue of the 100 fully paid shares (that on the 6 October 2010 were split into 2.440,000,000 ordinary shares so that it could be stated in the QR National Limited Share Offer Document (issued on 8 October 2010) that 2,440,000,000 ordinary issued shares (held by the Queensland government) were available for sale to the public). Refer Aurizon case at [53-54].

The Commissioner contended that the State Contribution was not share capital because it was not made (received) in exchange for the issue of shares (but was made (received) for nil consideration). The Commissioner contended that as the State Contribution (or $4,388,252,244 receivable asset) had been made (assigned) for nil consideration it was more properly characterised as a gift and therefore formed part of Aurizon Holdings Ltd contributed equity capital as retained profits or reserves (Aurizon case at [55-58]).

His Honour (Thawley J) found that cases such as Archibald Howie Pty Ltd v Commissioner of Stamp Duties (1948) 77 CLR, Re Swan Brewery Co Ltd (1976) 3 ACLR 164, Cable & Wireless Australia & Pacific Holding BV (in liquidation) v Federal Commissioner of Taxation [2016] FCA 78; (2016) 110 ACSR 616 and [2017] FCAFC 71; (2017) 251 FCR 483, National Mutual Life Association of Australia Ltd v Federal Commissioner of Taxation [2009] FCAFC 96, Kellar v Williams [2000] 2 BCLC 390 and The Commissioners for HM Revenue and Customs v Alan Blackburn Sports Limited [2008] EWCA Civ 1454 did not support Aurizon's contention that any money or property contributed by a shareholder to a company (where not made as a loan or gift) is share capital. It was noted by His Honour (at [90]) that these cases actually reaffirmed the Commissioner's position that shareholders may make capital contributions to equity (that form part of the equity capital of the company) that are not share capital.

His Honour stated (at [7]) that "the term "share capital" almost invariably refers to the capital contributed to a company in exchange for shares." It was also noted by His Honour (at [67]) that as none of the cases cited were concerned with (or had addressed) the precise issue raised in this Aurizon case:

"... namely the classification of an amount paid to a company by its sole shareholder, expressed to be for "nil consideration" and not in exchange for a new issue of shares, but which was to be adjusted to the contributed equity of the company, that contributed equity at the time being constituted only by share capital"

there was nothing in any of these cases to prevent the State Contribution from being share capital.

The decision of Thawley J that the State Contribution did form part of the share capital account of Aurizon Holdings Limited for section 975-300 was based on the following:

•         the State Contribution was not made as a loan because (pursuant to the Treasurer's November Direction paragraph 6 that stated "the consideration provided for transfer of the Receivable from the State of Queensland to Aurizon is nil") it was made for nil consideration;

•         the State Contribution (despite being made for nil consideration) was not made as a gift because of:

(i) the accounting treatment (pursuant to AASB Interpretation 1038[3], the Treasurer's November Direction

paragraph 7 and Aurizon Holdings Ltd directors meeting (board resolution) of 17 November 2010) as forming part of contributed equity (share capital); and

(ii) the fact shares were originally intended to have been issued in exchange for the State Contribution with

it only being due to the change in the original plan and (at [101(1)]) the "... failure on the part of the relevant advisers to notice or appreciate that the alteration to the original plan created the potential problem that the State Contribution would not be share capital ..." that this did not occur "but not an intention that it not be share capital";

with His Honour noting (at [48]) that whilst the accounting treatment (AASB Interpretation 1038) does not govern the legal position of what occurred, it is significant in that it showed (along with all the other facts and evidence) that the State Contribution was intended to be an equity contribution as owner, capable of redemption (meaning it not intended to be a gift);

•         the fact the Queensland government was the sole shareholder of Aurizon Holdings Ltd (at the time the contribution was made) meant there was no need to set out the respective ownership interests of equity contributors (as required by AASB Interpretation 1038 paragraphs 8(a) and 8(b)[4] where there are two or more shareholders);

•         the fact the only "equity" of Aurizon Holdings Ltd (at the time the contribution was made) was share capital meant the designation as a contribution of equity (or direction for the contribution to be adjusted against contributed equity) was a direction by the government for it to be added to share capital;

•         the fact the QR National Share Offer Document of 8 October 2010 in the pro-forma balance sheet (at page 104[5]) disclosed that the share capital of the company included the $4,388,255,242 State Contribution as too did the financial statements of Aurizon Holdings Ltd post ASX listing with the QR National Ltd (Aurizon Holdings Limited) financial statements for year ended 30 June 2011 recording Total Contributed Equity (as at 30 June 2011) at $6,111.9 million.[6] As stated at [101(2)] this meant the ordinary reader of the Offer Document would have assumed that the total share capital after restructure would be $6.074b or that the members of the public who purchased shares in the company (from the Queensland government) pursuant to the Share Offer Document (and also those who purchased shares (on market) post ASX listing) did so on the basis the State Contribution formed part of share capital.

The Aurizon Holdings Limited v Commissioner of Taxation 2022 ATC 20-824; [2022] FAC 368 Decision Impact Statement ("DIS") issued by the ATO on 25 August 2022 states as follows;

ATO view of decision

It is the ATO's view that the decision has very limited application beyond its own factual circumstances. His Honour makes it clear that ultimately it was a case that turned on its own particular facts and circumstances. Noting the unusual circumstances of this particular matter, it is the Commissioner's view that the decision reaffirms the pre-existing view as to what generally is to be treated as share capital, with His Honour stating at [7] that '... [t]he term "share capital" almost invariably refers to the capital contributed to a company in exchange for shares.'

The Commissioner considers that the approach in this case as to what constitutes share capital will only be relevant in the unusual circumstance where there is clear contemporaneous evidence that the objective intention was that the relevant amount was always meant to be a contribution to share capital.

Implications for impacted advice or guidance

It is the ATO's view that the Aurizon decision is considered to have very limited application as it turned on its own facts. The Commissioner does not intend to alter ATO precedential documents or Law administration practice statements. It is the Commissioner's view that the decision reaffirms the pre-existing ATO view as to what generally is to be treated as contributed share capital.

Application of Aurizon case to Company A

Company A was incorporated for the specific purpose of acquiring all the Australian branch assets and assuming all the Australian branch liabilities from its sole shareholder, Company B.

Like Aurizon, the contribution (of net branch asset book value) was made by Company B as sole shareholder, at a time when the only equity capital of the company was share capital (of $X).

Unlike Aurizon however the only evidence of such a (net branch asset book value) contribution amount having been made to Company A by Company B and only evidence that this contribution was intended to form part of the share capital of Company A (despite no shares being issued of in exchange) are the (audited) financial statements of Company A.

Whilst the Contribution Agreement and Assignment and Assumption Agreement provide evidence that branch assets were assigned to Company A and branch liabilities were assumed by Company A (from Company B) the agreements (apart from the reference to Exhibit A[7]) are both silent on the nature of these assets and liabilities and the amounts at which they were assigned and assumed. This means both agreements are silent on whether the value of the branch assets assigned exceeded the value of the branch liabilities assumed (noting book value is not market value) and as such provide no evidence of a net branch asset contribution of any amount as having been made (contributed) by Company B (as sole shareholder) to Company A. As the agreements provide no evidence of the value or amount of the net branch assets contributed (whether there was any such amount contributed) they provide no evidence of the intended treatment of such a (non-recognised) amount as share capital for any purpose.

This differs from Aurizon where the evidence of the $4,388,252,244 receivable asset (State Contribution) assigned (contributed) to Aurizon Holdings Limited (by the Queensland government as sole shareholder) on the 19 November 2010 and evidence of the intended treatment of this State Contribution amount as share capital (despite no shares being issued in exchange) included not just the financial statements of Aurizon Holdings Limited (the pro-forma balance sheet in the QR National Share Offer Document (page 104) and financial statements for year ended 30 June 2011 (and subsequent income years)) but also included (1) the original 16 August 2010 KPMG plan (pursuant to which the amount contributed by the State would (as noted at [20]) unarguably have been share capital); (2) the change to this original plan as made by Allen's (of 30 September 2010 and 5 October 2010) that was not intended to change this treatment; (3) the Treasurer's November Direction (paragraph 7) that designated the transfer of the Receivable (State Contribution) to be a contribution to the Equity (Share) Capital of Aurizon Holdings Ltd; (4) the 17 November 2010 Aurizon Holdings Ltd directors meeting (board resolution) resolving (in accordance with the November Direction and AASB Interpretation 1038) to recognise the transfer of the Receivable as a contribution of equity (share capital); (4) AASB Interpretation 1038 Contributions by Owners made to Wholly-Owned Public Sector entities (paragraph 8(c)) that prescribed the Equity (Share) Capital treatment of the State Contribution for accounting (financial statement) purposes (as referred to (relied on) by the Treasurer at paragraph 7 of the November Direction).

It is also noted that the Contribution Agreement expressly states that no additional shares in the Company (Company A) shall be issued in consideration for the branch assets with no reason provided for this express term or choice (to not issue shares) and/or why it should not prevent the (net branch asset) contribution amount (if any) from being share capital for CA 2001 and income tax purposes.[8]This differs to Aurizon as shares were clearly intended to have been issued in exchange for the State Contribution with it only being due to the change in the original plan and (at [101(1)]) the failure on the part of the relevant advisers to notice or appreciate that the alteration to the original plan created the potential problem that the State Contribution would not be share capital that this did not occur (but with no change to the intended treatment of the State Contribution as share capital). That is, we have no idea whether the reason for the Contribution Agreement choice (to not issue additional shares) was due to a focus on the US income tax and company law position rather than the Australian income tax and company law position (due to an oversight when drafting the agreement) or some other reason such as a deliberate choice to avoid the CA 2001 Part 2J.1 restrictions on return share capital from applying to the contribution amount or (alternatively) due (possibly) to there being no contribution amount as (as noted below) the assumption of the branch liabilities considered sufficient consideration for the assignment of the branch assets.

The fact the Contribution Agreement (and Assignment and Assumption Agreement) are both silent on the amount at which the branch assets assigned and branch liabilities assumed (the fact the agreements provide no evidence of a net branch asset contribution of any amount as having been made (contributed) to Company A) in combination with the somewhat ambiguous For good and valuable consideration, including the assumption of said Liabilities, ... clause in the Contribution Agreement, raises the possibility the assumption of the branch liabilities by Company A was considered (by the agreements) to be adequate good and valuable consideration for the assignment (acquisition) of the branch assets (or that the good and valuable consideration consisted entirely of the assumption of branch liabilities) with there being no (net branch asset) contribution amount at all under the agreements (and (as such) no contribution amount for income tax and CA 2001 purposes). In this regard it is noted that book value is not market value and (even if it were) the term good and valuable consideration (as used in the Contribution Agreement) does not mean market value (or full) consideration.

As the only evidence of both a contribution amount (net branch asset book value) and of the intended treatment of this amount as share capital (despite no shares being issued in exchange) are the Company A financial statements (pursuant to the above and the ATO DIS on the Aurizon decision) there is a lack of clear contemporaneous evidence of the quantum (existence) of this contribution amount and lack of clear contemporaneous evidence that the objective intention was that this relevant (contribution) amount was always meant to be a contribution to share capital for income tax and CA 2001 purposes.

The Contribution Amount credited to the Additional Paid-In Capital (APIC) Account of Company A for accounting purposes therefore is not an amount of share capital for income tax and CA 2001 purposes and does not form part of Company A's share capital account for the purposes of section 975-300 of the ITAA 1997.

Question2

A *dividend is defined in subsection 6(1) ITAA 1936 is as follows;

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 by No 63 of 1998)

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 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 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

A dividend is defined (to include) any distribution (of money or property) made or credited by a company to any of its shareholders where the amount paid or credited or value of property (distributed) is not debited by the company to its share capital account.

The Capital Component of the Proposed Distribution to be paid by Company A will constitute a dividend for the purposes of section 6 ITAA 1936 as the amount will be paid by debiting its APIC account, which is not a share capital account.

Question 3

A non-share capital account of a company is defined in 164-10 as follows;

Section 164-10 Non-share capital account

(1) A company has a non-share capital account if:

(a) the company issues a *non-share equity interest in the company on or after 1 July 2001; or

(b) the company has issued a non-share equity interest in the company before 1 July 2001 that is still in

existence on 1 July 2001; or

(c) a *debt interest in the company changes at a particular time (the change time) to an *equity interest in the company because of subsection 974-110(1) or (2); or

(d) the following conditions are satisfied in relation to an interest in the company:

(i) immediately before subsection 974-75(4) ceases to have effect, the interest is taken to be a debt interest in the company because of that subsection;

(ii) the interest is an equity interest in the company at the time (the change time ) that is immediately after that cessation;

(iii) subsection 974-75(6) does not apply to the interest in relation to the income year that includes the change time; or

(e) the following conditions are satisfied in relation to an interest in the company:

(i) subsection 974-75(6) applies to the interest in relation to a particular income year;

(ii) that subsection does not apply to the interest in relation to the next income year;

(iii) the interest is an equity interest in the company at the time (the change time) that is the start of that next income year.

A company will only have a non-share capital account if it has issued a non-share equity interest to a third party or has issued a debt interest to a third party that converts to an equity interest.

A non-share equity interest is defined as an equity interest that is not solely a share.

An equity interest in a company is defined in section 974-70 and section 974-75 of Subdivision 974-C as follows;

Section 974-70 Meaning of equity interest in a company

Scheme giving rise to equity interest

(1) A *scheme gives rise to an equity interest in a company if, when the scheme comes into existence:

(a) the scheme satisfies the equity test in subsection 974-75(1) in relation to the company because of the

existence of an interest; and

(b) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a

*debt interest in the company, or a *connected entity of the company, under SD 974-B.

Section 974-75 The test for an equity interest

Basic test for equity interest

(1) A *scheme satisfies the equity test in this subsection in relation to a company if it gives rise to an interest set

out in the following table:

This subsection has effect subject to subsection (2) (requirement for financing arrangement)

Financing arrangement

(2) A *scheme that would otherwise give rise to an *equity interest in a company because of an item in the table in

subsection (1) (other than item 1) does not give rise to an equity interest in the company unless the scheme is a *financing arrangement for the company.

For a non-share equity interest to be issued by a company there must be a scheme that is a *financing arrangement (as defined in section 974-130) for the company that satisfies the equity test in item 2 or item 3 of the table to subsection 974-75(1) (noting item 1 and Item 4 are not relevant here).

A scheme is a financing arrangement for an entity (pursuant to subsection 974-130(1)) if it is entered into or undertaken to raise finance for the entity.

As noted in the response to Question 1, both the Contribution Agreement and Assignment and Assumption Agreement are silent on the nature and amount of the branch assets assigned and branch liabilities assumed (silent on whether the value of the branch assets assigned exceeded the value of the branch liabilities assumed) and (therefore) provide no evidence of a net branch asset contribution of any amount as having been made (contributed) by Company B (as sole shareholder) to Company A.

As both the Contribution Agreement and Assignment and Assumption do not recognise a (net branch asset) contribution of any amount as having been made (contributed) to Company A there is nothing in the agreements that gives Company B an interest:

▪ that carries a right to a variable or fixed return from the company ...contingent on aspects of the economic

performance of the company (Item 2 of the table to 974-75(1)); or

▪ that carries a right to a variable or fixed return form the company the amount of which is at the discretion of

the company (Item 3 of the table to 974-75(1))

in exchange for making such a (non -recognised) contribution. In addition, just because a net branch asset book value amount was recognised by Company A as a contribution (by Company B) to share capital for accounting purposes there is nothing in the accounting (financial statement) material to give Company B an interest that meets item 2 or item 4 of the table to 974-75(1) in exchange for making this "contribution" irrespective of whether it is considered to be a *financing arrangement for Company A.

The lack of recognition of a contribution amount by the Contribution Agreement and Assignment and Assumption Agreement also makes it very difficult (impossible) to see how an implied term that the contribution was made in return for the right to receive a return on investment or (at least) a right to receive a return of some or all of the amount invested including as surplus capital on winding up or a term that a non-share equity interest (meeting the requirements of item 3 to the table to 975-75(1)) was issued by the company in exchange for the contribution can be (or should) be implied (read) into the agreements, pursuant to the case law principles on implying a term (of fact) into a formal contract.

Even if (on the basis of the accounting evidence) such a contribution amount was able to be implied (read into) the Contribution Agreement no such additional (implied) term that a non-share equity interest was issued by Company A in exchange for this (implied) contribution amount would be required to (also) be implied or read into the agreement pursuant to these principles as:

(i) it is not essential that such a term be implied for the contract to operate reasonably and equitably between the parties (given the sole shareholder status of the contributor). The fact the contribution (if not treated as giving rise to a non-share equity interest and non-share capital account of Company A for section 164-10 purposes (and where also not treated as forming part of the share capital of Company A)) means the Capital Component of the Proposed Distribution (to be debited against the APIC account) will be section 6 ITAA 1936 dividend and (pursuant to ss44(1A)) a ss44(1) ITAA 1936 assessable dividend in the hands of the shareholder Company F (rather than a return of a (tax free) capital amount[9]) is not a matter relevant to the (reasonable and equitable) operation of the Contribution Agreement or Assignment & Assumption Agreement between the parties;

(ii) it is not necessary that such a term be implied to give business efficacy to the contract as the Contribution Agreement (pursuant to the For good and valuable consideration, including the assumption of said Liabilities, the receipt and sufficiency of which is hereby acknowledged ... clause) is commercially effective without such an implied term. As an entity can choose how it finances its business operations, whether through debt or equity funding or (relevantly) through providing assets (to a wholly owned subsidiary) at nominal (less than market value) consideration (or forgiving debts to same) there is also no need for such an implicit term (that the contribution (if recognised) was made in exchange for the issue of non-share equity interests) to be read into the Contribution Agreement for the transaction to make sense;

(iii) such an implied term is not obvious to both parties (or does not go without saying) as there is no "standard fact pattern" for investment by a shareholder in a subsidiary nor "rights which are generally granted to an investor upon the contribution of capital. If the intention were for Company B to receive some form of "interest" in Company A in exchange for the contribution it would be necessary to expressly identify the nature (terms) of that interest (whether debt or equity) and number held, and if equity, its relationship (priority) to the other equity (viz share) interests held. This is not a matter that would "go without saying" but rather is a matter that would be expected to be expressly recognised (defined) by the agreement. It also means that any implied term said to afford Company B the rights generally granted to an investor upon the contribution would be so unclear as to likely be void for uncertainty (Whitlock v Brew (1968) 118 CLR 445);

(iv) such an implied term is not capable of clear expression (is not reasonably certain in its operation) for the same reason it is not obvious (to both parties). Nor would such an implied term be consistent with or not contradict an express term of the contract as (whilst there is no "standard fact pattern" for investment by a shareholder in a subsidiary or rights 'generally' issued to a shareholder in exchange for a contribution of capital) such rights if "generally" issued (where the contribution is clearly not made a loan or a gift by the shareholder) would be expected to be additional shares in the company. As the Contribution Agreement expressly states there is no issue of shares (in exchange for the assignment of the branch assets) such a term cannot be implied as it would contradict that express term of the contract.

If the contribution amount is unable to be treated (in the hands of Company A) as a contribution to the share capital account of the company for 975-300 purposes or as an amount received in respect of (attaching to) the rights issued to and held by Company B pursuant the contract (in the form of the constitution of Company A) entered into when Company B subscribed for and was issued the X ordinary $X shares (as sole shareholder) on incorporation, then (in the absence of a separate contract or some form of documentation between itself and Company A specifying the nature of the rights issued to it in return for making the (net branch asset) contribution) it is impossible to see how any such separate rights (said to constitute a *non-share equity interest) were created or issued.

That no non-share equity interest was issued by Company A to Company B in exchange for the (net branch asset) contribution is also evident from the fact no such "interest" was sold or transferred by Company B when it sold all the (X ordinary $X) shares to Company E. It is evident from the fact no non-share equity interests in Company A were acquired by Company F (from Company B) or are held by Company F as the current sole shareholder of Company A.

The contribution did not result in the issue of non-share equity interests by Company A (to Company B) and did not result in Company A having a non-share capital account for the purposes of section 164-10.

Question4

As there is no non-share equity account (see detailed reasoning in Question 3 above), the Capital Component of the Proposed Distribution will not constitute a non-share capital return.

[1] With TD 2014/4 saying no to all and (pursuant to the decision in National Mutual Life Association of Australia Ltd

v Federal Commissioner of Taxation [2009] FCAFC 96 and the Tax Laws Amendment (2006 Measures No 1) Act

2006 amendment to subsection 110-25(5) (fourth element cost base)) advising that such payments are to be

included in the (fourth element) cost base of the shares.

[2] Note that just after completion of the assignment on the 19 November 2010 Aurizon Holdings Ltd subscribed for 5.2 million

additional shares (worth $4,388,252,244) in QR Limited (its wholly owned subsidiary) which it paid for by setting-off the receivable asset against the subscription amount owed. This resulted in the receivable asset converting to a "shares held in (wholly owned subsidiary) QR Limited" asset of $4,388,244,252 with the liability of $4,388,244,252 owed by QR Limited (to Aurizon) converting to equity (share capital) of QR Limited of the same amount.

[3] AASB Interpretation 1038 Contributions by Owners made to Wholly-Owned Public Sector entities states at paragraph 8(c)

that a transfer (of money or property) by a sole (government) shareholder to its (wholly owned) public sector entity (company) will be treated as forming part of the contributed equity (share capital) of the company (without an issue of shares) IF a formal designation of the transfer by the transferor ... as forming part of the transferee's contributed equity, either before the transfer occurs or at the time of the transfer. Paragraph 25 states that a designation to treat the transfer as forming part of contributed equity (share capital) under paragraph 8(c) (without an issue of shares) is only possible where the transferee (recipient company) is wholly owned (has a sole shareholder).

[4] Where the transferee (recipient company) has two or more shareholders then for the transfer (contribution) to be treated as

contributed equity (share capital) AASB Interpretation 1038 requires, paragraph 8(a), that equity interests (shares) must be issued in exchange for the transfer (contribution) OR paragraph 8(b), that an agreement setting out the respective ownership interests of equity contributions in relation to the transfer must be entered into. The term "contributed equity" as used in paragraph 31 (together with paragraphs 22, 23, 25, 30, 32 and 26) means "share capital" (or in the case of a paragraph 8(b) transfer, means "non-share capital" in respect of "non-share equity interests").

[5] In the proforma balance sheet (at page 104 of the 8 October 2010 QR National Share Offer Document) Contributed Equity as

at 30 June 2010 is recorded at $2.067b with (after restructure adjustments including the $4.3883b State Contribution) it

increasing to (recorded at) $6.074b.

[6] In the Aurizon Holdings Limited financial statements for year ended 30 June 2011 the Total Contributed Equity of $6,111.9

million as at 30 June 2011 consisted of 2,440,000,000 ordinary fully paid shares of $1,711.7 million, the State Contribution

of $4,388.3 million, Share based payments $9.9 million and a State Capital Contribution for employee gift shares of $9.0 million.

[7] Exhibit A being the Australian Branch pro-forma balance sheet. No copy of this pro-forma balance sheet has been provided to

the Commissioner with Company A (applicant) having confirmed it is unable to provide.

[8] There also appears to be a conflict between clauses of the Contribution Agreement as one clause says the assignment

is intended to qualify as a tax-free transfer under section 351 of US Internal Revenue Code which generally requires stock (shares) to be received by the transferor (Company B) in the transferee (Company A) for the property transferred. It is noted that where the transferor already owns 100% of the shares in the transferee (as is the case here) it has been held by the US IRS and courts (pursuant to the "meaningless gesture" doctrine) that the actual issuance of additional shares is not required to satisfy section 351. This may explain the (ostensible) conflict between the clauses IF a (net branch asset) contribution amount was recognised (recorded) by the Contribution Agreement however the fact no such amount is recognised (recorded) could mean there is no such amount (and no need or role for the clause and section 351 here).

[9] The shares in Company A being held by a foreign resident shareholder means (on the assumption the shares not 855-25

Indirect Australian real property interests) section 855-10 will apply to ignore any CGT Event G1 gain that arises (noting Event G1 only applies to *shares (does not apply to *non-share equity interests). See PSLA 2008/10 on 45B ITAA 1936 at paragraph 112 on a return of non-share capital that is not a non-share dividend.