Facts
S was incorporated in Australia several years ago. It is a 100% subsidiary of a non-resident company, P.
S was originally established to acquire an interest in a mining tenement (the Project). Substantially all funds raised by S in its year first year of operation were expended in carrying out exploration and development activities.
As the Project generated cash flow from production, S wished to reduce its debt and equity, to reduce its interest cost in Australia and manage its debt and equity ratio appropriately. S decided to make a return of capital payment of part of its paid up capital to P, and to repay part of its debt obligations. The equity payment would be funded from excess cash funds on hand which originated from normal sales.
S had accounting profits for its first two years, and it expects a profit also for the current year. However, for income tax purposes no taxable income has been derived for the first two years, so no income tax has been paid to date.
There were no material sales of assets by S in the relevant periods.