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  • Share buy-backs

    As a shareholder, you may receive an offer from a company to buy back some or all of your shares in the company. If you dispose of shares back to the company under a share buy-back arrangement, you may make a capital gain or loss.

    To work out whether you've made a capital gain or loss, you compare the capital proceeds with your cost base and reduced cost base.

    When you make the capital gain or loss will depend on the conditions of the particular buy-back offer. For example, it may be the time you lodge your application to participate in the buy-back, or, if it is a conditional offer of buy-back, the time you accept the offer.

    The capital proceeds are taken to be what the share's market value would have been if the buy-back hadn’t occurred and was never proposed, less the amount of any dividend paid under the buy-back – if both of the following conditions apply:

    • the shares are not bought back by the company in the ordinary course of business of a stock exchange – for example, the company writes to shareholders offering to buy their shares (commonly referred to as 'off-market share buy-back'), and
    • the buy-back price is less than what the market value of the share would have been if the buy-back hadn’t occurred and was never proposed.

    In this situation, the company may provide you with the market value or may have obtained a class ruling from us.

    If the buy-back price is what the market value of the share would have been if the buy-back hadn’t occurred and was never proposed, the capital proceeds is the amount paid, excluding any dividend paid.

    See also:

    Example: Buy-back offer

    Sam bought 4,500 shares in Company A in January 1994 at a cost of $5 per share. In February 2018, Sam applied to participate in a buy-back offer to dispose of 675 shares (15%). Company A approved a buy-back of 10% (450) of the shares on 15 June 2018. The company sent Sam a cheque on 5 July 2018 for $4,050 (450 shares × $9). No part of the payment is a dividend.

    Sam works out his capital gain for 2017–18 as follows.

    If he chooses the indexation method:

    Capital proceeds

    $4,050

    Cost base 450 shares × $5
    ($2,250 × 1.117 including indexation)

    $2,513

    Capital gain

    $1,537

    If he chooses the discount method:

    Capital proceeds

    $4,050

    Cost base

    $2,250

    Capital gain (before applying any discount)

    $1,800

    Sam has no capital losses to apply against this capital gain and decides that the discount method will provide him with the better result. He takes $900 ($1,800 × 50%) into account in working out his net capital gain for the year.

    End of example

     

    Example: Off-market buy-back including dividend

    Ranjini bought 10,000 shares in Company M in January 2003 at a cost of $6 per share, including brokerage.

    In January 2018, the company wrote to its shareholders advising them it was offering to buy back 10% of their shares for $9.60 each. The buy-back price was to include a franked dividend of $1.40 per share (and each dividend was to carry a franking credit of $0.60).

    Ranjini applied to participate in the buy-back to sell 1,000 of her shares.

    Company M approved the buy-back on 1 May 2018, on the terms anticipated in its earlier letter to shareholders.

    The market value of Company M shares at the time of the buy-back (if the buy-back didn't occur and was never proposed) was $10.20.

    Ranjini received a cheque for $9,600 (1,000 shares × $9.60) on 8 June 2018.

    Because it was an off-market share buy-back and the buy-back price was less than what the market value of the share would have been if the buy-back hadn’t occurred, Ranjini works out her capital gain for the 2017–18 year as follows.

    Capital proceeds

    Calculations

    Per share

    For 1,000 shares

    Market value

    $10.20

    $10,200

    Dividend

    $1.40

    $1,400

    Market value minus dividend

    $8.80

    $8,800

    less cost base

    $6.00

    $6,000

    Capital gain (before applying any discount)

    $2.80

    $2,800

    Ranjini takes her capital gain into account in completing item 18 on her tax return (supplementary section). She also includes her dividend at item 11 ($1,400 at T and $600 at U).

    End of example

    See also:

    • Where a share buy-back affects a large number of people, we may publish guidance on the tax implications (see Events affecting shareholders)
    • TD 2004/22: Income tax: for off-market share buy-backs of listed shares, whether the buy-back price is set by tender process or not, what is the market value of the share for the purposes of subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936?
    • PS LA 2007/9: Share buy-backs
    Last modified: 29 Jun 2018QC 52226