On October 12, 2016 the Australian Taxation Office (ATO) published a Draft Taxation Ruling TR2016/D2 for public comment. The ruling provides guidance on applying the participation test in Subdivision 768-A when working out whether an equity distribution received by an Australian corporate tax entity from a foreign company is not assessable and not exempt (NANE) income. The due date for comments is November 25, 2016.

 

The draft ruling summarizes the Commissioner’s view as follows:

“It is the Commissioner’s view that for the purposes of Subdivision 768-A:

·   to have a participation interest in the foreign company, an entity must be a registered member of the foreign company at the start of the day the distribution is made

·   where the distribution is a dividend or non-share dividend, the distribution is made on the day that the foreign company pays or credits the distribution, and

·   where the distribution is a deemed dividend, the distribution is made on the day the tax legislation deems the dividend to have been taken to be paid.”

 

The draft ruling summarizes the outcome from the ATO view as follows:

“The outcome of this view is that for the purposes of Subdivision 768-A:

·   to have a participation interest, an entity must be a registered member of the foreign company at the start of the day the foreign company pays or credits the distribution

·   an entity can have a participation interest where the foreign company makes a distribution on the cancellation of its equity interest, provided that the entity is a registered member at the start of the day the distribution is paid3 , and

·   where the distribution is made under an off market share buy-back4 , an entity will have a participation interest equal to the registered membership that it holds at the start of the day that it enters into the share buy-back contract with the foreign company.”

 

Subjects discussed in the Draft ruling include a.o.:

·   Ruling

o  Subdivision 768-A

o  The participation test

o  Meaning of 'holds' and 'entitled to acquire'

o  Satisfying the participation test

o  When a distribution is made

o  When the distribution is made under an off market share buy-back

·   Examples

o  Example 1 - When an entity 'holds' or is 'entitled to acquire' a participation interest

o  Example 2 - Distribution on the cancellation of a share

o  Example 3 - Distribution made via an Interposed Trust

o  Example 4 - Distribution from an off market share buy-back

·   Date of effect

 

Furthermore there are 3 appendices attached to the draft ruling. Appendix 1 is titled “Explanation” and discusses a.o. the following subjects:

·   Subdivision 768-A

·   The participation test

·   Direct participation interest

·   Indirect participation interest

·   Direct control interest

·   Meaning of 'holds'

·   Meaning of 'entitled to acquire'

·   'At the time the distribution is made'

·   Meaning of 'the distribution' in section 768-5

o  Meaning of 'distribution'

o  Meaning of 'dividend'

o  Meaning of 'taken to be a dividend'

o  Meaning of 'non-share dividend'

·   When a distribution is made

o  When a dividend is made

o  When a non-share dividend is made

o  When a dividend and non-share dividend is 'paid'

o  When a deemed dividend is made

o  Satisfying the participation test

o  'On the day' is the day the distribution is made not received

·   Meaning of 'taken to be paid' for deemed dividends from off market share buy-backs

o  When does an off market share buy-back occur?

o  On the day' the buy-back contract is formed

 

Click here to be forwarded to Draft Taxation Ruling TR2016/D2 as available on the website of the ATO, which will open in a new window.

 

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