LAWCOMM | 403 | Tax Law | lecture notes |  However it does meet the 10

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

However, it does meet the 10% capital reducon test in secon CD 22(3)(b), but the Commissioner

must give noce to the company that the Commissioner does not intend to ulise the an-avoidance

rule in secon CD 22(6)



Previous versions of the ITA made it clear that the company should approach the

Commissioner and request a noce that the an-avoidance rule would not be applied. The

Commissioner can issue a binding ruling, although local oﬃces can, through wrien noce,

conﬁrm that they will not apply subsecon 6.



In the event that the Commissioner did so conﬁrm and that the 10% capital reducon test

was met, the payment must be less than or equal to the available subscribed capital per

share to be excluded from the dividend deﬁnion. In this case the numerator is $100,000 and

the denominator is 14,400 = $6.94 per share. Accordingly, the payment of $2.50 per share

would be an excluded dividend.

NTI

AVOIDANCE

RULE

–

THE

DIVIDEND

LIEU

TEST

A return of capital will be a dividend if any part of the payment is in lieu of a dividend.

CD 22

Returns of capital: oﬀ-market share cancellaons

…

(6)

Neither subsecon (2) nor (4) excludes an amount paid by a company on cancellaon of a share from being a dividend

any part of the payment is in lieu of the payment of a dividend

(7)

For the purposes of applying subsecon (6), the following factors must be considered:

(a)

the nature and amount of dividends paid by the company before or aﬅer the cancellaon; and

(b)

the issue of shares in the company aﬅer the cancellaon; and

(c)

the expressed purpose or purposes of the cancellaon; and

(d)

any other relevant factor.



The main three factors to look at to determine whether the cancellaon is in lieu of a dividend:

The nature and amount of any actual dividends paid before or aﬅer cancellaon



If the company has paid out dividends regularly in the past, then this parcular transacon probably

will not be a dividend in lieu



If the company hasn’t paid any dividends aﬅer cancellaon:



This may suggest that this parcular transacon is a dividend in lieu – the company has paid

15% of its capital and now does not have money to pay a dividend, so by cancelling shares it

was trying to pay dividends in advance



However, there may also be other reasons – perhaps the company wasn’t as proﬁtable

aﬅerwards

Issue of shares aﬅer cancellaon



The whole point of the cancellaon is to reduce capital, but issuing new shares would raise capital

again – therefore, this suggests that the cancellaon was a dividend in lieu

Purpose of the cancellaon



Are there genuine commercial reasons? – for example:



To gain strategic control of shares in certain hands – even if you did a pro rata oﬀer, some

shareholders may have strategically decided not to accept



The company wants to alter its debt-equity rao because of surplus capital



Reducing cash and obtaining cheaper loans (as interest rates are historically low right now)

to add more debt to the balance sheet



Example

Same facts as above

Assume bright line test has been met

The company must also sasfy the Commissioner that the payment is not a payment in lieu of a dividend

The interpretaon statement issued by the Commissioner and contained in Tax Informaon Bullen, Volume

11, number 8 (September 1999) provides helpful guidance on how the Commissioner will apply the various

elements of the test contained in subsecon 7



History of dividends paid

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