Edited version of private advice

Authorisation Number: 1052390429484

Date of advice: 27 May 2025

Ruling

Subject: Share capital account

Question 1

Did the relevant accounting journal entries recorded by Company B result in an amount to which Division 197 of the Income Tax Assessment Act 1997 (ITAA 1997) applies?

Answer 1

No

This ruling applies for the following periods:

Income tax year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company A and Company B are companies incorporated in Australia and are Australian residents. Company A is the head company of an income tax consolidated group which includes Company B as a subsidiary member.

Company B conducted a review of its share capital account and identified two accounting journal entries with respect to which it sought a ruling from the Commissioner regarding the application of Division 197.

There were no distributions of share capital at either the Company A or Company B level. A share buy-back occurred at the Company A level several years after the accounting journal entries were recorded.

Relevant legislative provisions

ITAA 1997 Div 197

ITAA 1997 197-5

ITAA 1997 197-50(1)

ITAA 1997 975-300

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise specified.

Meaning of a transferred amount

Under subsection 197-5(1), Division 197 applies to an amount that is transferred to a company's share capital account from another of the company's account, if the company was an Australian resident immediately before the time of the transfer.

The meaning of a company's share capital account includes 'an account that the company keeps of its share capital' (paragraph 975-300(1)(a)).

A company's share capital account becomes 'tainted' when an amount to which Division 197 applies is transferred to that share capital account, unless the account is already tainted (subsection 197-50(1)).

The Revised Explanatory Memorandum to Taxation Laws Amendment (2006 Measures No. 3) Act 2006 (the EM) provides the context of Division 197:

4.4... The share capital tainting rules are integrity rules designed to prevent a company from disguising a distribution of profits as a tax-preferred capital distribution by transferring profits into its share capital account and subsequently making distributions from that account.

Division 197 does not define when an amount is transferred from one account to another. However, the EM provides the following explanation of when an amount is transferred for the purposes of Division 197:

When is an amount transferred from one account to another account?

4.12 An amount is transferred from one account to another where that amount is moved from one account to another. This, in turn, requires the balance of the first account to be reduced, while the balance of the second account is increased by the same amount.

4.13 An amount is not transferred from one account to another where the particular accounting entries result in the balances of both accounts increasing in size. Accordingly, an accounting entry of the form 'debit asset, credit share capital account' does not represent a transfer in the relevant sense. Furthermore, a transfer to the share capital account will not arise if an expense account is debited at the same time that the share capital account is credited.

Application to these circumstances

When considering the substance of the dealing that the accounting journal entries purported to represent, it is considered the relevant accounting journal entries do not result in an amount to which Division 197 applies.