On Wednesday 3.8.2016, the ATO issued the following Class Ruling:
- CR 2015/57: Pacific Brands Ltd – Scheme of arrangement and payment of special dividend. It applies from 1 July 2016 to 30 June 2017.
[LTN 148, 2/8/16]
Section references: Income Tax Assessment Act 1936; Income Tax Assessment Act 1997
Extract from Class Ruling
Scheme
15. Hanes is a corporation based in the US that is listed on the New York Stock Exchange.
16. Hanes does not currently, directly or indirectly own, any of the ordinary shares in PBL.
18. On 28 April 2016, PBL announced in the ASX that it had entered into a Scheme Implementation Deed (SID) with Hanes.
The Scheme of Arrangement
18. On 28 April 2016, PBL announced in the ASX that it had entered into a Scheme Implementation Deed (SID) with Hanes.
19. Under the SID which sets out a number of conditions precedent, Hanes Sub acquired 100% of the ordinary shares in PBL under the SOA pursuant to Part 5.1 of the Corporations Act 2001.
20. The conditions precedent included but were not limited to the following:
- (a) the approval of PBL shareholders to the SOA – PBL shareholders approved the SOA at the scheme meeting held 24 June 2016
(b) Court approval of the SOA – Court approval for the SOA was provided on 27 June 2016, and
(c) Foreign Investment Review Board (FIRB) approval – FIRB approval was received on 6 May 2016.
21. Under the SOA, shareholders who held PBL shares on the Scheme Record Date of 8 July 2016 automatically transferred their PBL shares to Hanes Sub on the Scheme Implementation Date of 15 July 2016.
22. PBL shareholders received $1.056 ($1.15 minus the Special Dividend) per share in cash consideration (the Scheme Consideration) from Hanes Sub.
Special Dividend
23. The Board of Directors of PBL declared a fully franked, Special Dividend of $0.094 to PBL shareholders for each share held on the Special Dividend Record Date of 30 June 2016.
24. The Special Dividend was permitted under the SID. However:
- the SOA was not conditional on the Special Dividend being paid;
- Hanes did not in any way facilitate or finance the payment of the Special Dividend, and
- Hanes was not obliged to bring about the result that the Special Dividend will be received by PBL shareholders.
25. The Special Dividend was sourced entirely from PBL’s profits reserve and was not debited against PBL’s share capital account.
26. The Special Dividend was paid to PBL shareholders on the Special Dividend Payment Date of 7 July 2016.
Other matters
27. A condition precedent of the SOA proceeding was that PBL had taken all the steps to cancel and/or vest all Performance Rights on issue.
28. The PBL Board exercised a discretion associated with the Performance Rights that determined all outstanding Performance Rights vest or cancelled on 28 June 2016, the Effective Date for the SOA.
Ruling
Special Dividend
29. The Special Dividend of $0.094 paid to PBL shareholders constituted a ‘dividend’ as defined in subsection 6(1) of the ITAA 1936.
Assessability and withholding tax of the Special Dividend
30. A resident PBL shareholder who received the fully franked Special Dividend is required to include the dividend as assessable income under subparagraph 44(1)(a)(i) of the ITAA 1936.
31. A non-resident PBL shareholder who received the fully franked Special Dividend (other than those carrying on business in Australia at or through a permanent establishment in Australia) is not required to include the dividend as assessable income under subparagraph 44(1)(b)(i) of the ITAA 1936 (section 128D of the ITAA 1936) and is not liable to Australian withholding tax in respect of the dividend (paragraph 128B(3)(ga) of the ITAA 1936).
32. A non-resident PBL shareholder who received the fully franked Special Dividend and is carrying on business in Australia at or through a permanent establishment in Australia, where the Special Dividend is attributable to the permanent establishment, is required to include the dividend as assessable income under subparagraph 44(1)(c)(i) of the ITAA 1936 and is not liable to Australian withholding tax in respect of the dividend (subsection 128B(3E) of the ITAA 1936).
Gross-up and tax offset
Tax Offset
33. A resident PBL shareholder, and a non-resident PBL shareholder that is carrying on business in Australia at or through a permanent establishment in Australia, who received the fully franked Special Dividend:
- is required to include the amount of the franking credit in their assessable income, and
- is entitled to a tax offset equal to the amount of the franking credit,
under section 207-20 and subsection 207-75(2), subject to being a qualified person in relation to the Special Dividend.
34. A PBL shareholder that is the trustee of a trust (not being a complying superannuation entity) or a partnership, not being an entity taxed as a corporate tax entity, is required to include the amount of the franking credit attached to the Special Dividend in its assessable income under subsection 207-35(1), subject to the trustee or the partnership satisfying the qualified person rule.
Qualified person
35. Having regard to the relevant circumstances of the scheme, PBL shareholders are considered to have made a ‘related payment’ in respect of the Special Dividend for the purposes of paragraph 207-145(1)(a) and former section 160APHN of the ITAA 1936.
36. Therefore, a PBL shareholder will be a qualified person in relation to the Special Dividend if, from 17 May 2016 until 7 July 2016 inclusive, they continued to hold their PBL shares and did not have ‘materially diminished risks of loss or opportunities for gain’ (as defined under former section 160APHM of the ITAA 1936) in respect of their PBL shares for a continuous period of at least 45 days.
Refundable tax offset
37. The franking credit tax offset that PBL shareholders are entitled to under Division 207 is subject to the refundable tax offset rules in Division 67. Certain trustees and corporate tax entities are excluded from the refundable tax offset rules pursuant to section 67-25.
Capital gains tax (CGT)
CGT event A1
38. CGT event A1 happened when a PBL shareholder disposed of their PBL shares to Hanes Sub under the SOA being the Scheme Implementation Date of 15 July 2016 (section 104-10).
Capital gain or capital loss
39. A PBL shareholder will make a capital gain if the capital proceeds from the disposal of PBL shares exceed the cost base of the shares (subsection 104-10(4)). The capital gain is the amount of the excess.
40. A PBL shareholder will make a capital loss if the capital proceeds are less than the reduced cost base of the PBL shares (subsection 104-10(4)). The capital loss is the amount of the difference.
Capital proceeds
41. The capital proceeds for CGT event A1 happening to a PBL shareholder is the money received or entitled to be received in respect of the event happening (paragraph 116-20(1)(a)).
42. The capital proceeds received by a PBL shareholder who disposed of PBL shares pursuant to the SOA was $1.056 per share. The Special Dividend of $0.094 is not included in the capital proceeds.
Discount capital gain
43. A capital gain made by a PBL shareholder when the PBL shares were disposed of under the SOA is a discount capital gain if the shareholder acquired the shares at least 12 months before 15 July 2016, being the Scheme Implementation Date, and the other conditions in Division 115 are satisfied.
Foreign resident shareholders
44. A non-resident PBL shareholder who participated in the SOA disregards any capital gain or capital loss made when CGT event A1 happened if the PBL shares were not ‘taxable Australian property’ (section 855-10).
The anti-avoidance provisions
45. Section 177EA of the ITAA 1936 will not apply in respect of the Special Dividend.
46. Section 204-30 will not apply in respect of the Special Dividend.
47. Section 207-145 will not apply to the whole, or any part, of the Special Dividend received by a PBL shareholder.