Edited version of private advice

Authorisation Number: 1052255529045

Date of advice: 29 October 2024

Ruling

Subject: Dividend and return of share capital

Question 1

Will the Proposed Dividend of approximately $x per Abcd share satisfy the definition of 'Dividend' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Will the Proposed Dividend of approximately $x per Abcd share be assessable to the shareholders under subparagraph 44(1)(a)(i) of the ITAA 1936?

Answer

Yes.

Question 3

Will the proposed return of capital, of approximately $x, to the shareholders of Abcd be a Dividend as defined in subsection 6(1) of the ITAA 1936 and be included in the shareholders' assessable incomes under section 44 of the ITAA 1936.

Answer

No.

Question 4

Will the Commissioner make a determination under section 45A or 45B of the ITAA 1936 that section 45C of the ITAA applies?

Answer

No.

Question 5

In accordance with section 104-135, will CGT event G1 occur when Abcd pays the Proposed Return of Capital to the shareholders in respect of the shares they owned at the Record Date and still owned at the Payment Date?

Answer

Yes.

This ruling applies for the following period:

1 July 20YY to 30 June 20YY

Relevant facts and circumstances

Abcd is an Australian tax resident and a proprietary company incorporated in Australia in 20xx. The xx shareholders of Abcd are:

•                     Australian residents as defined in subsection 6(1) of ITAA 1936,

•                     hold their shares on capital account and do not hold their shares as revenue assets or as trading stock, and

•                     not subject to the Taxation of Financial Arrangement (TOFA) rules in Division 230 in relation to gains and losses on their shares.

Abcd has xxxx ordinary shares, with a paid-up capital of $xx. The paid-up capital is disclosed separately from its retained earnings in its books.

The proposed Distribution will be set off against the unsecured loans with the shareholders which would reduce to nil.

The remaining portion of the proposed Distribution that was not debited against the share capital (i.e. the Return of Capital) or set off against the unsecured loans with the shareholders will be settled from the available cash.

The share capital account is not tainted within the meaning of Division 197. Upon making the proposed return of capital, the share capital account will be debited accordingly.

Abcd will apply the 'slice' attribution approach set out in Law Administration Practice Statement PS LA 2008/10 Application of section 45B of the ITAA 1936 to share capital reductions to determine the ratio of the proposed return of capital and the proposed dividend in the proposed distribution.

Abcd will obtain approval from its shareholders to return share capital. The proposed return of capital will be made to the shareholders of Abcd on a pro-rata basis in proportion to each shareholder's interest in the share capital of Abcd.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1936 section 45A

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1997 section 104-125

Income Tax Assessment Act 1997 section 104-135

Income Tax Assessment Act 1997 section 197-50

Income Tax Assessment Act 1997 section 855-10

Income Tax Assessment Act 1997 section 975-300

Reasons for decision

Question 1

Will the Proposed Dividend of approximately $x per Abcd share satisfy the definition of 'Dividend' in subsection 6(1) of the ITAA 1936?

Summary

Yes, it will satisfy the definition of Dividend.

Detailed reasoning

The term 'Dividend' is defined in subsection 6(1) of the ITAA 1936 and includes any distribution made by a company to its shareholders whether in money or other property and any amount credited by the company to any of its shareholders as shareholders.

The proposed Dividend of approximately $x per share to Abcd shareholders will satisfy the definition of 'Dividend' in subsection 6(1) of the ITAA 1936 as it will consist of amounts credited by Abcd to its shareholders. The Dividend will not include amounts debited to the Abcd's share capital account.

Question 2

Will the Proposed Dividend of approximately $x per Abcd share be assessable to the shareholders under subparagraph 44(1)(a)(i) of the ITAA 1936?

Summary

Yes, the proposed Dividend will be assessable to the shareholders.

Detailed reasoning

As explained in Question 1, the Proposed Dividend meets the definition of a Dividend.

Subsection 44(1) of the ITAA 1936 provides that an Australian resident shareholder (the registered holder of shares) is assessable on all Dividends paid (to the shareholder) by a company out of profits derived from any source.

Therefore, the shareholders who receive the proposed Dividend are required to include that Dividend in their assessable income under paragraph 44(1)(a)(i) of the ITAA 1936 and an amount equal to the franking credit on the Dividend under subsection 207-20(1).

Question 3

Will the proposed return of capital, of approximately $x, to the shareholders of Abcd be a Dividend as defined in subsection 6(1) of the ITAA 1936 and be included in the shareholders' assessable incomes under section 44 of the ITAA 1936?

Summary

No, the proposed return of capital will not be a dividend included in the shareholders' assessable incomes under section 44 of the ITAA 1936.

Detailed reasoning

The term 'Dividend' is defined in subsection 6(1) and includes any:

(a)          distribution made by a company to any of its shareholders, whether in money or other property, and

(b)          amount credited by a company to any of its shareholders as shareholders.

However, paragraph 6(4)(d) of the definition of 'Dividend' excludes a distribution from the meaning of 'Dividend' if the amount of the distribution is debited against an amount standing to the credit of the company's share capital account.

Subsection 975-300(3) provides that an account is generally taken not to be a share capital account if it is tainted. Abcd has confirmed that its share capital will not be tainted as defined in section 197-50.

Abcd's proposed return of capital will be recorded as a debit to Abcd's untainted share capital account, paragraph (d) of the definition of 'Dividend' in 6(1) applies to exclude the return of capital from the definition of 'Dividend' in subsection 6(1). This means no part of the return of capital will be included in the assessable income under section 44.

Question 4

Will the Commissioner make a determination under section 45A or 45B of the ITAA 1936 that section 45C of the ITAA 1936 applies?

Summary

No, the Commissioner will not make a determination under section 45A or 45B that section 45C applies to the return of capital that Abcd pays to its shareholders.

Detailed reasoning

It cannot be concluded the scheme here will be entered into or carried out for a more than incidental purpose of enabling Abcd shareholders to obtain a tax benefit. The proposed return of capital is intended to return surplus capital to the shareholders. Accordingly, the Commissioner will not make a determination to the whole, or part, of the capital benefit provided to those shareholders.

Question 5

In accordance with section 104-135, will CGT event G1 occur when Abcd pays the Proposed Return of Capital (of approximately $x) to the shareholders in respect of the shares they owned at the Record Date and still owned at the Payment Date?

Summary

Yes, CGT event G1 will occur when Abcd pays the Return of Capital amount.

Detailed Reasoning

In accordance with section 104-135 on capital payments for shares.

1.             CGT event G1 happens if:

a.            a company makes a payment to you in respect of a share you own in the company (except for CGT event A1 or C2 happening in relation to the share); and

b.            some or all of the payment (the non-assessable part ) is not a Dividend, or an amount that is taken to be a Dividend under section 47; and

c.            the payment is not included in your assessable income.

2.             The time of the event is when the company makes the payment.

3.             You make a capital gain if the amount of the non-assessable part is more than the share's cost base. If you make a capital gain, the share's cost base and reduced cost base are reduced to nil.

4.             However, if the amount of the non-assessable part is not more than the share's cost base, that cost base and its reduced cost base are reduced by the amount of the non-assessable part.

CGT event G1 will occur when Abcd makes the Return of Capital to the shareholders in respect of Abcd shares owned at the Record Date that they continue to own at the Payment Date.

The shareholders will derive a capital gain under CGT event G1 where the amount of the return of capital is greater than the cost base of the Abcd share. The capital gain will be the difference between the cost base and the capital proceeds (subsection 104-135(3)).

There can be no capital loss made from a CGT event G1 (Note 1 to subsection 104-135(3), where the amount of the return of capital is not greater than the cost base of the shareholder's Abcd share (subsection 104-135(4)).

CGT event C2 will happen if Abcd pays the return of capital to Abcd shareholders in respect of Abcd shares that they owned at the Record Date, but did not own at the Payment Date (section 104-25).