CAUTION: This Case Decision Summary should not be relied upon in deciding whether to enter into any particular arrangement or transaction (referred to as a 'scheme' in Part IVA Income Tax Assessment Act 1936 for the reasons which follow. It is recommended that should you wish to enter into a scheme similar to that summarised you seek further advice or a ruling from the ATO, or advice from a professional adviser.

This Case Decision Summary illustrates the approach taken by the Commissioner of Taxation in applying Part IVA to a real fact situation. The facts have been simplified to focus on key practical issues.

To properly apply Part IVA, the law must be applied to all the relevant facts. In particular, an eight step test must be applied to determine whether, on the facts, a particular scheme objectively has the dominant purpose of obtaining a tax benefit not intended by the law. Where the scheme simply takes advantage of the intended operation of a structural feature of the law, Part IVA will not apply because the required dominant purpose will not exist.

In applying the dominant purpose test, regard must be had to the manner in which the scheme is carried out; that is, whether the scheme bears the stamp of tax avoidance. The Full Federal Court in Bellinz Pty Limited v Federal Commissioner of Taxation 98 ATC 4634 at 4647; 39 ATR 198 at 212 has noted the difficulty in applying Part IVA prior to the scheme being carried out, because the execution of the scheme may in fact be different to that originally proposed. Even where the scheme has been carried out, the Court has noted that a difficulty in coming to a view on the application of Part IVA is to ensure that all relevant facts are considered, including those concerning the manner in which the scheme is carried out.

This Case Decision Summary has been withdrawn and replaced by ATO Interpretative Decision ATO ID 2003/1094

ATO Case Decision

Case Decision Number:



Does section 45B (Income Tax Assessment Act 1936 (ITAA 1936)) apply to a company’s on-market share buy-back arrangement?


No. Section 45B (ITAA 1936) does not apply to the company’s on-market share buy-back arrangement.


An Australian resident public company enters into an on-market share buy-back arrangement. The buy-back is funded by borrowing at interest from one of its wholly owned subsidiaries which acts as the financier for the group’s operations. The whole of the purchase price of each share acquired under the buy-back is debited against the company’s share capital account.

Reasons for Decision:

Section 45B (ITAA 1936) deals with schemes under which a company provides a person with a capital benefit. The purpose of section 45B (ITAA 1936) is to ensure that certain payments that are paid in substitution for dividends are treated as dividends for taxation purposes. Section 45B (ITAA 1936) applies if:

· there is a ‘scheme’;

· under the ‘scheme’ a taxpayer obtains a ‘tax benefit’ (see subsection 45B(7) (ITAA 1936)); and

· having regard to the ‘relevant circumstances’ of the ‘scheme’(see subsection 45B(5) (ITAA 1936)), it would be concluded that the person, or one of the persons, who entered into the ‘scheme’ did so for a purpose of enabling the taxpayer to obtain a ‘tax benefit’.

(see subsection 45B(2) (ITAA 1936))

The term ‘scheme’ is not defined for the purposes of section 45B (ITAA 1936), however, if it is taken to have the same meaning as provided for in the content of Part IVA (ITAA 1936) then the term can encompass on-market share buy-back arrangements (see subsection 177A(1) (ITAA 1936)).

It is reasonable to conclude that as a result of the on-market share buy-back some shareholders/taxpayers may obtain a ‘tax benefit’. For example, depending on the amount of their indexed cost base used to work out the capital gain/loss and whether this is less than the franking amount which the company ordinarily pays on company dividends, a shareholder may obtain a tax benefit as a result of a buy-back.

When the ‘relevant circumstances’ (see subsection 45B(5)) (ITAA 1936)) of the case are examined, however, the main purpose of the share buy-back arrangement is not to provide capital benefits to the participating shareholders. The main purpose of the arrangement is to reduce the company’s capital base under agreeable conditions, although as an incidental purpose the shareholders/taxpayers may receive a ‘tax benefit’. Accordingly, as the conditions of subsection 45B(2) (ITAA 1936) are not satisfied, section 45B (ITAA 1936) has no application to the company’s share buy-back arrangement.

Legislative References:

Income Tax Assessment Act 1936 section 45B, subsection 45B(2), subsection 45B(5) subsection 45B(7), subsection 177A(1)


Return of capital on shares

Deemed dividends

Share buy backs

Tax benefits on tax avoidance schemes

Date of decision:

9 September 1998

Year of Income/Date of Transaction:

Year ended 30 June 1999

FOI Number: