Income tax: in specie distribution of units by Global Mining Investments Limited

This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates.

The relevant provisions dealt with in this Ruling are: • subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936); • section 45B of the ITAA 1936; • section 45C of the ITAA 1936; • section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997); • section 104-135 of the ITAA 1997; • section 109-5 of the ITAA 1997; • section 110-25 of the ITAA 1997; and • section 110-55 of the ITAA 1997.

The class of entities to which this Ruling applies is the shareholders of Global Mining Investments Limited (GMI) who: (a) owned ordinary shares in GMI and were registered on the GMI share register at 7:00 pm on the Record Date, being the date for determining entitlements to the in specie distribution described in paragraphs 10 to 22 of this Ruling; (b) held those GMI shares on capital account; (c) were residents of Australia, as that term is defined in subsection 6(1) of the ITAA 1936, at the time the scheme was undertaken; and (d) are not subject to the taxation of financial arrangements rules in Division 230 of the ITAA 1997 in relation to gains and losses on their GMI shares. (Note - Division 230 of the ITAA 1997 will generally not apply to individuals, unless they have made an election for it to apply to them.) In this Ruling, this class of entities is referred to as 'participating GMI shareholders'.

The Commissioner makes this Ruling based on the precise scheme identified in this Ruling.

The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 10 to 22 of this Ruling.

If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: • this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.

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This Ruling applies from 1 July 2012 to 30 June 2013. The Ruling continues to apply after 30 June 2013 to all entities within the specified class who entered into the specified scheme during the term of the Ruling. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

The following description of the scheme is based on information provided by the applicant. Note : certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation.

GMI was an Australian resident company listed for quotation on the Australian Securities Exchange (ASX).

GMI invested in the metal and mining sectors of global equity markets. GMI was managed locally by Bell Asset Management Limited while its Investment Manager was located overseas.

GMI provided exposure for Australian shareholders through a single ASX listed entity to a global portfolio of metal and mining securities. The portfolio comprised approximately 70 metal and mining stocks, including positions in international mining companies.

As at 31 August 2012, GMI's market capitalisation was approximately $160.1 million and the value of its net tangible assets (NTA) was approximately $176.4 million.

As at 31 August 2012, GMI had 181,898,994 ordinary shares on issue with total shareholders' equity of $177.8 million and accumulated losses of $7,224,346. GMI had not issued any shares other than ordinary shares.

Approximately 10% of GMI shares were held by non-resident entities. All GMI shares were acquired on or after 20 September 1985.

GMI undertook a restructure of its assets so that GMI's business is now carried on through an unlisted unit trust (the Restructure). GMI implemented the Restructure by undertaking the following steps: • establishing an unlisted managed investment scheme, the Global Mining Investments Trust (GMI Trust), the units of which were wholly-owned by GMI; • GMI elected to form a tax consolidated group with GMI Trust; • GMI entered into an asset sale deed and transferred its assets to GMI Trust on 27 November 2012 in consideration of GMI Trust issuing, at market value, further units in GMI Trust and assuming all current and future liabilities of GMI; • GMI made a capital return to GMI shareholders by way of an in specie distribution of one unit in GMI Trust for each share in GMI that they held on the Record Date; and • GMI was delisted from the ASX.

A shareholders meeting took place on 13 November 2012 where GMI shareholders approved the Restructure.

Under the Restructure, GMI made an in specie return of capital of $1.0081 per GMI share. The in specie return of capital was satisfied by an in specie distribution of a unit in GMI Trust. The GMI Trust units were allotted on the Scheme Implementation Date of 27 November 2012.

GMI shares were placed into a trading halt before the market opened on 13 November 2012. The Record Date for the scheme was 23 November 2012. It is possible that between the Record Date and Scheme Implementation Date, a GMI shareholder may have disposed of their GMI shares off-market.

GMI accounted for the in specie distribution made under the scheme by debiting its share capital account by $183,376,383.34.

The scheme was undertaken for the following reasons: • for a number of years GMI's share price had been trading below GMI's NTA per share despite GMI's initiatives to reduce the discount to NTA; • it is expected that after the restructure, investors in GMI Trust will be able to exit their investment at a price that reflects the GMI Trust's net assets per unit; and • as an unlisted trust, the GMI Trust will incur lower operating expenses than GMI.

GMI has confirmed that: • there have not been any transfers to its share capital account, as defined in section 975-300 of the ITAA 1997, from any of its other accounts; • it has no knowledge of any revenue or capital losses that are available to its shareholders; • all entitlements of participating GMI shareholders to receive units in the GMI Trust as a distribution in specie accrued to those shareholders included on GMI's Register of Members on the Record Date; and • the shares in GMI did not pass the principal asset test set out in section 855-30 of the ITAA 1997.

The in specie return of capital of $1.0081 per GMI share is not a 'dividend', as defined in subsection 6(1) of the ITAA 1936.

The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or any part of the capital benefit provided to participating GMI shareholders under the scheme.

CGT event G1 (section 104-135 of the ITAA 1997) happened to a participating GMI shareholder when GMI made the distribution of GMI Trust units in respect of a GMI share that they owned at the Record Date and continued to own at the time of the distribution of the GMI Trust units.

CGT event C2 (section 104-25 of the ITAA 1997) happened when GMI made the distribution of GMI Trust units to a participating GMI shareholder in respect of a GMI share that they owned at the Record Date but ceased to own at the time of the distribution of the GMI Trust units.

The first element of the cost base and reduced cost base of each unit in the GMI Trust received by a participating GMI shareholder is equal to the money paid (as applied under the capital reduction) by each participating GMI shareholder to acquire a unit in GMI Trust (sections 110-25 and 110-55 of the ITAA 1997).

The acquisition date of the new units in the GMI Trust is the date they were issued to each participating GMI shareholder (section 109-5 of the ITAA 1997).

Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividends, as defined in subsection 6(1) of the ITAA 1936, paid to shareholders out of profits derived by the company.

The term 'dividend' is defined in subsection 6(1) of the ITAA 1936 to include any distribution made by a company to any of its shareholders, whether in money or other property.

Paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 however, excludes from the definition of 'dividend' any: 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 the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company...

'Share capital account' is defined in section 975-300 of the ITAA 1997 as an account which the company keeps of its share capital, or any other account created on or after 1 July 1998 where the first amount credited to the account was an amount of share capital.

Subsection 975-300(3) of the ITAA 1997 states that an account is not a share capital account if it is tainted. Subsections 197-5(1) and 197-50(1) of the ITAA 1997 provide that a company's share capital account may become tainted if an amount is transferred to it from any of the company's other accounts.

Under the scheme, GMI distributed a total of $183,376,383.34 to participating GMI shareholders.

The entire distribution of $183,376,383.34 ($1.0081 per GMI share) was debited against an amount standing to the credit of GMI's share capital account. As GMI's share capital account is not tainted within the meaning of Division 197 of the ITAA 1997, paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 will apply.

Accordingly, the in specie return of capital is not a dividend as defined in subsection 6(1) of the ITAA 1936.

Section 45B of the ITAA 1936 applies where certain payments are made to shareholders in substitution of dividends. Subsection 45B(2) of the ITAA 1936 sets out the conditions under which the Commissioner may make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies. These conditions are that: • there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936); • under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936); and • having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936).

Each of these conditions is considered below.

A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as provided in subsection 177A(1) of Part IVA of the ITAA 1936. That definition is widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan or proposal.

The in specie distribution by GMI constitutes a scheme for the purposes of paragraph 45B(2)(a) of the ITAA 1936.

The phrase 'provided with a capital benefit' is defined in subsection 45B(5) of the ITAA 1936. It states that a person is provided with a capital benefit if: (a) an ownership interest in a company is issued to the person; (b) there is a distribution to the person of share capital; or (c) the company does something in relation to an ownership interest that has the effect of increasing the value of the ownership interest (which may or may not be the same interest) held by that person. Therefore, the in specie return of capital by GMI constitutes the provision of a capital benefit under paragraph 45B(5)(b) of the ITAA 1936.

A taxpayer 'obtains a tax benefit', as defined in subsection 45B(9) of the ITAA 1936, if: • the amount of tax payable; or • any other amount payable under the ITAA 1936 or the ITAA 1997, would, apart from the operation of section 45B of the ITAA 1936: • be less than the amount that would have been payable; or • be payable at a later time than it would have been payable, if the capital benefit had instead been a dividend.

The in specie return of capital to participating GMI shareholders constitutes a capital benefit. In the event that the relevant distribution was a dividend rather than a capital benefit, it is likely that the amount of tax payable by participating GMI shareholders would be greater than is payable in respect of the in specie return of capital (that payment being the capital benefit). Consequently, the receipt of the capital benefit is a 'tax benefit'.

Ordinarily, a return of capital would be subject to the CGT provisions of the income tax law. Unless the amount of the distribution exceeds the cost base of the shares, there will only be a cost base reduction under CGT event G1 (section 104-135 of the ITAA 1997). It is only to the extent (if any) that the distribution exceeds the cost base of the shares that a capital gain arises. By contrast, a dividend would generally be included in the assessable income of a resident shareholder or in the case of a foreign resident, be subject to a dividend withholding tax under section 128B of the ITAA 1936. Therefore, participating GMI shareholders obtain a tax benefit from the in specie return of capital.

Under paragraph 45B(2)(c) of the ITAA 1936, the Commissioner is required to consider the 'relevant circumstances' set out under subsection 45B(8) of the ITAA 1936 to determine whether any part of the scheme would be entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit. However, the list of relevant circumstances in subsection 45B(8) of the ITAA 1936 is not exhaustive and regard may be had to other circumstances on the basis of their relevance.

The test of purpose is an objective one. The question is whether it would be concluded that a person who entered into or carried out the scheme did so for the purpose of obtaining a tax benefit for the relevant taxpayer. This requisite purpose does not have to be the most influential or prevailing purpose but it must be more than an incidental purpose.

In this case, while the conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are met, the requisite purpose of enabling the participating GMI shareholders to obtain a tax benefit (by way of the in specie return of capital) is not present.

Having regard to the relevant circumstances of the scheme, set out in subsection 45B(8) of the ITAA 1936, it cannot be concluded that any of the parties to the scheme entered into our carried out the scheme for more than an incidental purpose of obtaining a tax benefit in the form of a capital benefit. The in specie return of capital is not considered to be attributable to the profits of GMI and the pattern of GMI's distributions does not suggest that it was paid in substitution for a dividend.

Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or any part of the in specie return of capital provided to participating GMI shareholders under the scheme.

As the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 in relation to the scheme as described, section 45C of the ITAA 1936 will not deem any part of the in specie return of capital to be an unfranked dividend for the purposes of the ITAA 1936 or of the ITAA 1997.

CGT event G1 (section 104-135 of the ITAA 1997) happens if a company makes a payment to a shareholder in respect of a share they own in the company and 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 of the ITAA 1936. A payment can include the giving of property.

Where the payment is the giving of property, the amount of the payment is the market value of the property given (section 103-5 of the ITAA 1997). Accordingly in the present circumstances the amount of the payment for the purposes of CGT event G1 was the market value of the units in GMI Trust at the time the GMI Trust units were distributed (that is, when the payment was made).

CGT event G1 happened to a participating GMI shareholder in respect of a GMI share that they owned at the Record Date and continued to own at the time of the distribution of the GMI Trust units.

As a result of CGT event G1 happening, the cost base and reduced cost base of each GMI share is reduced (but not below nil) by the amount of the non-assessable part (subsection 104-135(4) of the ITAA 1997), in this case being the amount of the payment.

A participating GMI shareholder made a capital gain if the amount of the payment exceeded the cost base of the GMI share (subsection 104-135(3) of the ITAA 1997). The amount of the capital gain is equal to the excess.

If a participating GMI shareholder made a capital gain when CGT event G1 happened, the cost base and reduced cost base of the GMI share are reduced to nil. A participating GMI shareholder cannot make a capital loss when CGT event G1 happened (subsection 104-135(3) of the ITAA 1997).

A capital gain made when CGT event G1 happened will be eligible to be treated as a discount capital gain under Subdivision 115-A of the ITAA 1997 provided that the GMI share was acquired at least 12 months before the date of distribution (subsection 115-25(1) of the ITAA 1997) and the other conditions of that Subdivision are satisfied.

The right to receive the distribution is one of the rights inherent in a GMI share at the Record Date. If, after the Record Date but before the time of the distribution of the GMI Trust units, a participating GMI shareholder ceased to own a GMI share, the right to receive the distribution in respect of each GMI share disposed of is retained by the participating GMI shareholder and is a separate CGT asset.

CGT event C2 happened when the distribution of GMI Trust units was made and a participating GMI shareholder's right to receive that distribution ended (section 104-25 of the ITAA 1997).

A participating GMI shareholder made a capital gain if the capital proceeds from the ending of the right were more than the cost base of the right. The capital gain is equal to the amount of the excess. A participating GMI shareholder made a capital loss if the capital proceeds from the ending of the right were less than the reduced cost base of the right. The capital loss is equal to the amount of the difference (subsection 104-25(3) of the ITAA 1997).

In working out the capital gain or capital loss made when CGT event C2 happens, the capital proceeds will be the market value of the GMI Trust units received under the in specie distribution at the time of the distribution (subsection 116-20(1) of the ITAA 1997).

The cost base of the participating GMI shareholder's right to receive the units in GMI Trust is worked out under Division 110 of the ITAA 1997 (modified by Division 112 of the ITAA 1997). As no amount was paid for the right by the participating GMI shareholder, the cost base of the right will likely be nil. Therefore, for a participating GMI shareholder, a capital gain equal to the market value of the GMI Trust units at the time of distribution is likely to arise.

As the right to receive the units in GMI Trust from GMI was inherent in the GMI share during the time that it was owned, the right is considered to have been acquired at the time when the corresponding GMI share was acquired (section 109-5 of the ITAA 1997). Accordingly, if the GMI share was originally acquired by the former participating GMI shareholder at least 12 months before the distribution, a capital gain made when CGT event C2 happened will be a discount capital gain (section 115-25 of the ITAA 1997) provided the other conditions in Subdivision 115-A of the ITAA 1997 are satisfied.

The first element of the cost base and reduced cost base of each unit in the GMI Trust received by a participating GMI shareholder is equal to the money paid (as applied under the capital reduction) by each participating GMI shareholder to acquire a unit in the GMI Trust (sections 110-25 and 110-55 of the ITAA 1997).

The acquisition date of the new units in the GMI Trust is the date they were issued to each participating GMI shareholder (section 109-5 of the ITAA 1997).

The following is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Relevant provision(s) 2 Class of entities 3 Qualifications 4 Date of effect 8 Scheme 9 Background 10 GMI corporate restructure 16 Accounting for the distribution 20 Reasons for the restructure 21 Other matters 22 Ruling 23 The in specie distribution is not a dividend 23 Anti avoidance provisions 24 Application of sections 45B and 45C of the ITAA 1936 24 Capital gains tax (CGT) consequences 25 CGT event G1 25 CGT event C2 26 Cost base of units in GMI Trust 27 Acquisition date of units in GMI Trust 28 Appendix 1 - Explanation 29 The in specie distribution is not a dividend 29 Anti avoidance provisions 37 Section 45B of the ITAA 1936 - schemes to provide capital benefits 37 Scheme 39 Tax benefit 42 Relevant circumstances 45 Section 45C of the ITAA 1936 - deeming dividends to be paid where a determination is made under section 45B of the ITAA 1936 50 CGT Consequences 51 CGT event G1 51 CGT event C2 58 Cost base of units in GMI Trust 64 Acquisition date of units in GMI Trust 65 Appendix 2 - Detailed contents list 66