FYI,I wrote to John Jetter, Steve Herod on October 30th, 2023...

FYI,
I wrote to John Jetter, Steve Herod on October 30th, 2023 expressing my concern re. ATO Class Ruling

Dear Steve, John, Mike

I would like to offer the following for your consideration.

Will the ATO rule that $0.002 of the proposed $0.008 Capital Return is an unfranked dividend?

I believe that this is at least possible if not probable.

About me.

Deleted personal details.

Capital Return

Journal of Australian Taxation

Clayton Utz

Whilst I am not a tax expert, I investigated the complex and (deliberately?) opaque "capital return" area of tax law a few years ago. The opaqueness stems from broad ATO discretionary powers, the lack of legislation/regulation clarity, and ATO guidance.

I have a reasonable knowledge; however, I undoubtedly have misconceptions.

In 1998 the concept of Par Value was removed.

A major concern of the ATO was that a capital return could be used as a substitute for dividends: thereby conferring a tax advantage that is more than incidental. As a result, additional anti-avoidance measures were introduced, giving discretionary power to the ATO, making the operation of the Act opaque, and difficult to predict outcomes even for tax specialists. In addition, the ATO has an underlying dislike of the "tax deferral" aspect of capital returns.

Operation in General (especially for Companies with No Retained Profits)

As a general observation, the following appears to be a safe path for distributions of proceeds that are not the from asset sales.

1. First distribution: capital return is OK. This may not be the case for Otto as explained below.
2. Second distribution: part capital return and part dividend is advisable.
3. Third and subsequent distributions: dividend.

In Otto's case, dividends can be declared as Conduit Foreign Income (CFI) which would be tax free for non-resident shareholders.

The Class Ruling: the possibility that $0.002 is deemed an unfranked dividend

The initial 1997 "Removal of par Value" discussion paper proposed tracking the price paid for each share over time. This is clearly impractical, and whilst it didn't survive, I believe that it can still be factored into an ATO Class Ruling decision making process.

The Fly in the Ointment

Molton have 2,000,000,000 shares issued at $0.006. This is more than 40% of the issued capital of Otto Energy.

I believe that details of Molton's shareholding need to be disclosed as part of the Class Ruling application.

Even if this is not the case, it is likely that Molton's shareholding would be investigated by the ATO.

As a consequence, the ATO may deem $0.002 an unfranked dividend because

1. $0.002 is the excess of the issue price of Molton's 2B shares.
2. Molton still hold those shares.
3. Molton is a Foreign Entity and no tax would be payable on the $0.002 realised gain.

If this fact has not been disclosed in discussions (if any) with the ATO, then any guidance (if any) may be rescinded.

Another Concern.

In my limited experience, all distributions have been made prior to a Class Ruling being received.

Whilst I have no concrete information to indicate the following is true, I see these points as realistic possibilities

1. This may indicate that the ATO has a (unofficial) policy of NOT issuing a Class Ruling until the distribution has been made.

1. 1. I believe that the Class Ruling is about "How Shareholders Report the Distribution to the ATO", and that
   2. It is not about seeking Binding Tax Advice.
   3. The ATO has not issued guidance to clarify this area of "difficult to predict" tax law.

1. If a Class Ruling is issued prior to distribution, a change of tack in the event of an adverse Class Ruling, would indicate that tax considerations were more than "incidental", thereby triggering anti-avoidance considerations. This may have negative implications for a modified proposal, as well as any future distributions.

A More Certain Distribution Approach, that may have Added Benefits.

1. Reduce Capital Return to $0.006 / share.
2. Use $0.002 / share to fund an Off Market Buyback prior to the Return of Capital
3. A 10% or less Off Market Buyback would not require shareholder approval, and could be initiated prior to a (reduced) capital return.

Off Market Buyback

The obvious question is at "What Price?".

My simplistic valuation framework is as follows

1. NPV.
2. The Acceptable Total Asset Sale Price. I would assume that this would be (significantly?) less than NPV.
3. Current Sum of Asset Buyer Offer Prices. Obviously currently less than 2. above.
4. Current share price. Hopefully the lowest, but not necessarily the case.

To facilitate a discussion on the merits of incorporating an Off Market BB into the current proposed distribution, I would suggest a Buy back price close to, or above the Acceptable Total Asset Sales Price. My rationale is as follows:

1. The BB price would be consistent with the proceeds that would be received if Otto is successful in selling all assets.
2. The BB price would send a very clear message regarding Company Asset Valuation to

1. 1. Potential buyers of our assets. This would be especially useful if the sales agreements remain achievable.
   2. Potential and existing shareholders. It is probable that the share price would trade around the BB price.

The BB price should be acceptable to the vast majority of shareholders and needs to be acceptable to Molton to be practical.

If Asset Sales are unlikely to be concluded, a Buyback price closer to the NPV may be a more appropriate value.

I offer the following table as an indication of cashflow impact of this approach. I selected $0.02 as the starting point: i.e., the current share price; I estimate this is Molton's (desired) minimum exit price.

A 10% Off market BB at $0.026 and a reduced capital return of $0.006 / share has the same cost as the current proposal.

Note that the BB is undertaken prior to the Capital Return.

Tax Implications (a few quick observations).

1. If the distribution is made prior to receiving the ATO Class Ruling, and the ATO deems $0.002 to be an unfranked dividend: this would be very bad for residents and non-residents.
2. Combined CR and BB: residents (non-residents no effect)

1. 1. I believe that the cohort that deserves the most consideration is long-term resident shareholders, i.e., pre-CG21 capital raise, who supported Otto in the $0.006 capital raise, and still hold all shares.

1. 1. 1. The current proposal would result in a taxable gain on their $0.006 holding in 2024.
      2. A future capital loss (on high cost shares) may result in future years, that may not be able to be utilised by some shareholders. This could be compounded if assets sales don't eventuate, and funds are returned via unfranked dividends.
      3. Under the CR+BB model, high cost shares could be sold into the BB avoiding a capital gain.
      4. No gains on CR.
      5. This cohort would likely be better off under a CR+BB scenario.
      6. This would include John Jetter if his holding is via a resident entity.

1. 1. The Johnnies-Come-Latley, like me (although I will have $0 tax liability).

1. 1. 1. A gain will we realised on BB shares for some shareholders, and the 50% discount would apply to many of those.
      2. This gain would be consistent with the gain that will be incurred if Asset Sales are completed, and therefore more of a timing issue than final value.

Regards,