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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 114
Because you cannot give back more ASC than the shareholders put in
If you purchased 100 shares at $1 each, then you put in $100 into the company
The company offers to buy back 50 shares – since the ASC you put in is $100, then each share
should be at $2 to give back $100 in capital
B
RIGHT
LINE
TESTS
CD 22
Returns of capital: off-market share cancellaons
…
(3)
The bright line tests referred to in subsecon (2)
(a) are as follows:
(a)
the cancellaon is part of a pro rata cancellaon that results in a fiſteen percent capital reducon for the
company:
(common)
(b)
the cancellaon is part of a pro rata cancellaon that results in a ten percent capital reducon for the company
and the Commissioner has given a noce under subsecon (8):
(common)
(c)
the cancellaon is not part of a pro rata cancellaon and results in the shareholder suffering a fiſteen percent
interest reducon:
A pro rata cancellaon is an offer to all shareholders to buy the same percentage of their shares and cancel them
o
The reducon must be at least 15% (in case of secon CD 22(3)(a)) or at least 10% (in case of secon CD 22(3)
(b))
This means the total amount paid by the company must be equal to or greater than 15%/10% of the
market value of the parcipang shares in the company (the market value being measured at the
me the company first gave noce to the shareholders)
o
In case of secon CD 22(3)(b), the Commissioner may give noce that the an-avoidance rule does not apply
under secon CD 22(8) – this addional is in place because 10% is closer to the borderline of being a return
that looks like a dividend
The company may also do a non-pro rata cancellaon (i.e. they deal with a single shareholder rather than all
shareholders) under secon CD 22(3)I – if so, they only need at least a 15% interest reducon
o
The test is to look at the shareholder’s interest and see whether they have had greater than or equal to 15% of
their shares cancelled
Why do we introduce these bright line thresholds?
o
To avoid people trying to disguise a dividend as a return of capital – a return of capital needs to be of a
significant and sizable scale such that the company cannot enter into it on a regular basis in substuon of an
ordinary dividend (i.e. trying to avoid tax)
o
Why 10% and 15% specifically? – it is a significant size as dividends yields are around 4% or 5%
Example
o
Facts
The company issues 100,000 shares of $1 in 2007 (this is its capital or ASC)
Over the last few years, the company has done well and earned $150,000 before tax profits which
have been subject to tax (assume 28% tax rate)
In the 2019 income year, a capital asset was disposed of generang a non-associated capital profit of
$50,000
The statement of financial performance is:
Capital
$100,000
Capital profits
$50,000
Retained earnings
$108,000 ($150,000 profit less $42,000 tax)
Cash
$258,000
The company decides to return $36,000 by way of a pro rata share cancellaon to all shareholders –
the proposal is to cancel 14,400 shares at $2.50 each
o
Has a bright line test been met?
The market value of all shares is $258,000, while the proposal is to pay 2.5 x 14,400 = $36,000
This represents 13.95% (36,000/258,000) of the market value of the shares in the company –
therefore, it will be insufficient to meet the 15% capital reducon test in secon CD 22(3)(a)
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