On Wed 31.1.2018, the ATO issued Class Ruling CR 2018/7 (Eneabba Gas Limited – return of capital by way of in specie distribution).

It explains the tax consequences for shareholders of Eneabba Gas Ltd (ENB) who received an in specie distribution of UIL Energy Ltd (UIL) convertible redeemable preference shares in September 2016.

The ATO says that: demerger relief is not available;

  • the difference between the market value of the in specie distribution and the amount debited to Eneabba’s share capital account is assessable as a dividend (see extract, below, for details);
  • CGT event G1 happened in relation to that part of the in specie distribution that is not a dividend (see extract, below, for details);
  • CGT event C2 happened on the conversion or redemption of UIL Energy’s shares (see extract, below, for details); and
  • various anti-avoidance rules do not apply.

DATE OF EFFECT: 1 July 2016 to 30 June 2017.

[LTN 20, 31/1/18; FJM; Tax Month January 2018]

 

Study questions (answers below*)

  1. Was ‘demerger’ relief available?
  2. Was there any ‘dividend’ amount, given the accounting treatment, to debit ENB’s ‘share capital account’?
  3. Did CGT event G1 (about reductions in capital) happen for the non-dividend part of the distribution in specie?
  4. Did the ruling cover the conversion or redemption of the ‘convertible redeemable preference shares’?

 

 

*[Answers:1.no(UILnotDemergerSubAtBeginning-seeBelow);2.yes(ExcessOfMarketValue);3.yes;4.yes(CGTeventC2)]

Extract from Ruling

Demerger relief not available

26. Demerger relief (being demerger roll-over under s125-55 of the ITAA 1997 and demerger dividend treatment under subsections 44(3) and 44(4) of the ITAA 1936) is not available as the scheme does not satisfy the requirements of a demerger under subsection 125-70(1) of the ITAA 1997. (48. Because: “UIL [whose preference shares are distributed, in-specie, to ENB shareholders] was not a demerger subsidiary of ENB when the restructuring commences.”)

Return of capital and dividend component

27. The amount of $0.013700001 per ENB share, being the amount per share debited to the share capital account of ENB, is not a ‘dividend’ as defined in subsection 6(1).

28. The amount of $0.000877412 per ENB share, being the difference between the market value of the in specie distribution and the amount debited to the share capital account of ENB on a per share basis, is a ‘dividend’ as defined in subsection 6(1) that is paid out of ENB’s profits. The dividend is unfranked. This amount is included in the assessable income of a resident ENB shareholder pursuant to subsection 44(1).

Application of sections 45A, 45B and 45C

29. The Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the whole or any part of the return of capital.

30. The Commissioner has made a determination under paragraph 45B(3)(b) that section 45C applies to a part of the amount that was debited to the share capital account of ENB, being $0.006585525 per ENB share. That amount is included in the assessable income of a resident ENB shareholder pursuant to subsection 44(1).

CGT consequences

CGT event G1

31. CGT event G1 happened to a resident ENB shareholder when ENB made the in specie distribution to the ENB shareholder in respect of ENB shares that they owned at the Record Date and continued to own at the time of the in specie distribution (section 104-135 of the ITAA 1997), but only to the extent of that part of the in specie distribution that was not a dividend.

32. The non-assessable part of the in specie distribution, to which CGT event G1 applies, is $0.007114475 per ENB share (subsection 104-135(1) of the ITAA 1997).

33. An ENB shareholder will make a capital gain if the non-assessable part is more than the cost base of the shareholder’s ENB share. The amount of the capital gain is equal to that excess (subsection 104-135(3) of the ITAA 1997). If the non-assessable part is not more than the cost base of the shareholder’s ENB share, the cost base and reduced cost base of the share are reduced by the amount of the non-assessable part (subsection 104-135(4) of the ITAA 1997).

CGT event C2

34. CGT event C2 happened to a resident ENB shareholder when ENB made the in specie distribution to the ENB shareholder in respect of ENB shares that they owned at the Record Date but had ceased to own at the time of the in specie distribution (section 104-25 of the ITAA 1997). The capital gain will be equal to the market value of the Class A and Class B CRPS in UIL received by the ENB shareholder (section 116-20 of the ITAA 1997), being $0.014577412 per ENB share.

35. Under section 118-20 of the ITAA 1997, any capital gain made as a result of CGT event C2 happening is reduced by $0.007462937 per ENB share, being that part of the in specie distribution that is included in the shareholder’s assessable income. This is made up of the normal dividend as defined in subsection 6(1), and the deemed dividend arising under paragraph 45B(3)(b) and section 45C.

Conversion of CRPS

36. CGT event C2 happened to a resident ENB shareholder on 21 September 2016 when the Class A CRPS in UIL that had been distributed to the ENB shareholder converted into ordinary shares in UIL (section 104-25 of the ITAA 1997).

37. The Class A CRPS were a ‘convertible interest’ in UIL (as defined in subsection 995-1(1) and item 4 of the table in subsection 974-75(1) of the ITAA 1997). Any capital gain or capital loss made by the ENB shareholder from CGT event C2 happening on the conversion of the Class A CRPS in UIL is disregarded (subsection 130-60(3)) of the ITAA 1997).

38. Similar CGT outcomes will arise for a resident ENB shareholder if their Class B CRPS in UIL are converted into ordinary shares in UIL.

 

 

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