Edited version of private advice

Authorisation Number: 1051513798194

Date of advice: 18 June 2019

Ruling

Subject: Share capital account

Question 1

Is the general ledger account named 'Additional Paid in Capital' a share capital account of ABC Pty Ltd (ABC) for the purposes of subsection 975-300(1) of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

1 January 20XX to 31 December 20XX

Relevant facts and circumstances

ABC Pty Ltd was incorporated in, and is a tax resident of, Australia.

ABC is immediately wholly-owned by a foreign company.

At the time of incorporation, ABC had paid up share capital of $Y represented by Y ordinary shares fully paid to $1. The initial share capital on incorporation of $Y was recorded in the accounting records of ABC in a general ledger account named "Share Capital".

Contribution of branch assets

Pursuant to a Contribution Agreement made in the year of incorporation, ABC's then parent entity and sole shareholder, another foreign company (Foreign Company), contributed all of the assets and liabilities of its Australian branch (the Australian Branch) to ABC (the asset contribution).

The Contribution Agreement provided that, for good and valuable consideration, including the assumption of Liabilities, Foreign Company shall assign, convey and transfer to ABC legal title to and beneficial ownership in all of the Assets and Liabilities of the Foreign Company's Australian Branch. The Contribution Agreement expressly states that no additional shares in ABC shall be issued in consideration for the said transfer.

Foreign Company and ABC also executed a document entitled Assignment of Branch Assets and Assumption of Branch Liabilities of the Australian Branch (the Assignment). The Assignment provided that all right, title and beneficial interest in all Australian Branch Assets, subject to any mortgages, liabilities or other encumbrances, as well as all other Branch Liabilities were assigned, transferred and conveyed by Foreign Company for good and valuable consideration to ABC.

The net book value of the Australian Branch Assets and Branch Liabilities transferred to ABC pursuant to the Assignment was $X which was recorded in the accounting records of ABC in a general ledger account named "Additional Paid In Capital" (APIC).

Reasons for Decision

Question 1

Detailed reasoning

The term 'share capital account' is defined in section 995-1 of the ITAA 1997 as having the meaning given by section 975-300 of the ITAA 1997. Section 975-300 of the ITAA 1997 states:

975-300(1)

A company's share capital account is:

(a) an account that the company keeps of its share capital; or

(b) any other account (whether or not called a share capital account) that satisfies the following conditions:

(i) the account was created on or after 1 July 1998;

(ii) the first amount credited to the account was an amount of share capital.

975-300(2)

If a company has more than one account covered by subsection (1), the accounts are taken, for the purposes of this Act, to be a single account.

Subsection 975-300(3) of the ITAA 1997 states that, except for certain limited purposes, an account will not be a share capital account if it is tainted.

A share capital account is therefore an account which the company keeps of its share capital or an account created on or after 1 July 1998 where the first amount credited to the account was an amount of share capital provided that the account is not tainted. The words 'share capital' are not defined in section 995-1 of the ITAA 1997. The words therefore take their ordinary meaning according to the context in which they are used.

The Commissioner observed the following about the words 'share capital' as used in section 975-300 in Taxation Ruling TR 2012/5 Income tax: section 254T of the Corporations Act 2001 and the assessment and franking of dividends paid from 28 June 2010 (TR 2012/5):

23.  ... 'Share capital account' is defined by section 975-300 of the ITAA 1997. The references in section 975-300 to 'share capital' are references to a company's share capital for company law purposes. This is the first point at which the income tax law adopts company law as one of its criteria for taxation...

The Commissioner considered the concept of share capital in Taxation Ruling TR 2012/1: Income tax: retail premiums paid to shareholders where share entitlements are not taken up or are not available (TR 2012/1):

32. It is the Commissioner's view for the purposes of the income tax law that all amounts paid in consideration for the issue of shares by a company are share capital of the company (which should be credited to the company's share capital account).

...

34. The ITAA 1936 and the ITAA 1997 use the concept of share capital without a statutory definition of the term (though share capital account has long been defined for income tax purposes, currently in section 975-300 of the ITAA 1997). The Corporations Act 2001 includes Chapter 2H-Shares and Chapter 2J-Transactions affecting share capital but also without a statutory definition of the term. The ordinary meaning of share capital applies. This meaning is supported by case law, which has also been reflected in discussions in legal text books and Explanatory Memoranda.

Case law definition of share capital

35. The concept of share capital was considered by the High Court in Archibald Howie Proprietary Ltd & Ors v. Commissioner of Stamp Duties (NSW ) (1948) 77 CLR 143 ( Archibald ) where Williams J stated, at 157:

A company obtains capital by the issue of its shares....The amount payable may be satisfied by the payment of money or by some other proper consideration. But all shares must be paid for in full by money or money's worth. When the person to whom the shares are allotted pays or assumes the liability to pay for the shares in money or money's worth, full consideration in money or money's worth moves from him to the company for all the rights which he acquires under the memorandum and articles of association [emphasis added].

36. In Archibald, Dixon J also supported the above view when he stated at 152-3:

The consideration given is the payment up of the share capital in satisfaction of the liability for the amount of the share incurred on allotment.

From the standpoint of company law the division of the capital of a company into shares and the payment up of shares issued are regarded as respectively significant and real. The shareholder contributes the amount of the share to the capital of the company. This contribution measures his right to any return of capital which the company may make either as a going concern or in a winding up.

...

38. The above statements by Williams J and Dixon J in Archibald were also referred to and approved by Gillard J in Re The Swan Brewery Co Ltd (1976) 3 ACLR 164 (Swan Brewery), where his Honour stated at 165:

Those dicta, to my mind, indicate the concept of what is 'share capital'.

39. In support of the above principle regarding share capital, Gillard J then said at 166:

But when one talks about share capital, in my view, it means capital raised by the company from the issue of its shares.

40. The meaning of the term 'issued share capital', was also considered by Gillard J in Swan Brewery at 166:

...when one uses the words 'issued share capital', then it seems to me that this expression means money or money's worth derived from the issue by directors of shares in order to raise capital.

41. These statements were endorsed and applied by the Full Court of the Federal Court in St George Bank Ltd v. Federal Commissioner of Taxation (2009) 176 FCR 424; [2009] FCAFC 62; 2009 ATC 20-103; (2009) 73 ATR 148 ( St George ). As Perram J said at FCAFC paragraph 90:

...If the subscription consideration is money then the company obtains money; if it is land, it obtains land; if the share is not fully paid then the company acquires a right to call upon the unpaid portion. The 'capital' of the company is the money or money's worth derived by the company from the issue of shares: Re The Swan Brewery Co Ltd (1976) 3 ACLR 164 at 166 per Gillard J.

Corporate law text book definitions of the term 'share capital'

42. It should be noted that corporate law text book definitions of share capital quote from, are consistent with and confirm the context of the above case law authority.

43. In Ford's Principles of Corporations Law ¹, share capital is described at page 929:

A company's share capital is the total amount of money representing what members, or persons proposing to be members of the company, have provided, or contractually bound themselves to provide, to the company, in cash or other value, for the company to use in its undertaking, they having done so in their character of members or intending members and not as creditors: see [17.020]. Compare Re Swan Brewery Co Ltd (1976) 3 ACLR 164.

Capital subscribed by members as such is called 'share capital' rather than just capital.

44. In Commercial Applications of Company Law ² share capital is described at page 355:

The company's share capital is the amount of money or assets contributed to the company by its members when they subscribe for shares in the company. In subscribing for a share, a person who wishes to become a member takes some of the person's own money or assets and contributes that amount to the company. The money or assets contributed then belong to the company. In return, the member is issued with shares in the company [emphasis added].

45. A similar definition of share capital was used in the corporate law text Understanding Company Law ³ where it is described at page 166:

Share capital (sometimes also referred to as 'equity capital') comprises the total amount of money or other property that investors pay to the company for the shares issued to them [emphasis added].

Explanatory memorandum discussion of share capital

46. In a taxation context, a similar definition of share capital was explained in paragraph 4.10 of the Explanatory Memorandum⁴ referring to section 975-300 of the ITAA 1997 (which transferred to the ITAA 1997 the long-standing provisions defining the meaning of 'share capital account', originally 'share premium account' in the ITAA 1936). Paragraph 4.10 states:

The concept of share capital is not defined in the ITAA 1997. Under its ordinary meaning, share capital includes amounts received by a company in consideration for the issue of shares.

47. Although for some accounting purposes a company may treat funds raised from a share issue as a liability until it formally issues shares to its subscribers, paragraph 1.65 of the Explanatory Memorandum to the Taxation Laws Amendment (Company Law Review) Bill 1998 states:

Under the Corporations Law, amounts received by a company for the issue of shares are credited to the share capital account. The share capital account of the company will thus already include all amounts paid-up on the shares of the company. Therefore a share capital account cannot be tainted by transferring amounts paid-up for shares to that account, but only by other accounts. ( Some accounting standards may require a company to initially treat part of what is legally share capital as a liability for accounting purposes, and then to transfer that amount to share capital. Since, however, for tax purposes the amount will already be credited to the share capital account, this transfer is not affected by the tainting rule.)

...

50. The amounts proffered in subscription for the issue of shares are share capital of the company and are properly credited by the company to its share capital account.

A critical issue which must be determined is whether the net book value of the Australian Branch Assets and Branch Liabilities received by ABC from Foreign Company was a contribution to share capital to ABC. If it was not, then the APIC account in the general ledger of ABC will not be a share capital account as it will not be able to satisfy either paragraph (a) or (b) of subsection 975-300(1) of the ITAA 1997.

The Contribution Agreement and the Assignment both state that ABC and Foreign Company agreed that the transfer of the Australian Branch Assets and Branch Liabilities was for good and valuable consideration. However, the Contribution Agreement expressly states that no new shares were to be issued by ABC to Foreign Company in consideration for receiving the Australian Branch Assets and Branch Liabilities.

Additionally, we note that since incorporation ABC has had Y shares issued which reflect paid up share capital of $Y. No change has occurred to the share capital structure of ABC since it was incorporated.

We consider that absent any underlying share transaction, the contribution of the net book value of the Australian Branch Assets and Branch Liabilities cannot be considered a contribution to the share capital of ABC.

On that basis, the amount of $X recognised in the APIC account in the general ledger of ABC is not share capital and as a result the APIC account cannot satisfy either paragraph (a) or (b) of subsection 975-300(1) of the ITAA 1997.

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