Managing shareholder returns in the ‘low growth era’ burdens boards, with considerations not confined to a question of sustainability but also the character of returns in the hands of shareholders.
Receipt of franked dividends remains a key objective of Australian investors in the absence of stable capital growth and, accordingly, boards are tasked with ensuring that dividends are not sourced directly or indirectly from share capital (by inference are sourced from profits) to facilitate frankable dividends. This raises questions of interactions between the accounting and corporate law treatment, which regrettably remain not fully resolved.
Share capital returns in recent times have returned as a tool to deliver shareholder returns, judging by the number of ATO Class Rulings which deal with section 45B.
Broadly, section 45B operates by re-characterising a share capital return as an unfranked dividend where an incidental purpose of the return is the receipt of a preferentially taxed capital benefit. it is therefore adverse to shareholders.
One notable transaction, in which section 45B was ruled not to apply, notwithstanding the presence of current year profit (that were applied against prior year accumulated losses) was in the Qantas share capital return in CR 2015/101. There, the Commissioner appears to have accepted the proposition that the capital returned was genuinely in excess of the company’s capital management needs (based on a range of metrics).
As an observation, whilst CR 2015/101 is something short of precedential value, it offers companies with surplus capital funds (and no other prudent options for their deployment) and current year profits, a possible way forward for share capital returns.
However, early engagement of the ATO continues to be necessary to obtain the requisite certainty of character shareholder returns, which is essential in these uncertain times.