Class Ruling

CR 2005/48

Income tax: share buy-back: Coles Myer Ltd

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FOI status:

may be released

Preamble

What this Class Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax law(s)' identified below apply to the defined class of persons, who take part in the arrangement to which this Ruling relates.

Tax law(s)

2. The tax laws dealt with in this Class Ruling are:

•

section 44 of the Income Tax Assessment Act 1936 (ITAA 1936);

•

section 45A of the ITAA 1936;

•

section 45B of the ITAA 1936;

•

section 45C of the ITAA 1936;

•

paragraph 128B(3)(ga) of the ITAA 1936;

•

Division 16K of Part III of the ITAA 1936;

•

Division 1A of Part IIIAA of the ITAA 1936;

•

section 177EA of the ITAA 1936;

•

section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997);

•

section 116-20 of the ITAA 1997;

•

section 118-20 of the ITAA 1997;

•

section 118-25 of the ITAA 1997;

•

section 136-10 of the ITAA 1997;

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section 136-25 of the ITAA 1997;

•

section 202-5 of the ITAA 1997;

•

section 202-40 of the ITAA 1997

•

section 202-45 of the ITAA 1997;

•

section 204-30 of the ITAA 1997;

•

section 207-20 of the ITAA 1997; and

•

section 207-145 of the ITAA 1997;

Class of persons

3. The class of persons to which this Ruling applies are shareholders who disposed of shares under the 2005 Coles Myer Ltd off-market share buy-back of ordinary shares ('Buy-Back') described in the Arrangement part of this Ruling.

4. The class of persons to which this Ruling applies does not include Coles Myer Ltd ('CML'). The Ruling does not deal with how the taxation law applies to CML in relation to the Buy-Back.

Qualifications

5. The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling.

6. The class of persons defined in this Ruling may rely on its contents provided the arrangement actually carried out was carried out in accordance with the arrangement described in paragraphs 11 to 26.

7. If the arrangement actually carried out was materially different from the arrangement that is described in this Ruling, then:

•

this Ruling has no binding effect on the Commissioner because the arrangement entered into is not the arrangement on which the Commissioner has ruled; and

•

this Ruling may be withdrawn or modified.

8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Commonwealth Copyright Administration

Attorney General's Department

Robert Garran Offices

National Circuit

Barton ACT 2600

or posted at: http://www.ag.gov.au/cca

Date of effect

9. This Ruling applies to the income year ended 30 June 2005. The arrangement will be carried out within that income year. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20). Furthermore, the Ruling only applies to the extent that:

•

it is not later withdrawn by Gazette;

•

it is not taken to be withdrawn by an inconsistent later public ruling; or

•

the relevant tax laws are not amended.

Withdrawal

10. This Ruling is withdrawn and ceases to have effect after 30 June 2005. However, the Ruling continues to apply after its withdrawal in respect of the tax laws ruled upon, to all persons within the specified class who entered into the specified arrangement during the term of the Ruling, subject to there being no change in the arrangement or in the person's involvement in the arrangement.

Arrangement

11. The arrangement that is the subject of this Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the arrangement are:

•

The application for a Class Ruling dated 9 December 2004;

•

Correspondence dated 19 January 2005, 14 February 2005, 18 February 2005, 21 February 2005, 24 February 2005 and 28 February 2005; and

•

The Off Market Share Buy-Back Booklet (March 2005) issued by CML to shareholders.

Note: Certain information from CML has been provided on a commercial-in-confidence basis and will not be disclosed or released under the Freedom of Information Legislation.

12. CML is an Australian incorporated company listed on the Australian Stock Exchange (ASX). On 17 March 2005, CML announced its intention to make an off-market Buy-Back of its own shares. CML announced it would buy-back up to 110 million of its ordinary shares ('Buy-Back Limit') based on the Tender Range, representing up to a maximum $700 million. Under the terms of the Buy-Back, CML could choose to buy-back any number of shares up to the Buy-Back Limit, or none at all.

13. In the Off Market Share Buy-Booklet Booklet (March 2005), the Statement of Financial Position, as at 23 January 2005, disclosed total shareholder's equity of $4,394.3 million, consisting of $2,396.5 million contributed share capital, $1,542.7 million retained profits and $455.1 million other equity. As at 23 January 2005, CML has approximately 1,238 million shares on issue. The franking account balance at 30 November 2004 was approximately $296 million.

14. The shareholders in CML are a mix of individuals, companies, superannuation funds and other institutional investors, some of whom are non-residents.

15. The Buy-Back forms part of CML's ongoing program of active capital management and was expected to enhance earnings per share and return on equity, while enabling it to maintain a more efficient capital structure.

16. The Buy-Back was conducted through a tender process during a specified tender period and was open to all CML ordinary shareholders (excluding employees holding shares restricted from sale) who were registered on the Record Date for the Buy-Back (30 March 2005). Shares acquired on the ASX on an ex-entitlement basis on or after the ex-entitlement date (23 March 2005) carried no entitlement to participate. Participation in the Buy-Back was voluntary. Hence, eligible shareholders not wishing to participate were not required to do anything. Non-participating Shareholders did not receive any property, dividend or distribution by way of compensation.

17. The tender period opened on 7 April 2005 and closed on 20 May 2005. Under the tender process, shareholders were invited to tender up to 100% of their shares at a specified price(s) within a specified price range of between $7.40 and $10.10 per share ('the Tender Range'). The Buy-Back was completed, including the acceptance of any tenders, on 23 May 2005.

18. Shareholders were also able to submit tenders to sell different parcels of shares at different prices. Alternatively shareholders could submit a Final Tender Price under which they offered to sell their shares for the price determined by the tender process ('Final Price Tender').

19. Shareholders with 600 shares or less, who wished to participate in the Buy-Back were required to tender all of their shares at either one specified price within the Tender Range, or as a Final Price Tender which is at the price as finally determined under the tender process. Shareholders holding more than 600 shares could submit tenders to sell different parcels of shares at different prices within the Tender Range, or as a Final Price Tender which is at the price as finally determined under the tender process.

20. The final Buy-Back Price would be the lowest cash amount per share, within the price range, that would allow CML to purchase the number of shares that it actually decided to buy-back.

21. The Buy-Back Price was also subject to the two following overriding limits:

(a)

CML undertook not to buy-back shares at a greater discount than 14% to the volume weighted average price (VWAP) of CML shares over the five (5) trading days up to and including the closing day of the tender period (20 May 2005); and

(b)

The Buy-Back Price would not exceed the market value of CML shares determined in accordance with Taxation Determination TD 2004/22.

22. Shareholders who tendered a price at or below the Buy-Back Price or, as a Final Price Tender, were accepted in full, unless a scale-back applied. Shareholders who tendered at a price above the Buy-Back Price were not accepted. All successful tenderers received the Buy-Back Price for each share bought back, even if they tendered shares at a lower price.

23. All shares bought back under the Buy-Back would be cancelled.

24. Shareholders who tendered shares into the Buy-Back could withdraw some or all of the tenders, or could change the terms of their tenders by notifying CML no later than 5.00pm on the day the tender period closed, 20 May 2005.

25. Under the Buy-Back, $3.00 per share was debited to CML's untainted share capital account and the balance of the Buy-Back Price was debited to CML's retained profits.

26. On 23 May 2005, CML announced that:

•

It had successfully completed the off-market share Buy-Back of 70.4 million CML shares.

•

The total amount of capital repurchased under the Buy-Back was $585 million, representing 5.7% of the issued capital of CML.

•

The final price for the Buy-Back was set at A$8.30 per share, representing a discount of 7.0% of the VWAP of CML shares over the 5 days up to and including the closing date of the Buy-Back.

•

Shares tendered at or below a price of A$8.30 or as a final tender price were accepted in full.

•

Shares tendered at a price above A$8.30 were not accepted.

•

No scale back was applied to any of the accepted tenders.

Ruling

The Dividend Component

27. Participating Shareholders are taken to have been paid a dividend of $5.30 ('the Dividend Component') for each share bought back under section 159GZZZP of the ITAA 1936.

28. The Dividend Component is a frankable distribution pursuant to section 202-40 of the ITAA 1997, and is therefore capable of being franked in accordance with section 202-5 of the ITAA 1997.

Assessability of the Dividend Component and Tax Offset

29. The Dividend Component and an amount equal to the franking credit on the Dividend Component ('gross-up') is included in the assessable income of resident individual, superannuation fund and company shareholders who participate in the Buy-Back. Those shareholders will be entitled to a tax offset under subsection 207-20(2) of the ITAA 1997 equal to the amount of the franking credit on the Dividend Component ('tax offset'), subject to being a 'qualified person' (see paragraph 35).

Non-resident shareholders

30. As the Dividend Component is fully franked, Participating non-resident Shareholders are not liable for Australian withholding tax under paragraph 128B(3)(ga) of the ITAA 1936.

The Capital Component (Sale Consideration)

31. Participating Shareholders are taken to have received $3.84 as consideration in respect of the sale of each of their shares bought back under the Buy-Back ('Sale Consideration') in accordance with section 159GZZZQ of the ITAA 1936 (unless the Participating Shareholder is a corporate tax entity to which subsections 159GZZZQ(8) and (9) apply).

32. TD 2004/22 outlines how to determine what would have been the market value of the share at the time of a buy-back if the buy-back did not occur and was never proposed to occur. If the Buy-Back Price for each share bought back under the Buy-Back was less than what would have been the market value of the share if the Buy-Back did not occur and was never proposed to occur, then, in accordance with TD 2004/22, the market value rule in subsection 159GZZZQ(2) of the ITAA 1936 applies to the Buy-Back. The effect of this rule is that the difference between the Buy-Back Price and the market value determined in accordance with TD 2004/22 will be included in the consideration received for the disposal of the share for ordinary income or capital gains tax purposes in addition to the capital amount of $3.00 per share.

33. The treatment of the Sale Consideration for tax purposes will depend on whether the sale is on capital account (where the shares are held for investment) or on revenue account. In general, the relevant treatment should be as follows:

(a)

Shares held on capital account

The Sale Consideration represents the capital proceeds for the CGT event A1 that happens when a share is bought back: note 3 to subsection 116-20(1) of the ITAA 1997. A shareholder will make a capital gain on a share if the capital proceeds of $3.84 exceeds the cost base of that share. The capital gain is the amount of the excess. Similarly, a shareholder will make a capital loss if the capital proceeds of $3.84 are less than the reduced cost base of the share: subsection 104-10(4) of the ITAA 1997.

The time of the CGT event is 23 May 2005 when a contract is formed between CML and a Participating Shareholder: paragraph 104-10(3)(a) of the ITAA 1997.

(b)

Shares held on revenue account

Where the shares are held as trading stock, the consideration of $3.84 is included in assessable income under section 6-5 of the ITAA 1997.

Where the shares are held as revenue assets the amount by which the consideration of $3.84 exceeds the cost of each share will be included in the shareholder's assessable income. Correspondingly, if the cost exceeds $3.84, the difference will be an allowable deduction.

Non-resident shareholders

34. A non-resident shareholder that participates in the Buy-Back will only make a capital gain or capital loss if their shares have the necessary connection with Australia under the tests in section 136-25 of the ITAA 1997. A CML share will have the necessary connection with Australia if, at any time during the 5 years before 23 May 2005, the shareholder together with their associates owned 10% or more by value of the issued shares in CML.

Qualified Persons

35. For the purposes of Division 1A of Part IIIAA of the ITAA 1936 Participating Shareholders will be considered to satisfy the holding period rule under section 160APHO of the ITAA 1936 and therefore be qualified persons (as long as the related payments rule is also met) in relation to the Dividend Component received under the Buy-Back if:

(a)

the shares sold into the Buy-Back were acquired on or before 22 March 2005; and

(b)

during the period when the shares or interest in the shares were held the shareholders did not have 'materially diminished risks of loss or opportunities for gain' in respect of the shares or interest in the shares (as defined in section 160APHM of the ITAA 1936) for a continuous period of at least 45 days.

The anti-avoidance provisions

36. The Commissioner will not make a determination under section 45A or 45B of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole, or any part, of the Capital Component of the Buy-Back Price received by Participating Shareholders.

37. The Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received in relation to the Dividend Component under the Buy-Back by Participating Shareholders.

38. The Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny the whole, or any part, of the imputation benefits received in relation to the Dividend Component under the Buy-Back by Participating Shareholders.

Explanation

The Dividend and Capital Components

39. The purchase price received by a Participating Shareholder for each share bought back under the Buy-Back ('the Buy-Back Price') comprises two components:

•

a Dividend Component; and

•

a Capital Component.

The amount of each of these components is determined in accordance with sections 159GZZZP and 159GZZZQ of the ITAA 1936, having regard to how the company accounts for the off-market share buy-back.

The Dividend Component

40. Section 159GZZZP provides that where the buy-back of a share is an off-market purchase, the difference between the buy-back price and the part (if any) of the buy-back price which is debited against amounts standing to the credit of company's share capital account, is taken to be a dividend paid by the company to the seller on the day the buy-back occurs. In the case of CML, the Buy-Back Price was $8.30 per share and $3.00 of this was debited to the share capital account, which was untainted. Thus the Dividend Component is $5.30 per share.

41. The Dividend Component of $5.30 per share is frankable but only to the extent that the Buy-Back Price does not exceed the market value of the share at the time of the Buy-Back if the Buy-Back did not occur and was never proposed to occur (paragraph 202-45(c) of the ITAA 1997). TD 2004/22 outlines how to determine what would have been the market value of the share at the time of the Buy-Back if the Buy-Back did not occur and was never proposed to occur.

42. In accordance with the terms of the Buy-Back, the Buy-Back Price did not exceed the market value of CML shares determined in accordance with TD 2004/22. The dividend is therefore capable of being franked in accordance with section 202-5 of the ITAA 1997. CML fully franked the distribution and the amount of the franking credit was $2.27 per share.

43. For Australian resident individual and corporate tax entity shareholders, and also for Australian superannuation funds, the dividend amount is included in their assessable income under subsection 44(1) of the ITAA 1936.

44. Generally, an amount equal to the amount of the franking credit is included in their assessable income under subsection 207-20(1) of the ITAA 1997 ('gross up'). These shareholders are generally also entitled to a tax offset under subsection 207-20(2) of the ITAA 1997 reflecting the franking credit attached to the dividend.

45. However, it should be noted that provisions exist which may deny a gross up or a tax offset in certain circumstances. For example, paragraph 207-145(1)(a) of the ITAA 1997 requires that the shareholder be 'a qualified person in relation to the distribution for the purposes of Division 1A of Part IIIAA of the ITAA 1936' to be entitled to a tax offset. Broadly speaking, to be a 'qualified person' in relation to the dividend paid under the Buy-Back, the Participating Shareholder must satisfy both the holding period rule (or certain alternative rules) and the related payments rule. See paragraphs 58 to 66 of this Ruling.

Non-resident shareholders

46. As the Dividend Component of the consideration received under the Buy-Back is fully franked, a Participating non-resident Shareholder is not liable to Australian withholding tax on the Dividend Component (paragraph 128B(3)(ga) of the ITAA 1936).

The Capital Component (Sale Consideration)

47. Participating Shareholders are taken to have sold those shares accepted under the Buy-Back on 23 May 2005. The sale may have different taxation implications for shareholders depending on how the shares were held, for instance:

•

an investor who held shares on capital account will be subject to the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997; and

•

a shareholder who held shares on revenue account will be subject to the ordinary income provisions, and if the shares are held as trading stock, the specific trading stock provisions of Part 2-25 of the ITAA 1997.

48. It should be noted that shareholders who have both an income tax and a capital gains tax liability will generally have the amount of the capital gain reduced under the anti-overlap provisions contained in section 118-20 of the ITAA 1997. If the shares are held as trading stock the capital gain or loss is disregarded under section 118-25 of the ITAA 1997.

49. For the purposes of computing the amount of the gain or loss (on capital or revenue account), the Sale Consideration in respect of the disposal of a share under a buy-back is determined in accordance with section 159GZZZQ of the ITAA 1936.

50. Subsection 159GZZZQ(1) of the ITAA 1936 provides that the shareholder is taken to have received an amount equal to the Buy-Back Price as consideration in respect of the sale of each share bought back. However, this amount is subject to certain adjustments in order to arrive at the Sale Consideration for each share bought back under the Buy-Back.

51. Subsection 159GZZZQ(2) of the ITAA 1936 is one of the adjusting provisions. It provides that if the buy-back price is less than the market value of the share at the time of the buy-back if the buy-back did not occur and was never proposed to occur the shareholder is taken to have received an amount equal to the market value as consideration in respect of the sale of the share bought back.

52. For the purposes of determining market value under subsection 159GZZZQ(2) the following methodology has been proposed by CML and accepted by the Commissioner in accordance with TD 2004/22; the market value of each share is the VWAP of the shares over the last five trading days before the first announcement of the Buy-Back, adjusted on an ex-dividend basis for the percentage change in the S&P/ASX 200 Index from the commencement of trading on the date that the Buy-Back was announced on 17 March 2005 (Opening S&P/ASX 200 Index) to the close of trading on the day that the Buy-Back closed (Closing S&P/ASX 200 Index).

53. Under this methodology, the market value of a share bought back under the Buy-Back was calculated to be $9.14. Thus, the shareholders are taken to have received $9.14 for the sale of each share rather than $8.30 ('Deemed Consideration').

54. Pursuant to subsection 159GZZZQ(3) of the ITAA 1936, the Deemed Consideration of $9.14 is reduced by a 'Reduction Amount'. The Reduction Amount is an amount calculated under subsection 159GZZZQ(4) of the ITAA 1936. In the circumstances of the Buy-Back, the Reduction Amount is equivalent to the Dividend Component, that is, $5.30.

55. Thus, the Sale Consideration determined under section 159GZZZQ is $3.84, calculated as follows:

56. However, it should be noted that where the Participating Shareholder is a corporate tax entity, which is entitled to a tax offset under Division 207 of the ITAA 1997 in respect of the Dividend Component, an adjustment may be made to the Sale Consideration. Under subsection 159GZZZQ(8), if that shareholder would otherwise incur either a capital loss or a deductible loss (or any increase in such a loss) in respect of the sale of a share bought back under the Buy-Back, the Sale Consideration is increased by an offsetable amount determined under subsection 159GZZZZQ(9). The Reduction Amount is reduced by so much of the offsetable amount that does not exceed the capital loss or the deductible loss.

Non-resident shareholders

57. Pursuant to section 136-10 of the ITAA 1997, a non-resident will make a capital gain or a capital loss from the sale of shares under the Buy-Back only if the shares have the necessary connection with Australia under the tests in section 136-25. Under category 5 of the table set out in section 136-25 of the ITAA 1997, a CML share will have the necessary connection with Australia if, at any time during the 5 years before 23 May 2005, the shareholder together with their associates owned 10% or more by value of the issued shares in CML.

Qualified Persons

58. Paragraph 207-145(1)(a) of the ITAA 1997 provides that in relation to a franked distribution made to an entity only 'a qualified person in relation to the distribution for the purposes of Division 1A of Part IIIAA of the ITAA 1936' is entitled to a franking credit or tax offset. Broadly speaking, to be a 'qualified person' in relation to the Dividend Component paid under the Buy-Back, the Participating Shareholder must satisfy both the holding period rule and the related payments rule.

59. In general terms, a shareholder will not satisfy the related payments rule if the shareholder, or an associate of the shareholder, is under an obligation to make, or makes, a payment in respect of the dividend which effectively passes the benefit of the dividend to another person.

60. The holding period rule requires shareholders to hold the shares, or the interest in the shares, on which the dividend is paid at risk for a continuous period of at least 45 days. In determining whether a shareholder has satisfied the holding period rule, any days during which there is a materially diminished risk in relation to the relevant shares are not counted. The day of acquisition and the day of disposal of the relevant shares are also not counted.

61. Under subsection 160APHM(2) of the ITAA 1936, a shareholder is taken to have materially diminished the risks of loss and opportunities for gain with respect to shares or interests in shares if the 'net position' of the shareholder results in the shareholder having less than 30% of the risks and opportunities relating to the shares or interest in shares.

62. In this case, the Commissioner does not regard the announcement of the Buy-Back offer as affecting whether the shares or an interest in shares was held at risk or not.

63. There are 45 clear days between 7 April 2005 and 23 May 2005, that is, the date the tender offer was accepted. However, shares in CML will trade on the ASX on an ex-entitlement basis on and after 23 March 2005. Therefore, a shareholder who acquired shares on or before 22 March 2005 and disposed of those shares into the Buy-Back satisfies the holding period rule as long as those shares were held at risk for at least 45 continuous days.

64. Generally, under the holding period rule a shareholder will be deemed to have disposed of his or her most recently acquired shares first: subsection 160APHI(4) of the ITAA 1936. This rule operates on a last-in-first-out basis, so that shareholders will be deemed to have disposed of their most recently acquired shares first for the purposes of applying the 45 day rule.

65. CML shares acquired by Participating Shareholders which do not confer an entitlement to participate in the Buy-Back do not constitute 'related securities' for the purposes of subsection 160APHI(4) of the ITAA 1936 to any CML shares held by the shareholder which do confer an entitlement to participate in the Buy-Back.

66. Accordingly, subsection 160APHI(4) of the ITAA 1936 will not apply in relation to shares disposed of into the Buy-Back where a Participating Shareholder acquired, on or after 23 March 2005, any additional CML shares that did not confer an entitlement to participate in the Buy-Back.

The anti-avoidance provisions

Sections 45A and 45B of the ITAA 1936

67. It was noted at paragraph 40 that CML debited $3.00 of the Buy-Back price to its untainted share capital account. This amount is a distribution of capital to Participating Shareholders.

68. Sections 45A and 45B are two anti-avoidance provisions which, if they apply, allow the Commissioner to make a determination that section 45C of the ITAA 1936 applies. The effect of such a determination is that all or part of the distribution of capital received by the shareholder under the Buy-Back is treated as an unfranked dividend. Accordingly, the application of these two provisions to the Buy-Back must be considered.

69. Section 45A is an anti-avoidance provision that applies in circumstances where capital benefits are streamed to certain shareholders (the advantaged shareholders) who derive a greater benefit from the receipt of share capital and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends.

70. Although a 'capital benefit' (as defined in paragraph 45A(3)(b)) is provided to Participating Shareholders under the Buy-Back, the circumstances of the Buy-Back indicate that there is no streaming of capital benefits to some shareholders and dividends to other shareholders. Accordingly, section 45A has no application to the Buy-Back.

71. Section 45B applies where certain capital payments are paid to shareholders in substitution for dividends. In broad terms, section 45B applies where:

(a)

there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a));

(b)

under the scheme, a taxpayer, who may or may not be the person provided with the capital benefit, obtains a tax benefit (paragraph 45B(2)(b)); and

(c)

having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose), of enabling a taxpayer to obtain a tax benefit (paragraph 45B(2)(c)).

72. In the case of the Buy-Back, whilst the conditions of paragraphs 45B(2)(a) and 45B(2)(b) have been met, the requisite purpose of enabling the shareholder to obtain a tax benefit - by way of capital distribution - was not present.

73. Having regard to the 'relevant circumstances' of the scheme (the Buy-Back), as set out in subsection 45B(8), it is apparent that the inclusion of a capital element in the Buy-Back price was not inappropriate. Further, the Capital Component of the Buy-Back cannot be said to be attributable to the profits of the company, nor does the pattern of distributions that have been made by CML in the past indicate that the Capital Component was being paid in substitution for a dividend.

Section 177EA of the ITAA 1936

74. Section 177EA is a general anti-avoidance provision that applies to a wide range of schemes to obtain a tax advantage in relation to imputation benefits. In essence, it applies to schemes for the disposition of shares or an interest in shares, where a franked distribution is paid or payable in respect of the shares or an interest in shares. This would include a buy-back with a franked dividend component.

75. Specifically, subsection 177EA(3) provides that section 177EA applies if:

(a)

there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and

(b)

either:

(i)

a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or

(ii)

a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and

(c)

the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and

(d)

except for this section, the person (the 'relevant taxpayer' ) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and

(e)

having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

76. In the present case, the conditions of paragraphs 177EA(3)(a) to (d) are satisfied. Accordingly, the issue is whether, having regard to the relevant circumstances of the scheme, it would be concluded that, on the part of CML, its shareholders or any other relevant party, there is a purpose, more than merely an incidental purpose, of conferring an imputation benefit under the scheme. Under this arrangement the relevant taxpayer is the Participating Shareholder and the scheme comprises the circumstances surrounding the Buy-Back.

77. In arriving at a conclusion the Commissioner must have regard to the relevant circumstances of the scheme which include, but are not limited to, the circumstances set out in subsection 177EA(17). The relevant circumstances listed there encompass a range of circumstances which taken individually or collectively could indicate the requisite purpose. Due to the diverse nature of these circumstances some may not be present at any one time in any one scheme.

78. The Commissioner has come to the view that section 177EA applies to the Buy-Back. In coming to this conclusion the Commissioner had regard to all the relevant circumstances of the arrangement, as outlined in subsection 177EA(17). Among the circumstances of the Buy-Back reflected in those paragraphs are:

•

the delivery of franking credits in excess of what would have otherwise been distributed in the ordinary course of dividend declaration;

•

the greater attraction of the Buy-Back to resident shareholders who could fully utilise the franking credits than to non-resident shareholders who could not;

•

the greater attraction of the Buy-Back to some resident shareholders with a low marginal tax rate than other resident shareholders (for example, whereas complying superannuation funds are taxed at 15% and corporations at 30% individuals can be taxed at a marginal tax rate up to 47%); and

•

that Participating Shareholders were more likely than not to make an economic gain, but a loss for tax purposes, from their participation.

79. Where section 177EA applies the Commissioner has a discretion, pursuant to subsection 177EA(5) to make a determination to debit the company's franking account pursuant to paragraph 177EA(5)(a), or deny the imputation benefit to each shareholder pursuant to paragraph 177EA(5)(b). The Commissioner will exercise his discretion in such a way that he does not make a determination that the imputation benefit obtained by the Participating Shareholders be denied under paragraph 177EA(5)(b).

Section 204-30 of the ITAA 1997

80. Section 204-30 of the ITAA 1997 applies where a corporate tax entity streams the payment of dividends, or the payment of dividends and the giving of other benefits, to its members in such a way that:

(a)

an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions (paragraph 204-30(1)(a));

(b)

the member would derive a greater benefit from franking credits than another member of the entity (paragraph 204-30(1)(b)); and

(c)

the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits (paragraph 204-30(1)(c)).

81. Relevantly, if section 204-30 applies the Commissioner is vested with a discretion under subsection 204-30(3) to make a determination in writing either:

(a)

that a specified franking debit arises in the franking account of the entity, for a specified distribution or other benefit to a disadvantaged member (paragraph 204-30(3)(a)); or

(b)

that no imputation benefit is to arise in respect of any streamed distributions made to a favoured member and specified in the determination (paragraph 204-30(3)(c)).

82. For section 204-30 to apply, members to whom distributions are streamed must derive a greater benefit from imputation benefits than the members who do not participate in the Buy-Back. The words 'derives a greater benefit from franking credits' (imputation benefits) are defined in subsection 204-30(8) by reference to the ability of the members to fully utilise imputation benefits.

83. A significant portion of CML shareholding was held by non-residents who do not fully benefit from franking, a feature of the Buy-Back, to the same extent as resident shareholders. Thus, the conditions in subsection 204-30(1) for the provision to apply are met. However, the Commissioner will not make a determination under section 204-30.

Detailed contents list

84. Below is a detailed contents list for this Class Ruling:

Commissioner of Taxation
22 June 2005

Not previously issued as a draft

References

ATO references:
NO 2005/8462

Related Rulings/Determinations:

CR 2001/1
TR 92/1
TR 92/20
TR 97/16
TD 2004/22

Subject References:
capital benefit
capital gains tax
capital proceeds
capital reduction
CGT event
deemed dividends
dividend income
dividend streaming arrangements
frankable dividends
imputation system
return of capital on shares
share capital
share buy backs

Legislative References:
Copyright Act 1968
ITAA 1936 44
ITAA 1936 44(1)
ITAA 1936 45A
ITAA 1936 45A(3)(b)
ITAA 1936 45B
ITAA 1936 45B(2)(a)
ITAA 1936 45B(2)(b)
ITAA 1936 45B(2)(c)
ITAA 1936 45B(8)
ITAA 1936 45C
ITAA 1936 128B(3)(ga)
ITAA 1936 Pt III Div 16K
ITAA 1936 159GZZZP
ITAA 1936 159GZZZQ
ITAA 1936 159GZZZQ(1)
ITAA 1936 159GZZZQ(2)
ITAA 1936 159GZZZQ(3)
ITAA 1936 159GZZZQ(4)
ITAA 1936 159GZZZQ(8)
ITAA 1936 159GZZZQ(9)
ITAA 1936 Pt IIIAA Div 1A
ITAA 1936 160APHI(4)
ITAA 1936 160APHM
ITAA 1936 160APHM(2)
ITAA 1936 160APHO
ITAA 1936 177EA
ITAA 1936 177EA(3)
ITAA 1936 177EA(3)(a)
ITAA 1936 177EA(5)
ITAA 1936 177EA(5)(a)
ITAA 1936 177EA(5)(b)
ITAA 1936 177EA(17)
ITAA 1997 6-5
ITAA 1997 Pt 2-25
ITAA 1997 Pt 3-1
ITAA 1997 104-10
ITAA 1997 104-10(3)(a)
ITAA 1997 104-10(4)
ITAA 1997 116-20
ITAA 1997 116-20(1)
ITAA 1997 118-20
ITAA 1997 118-25
ITAA 1997 Pt 3-3
ITAA 1997 136-10
ITAA 1997 136-25
ITAA 1997 202-5
ITAA 1997 202-40
ITAA 1997 202-45
ITAA 1997 202-45(c)
ITAA 1997 204-30
ITAA 1997 204-30(1)
ITAA 1997 204-30(1)(a)
ITAA 1997 204-30(1)(b)
ITAA 1997 204-30(1)(c)
ITAA 1997 204-30(3)
ITAA 1997 204-30(3)(a)
ITAA 1997 204-30(3)(c)
ITAA 1997 204-30(8)
ITAA 1997 207-20
ITAA 1997 207-20(1)
ITAA 1997 207-20(2)
ITAA 1997 207-145
ITAA 1997 207-145(1)(a)
TAA 1953 Pt IVAAA