ATO Interpretative Decision

ATO ID 2001/323

Income Tax

Proposed off market share buy-back.
FOI status: may be released

The Government has announced that from 7:30pm AEDST on 25 October 2022, there will no longer be a dividend component in respect of the price paid by a listed public company undertaking an off-market share buy-back. The entire buy-back price paid for the share will be treated as capital proceeds for a share held on capital account, or as the entire proceeds for a share held as trading stock or on revenue account (but not as trading stock).
Retrospective tax law changes have effect for a period before the date of enactment once the legislation is passed. See Administrative treatment of retrospective legislation.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Will Division 16K of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) deem the difference between the market value of the shares bought back and the amount paid by the company to the shareholder to be a dividend?

Decision

No. The difference between the amount paid for the share and the market value will not be a deemed dividend.

Facts

The taxpayer, an individual, acquired his/her entire shareholding in the company before 20 September 1985.

The company now proposes to buy-back a majority of the shares on issue at their face value and debit the full purchase price against the credit standing in the company's share capital account.

The market value of the shares exceeds their face value.

Reasons for Decision

The buy-back arrangement is an off-market purchase in accordance with the explanation of terms in section 159GZZZK of the ITAA 1936.

Subdivision C of Div 16K (sections 159GZZZP and 159GZZZQ) of the ITAA 1936 sets out the tax consequences for a shareholder who sells shares to a company in an 'off market purchase'.

Section 159GZZZP of the ITAA 1936 deals with the treatment of the purchase price in an off-market buy-back situation. It acts to treat the difference between the purchase price and that part of the purchase price (if any) which is debited against a credit in the company's share capital account as a dividend paid by the company to the seller out of the company profits on the day the buy-back occurs.

In this case as the full purchase price will be debited against the credit standing in the company's share capital account, no amount is taken to be a dividend deemed or otherwise.

Subsection 159GZZZQ(1) of the ITAA 1936 provides that the buy-back price of the share is, for general income tax and Capital Gains Tax purposes, the amount actually received. If the full purchase price is less than the share's market value, the market value is used as the disposal consideration (subsection 159GZZZQ(2)) of the ITAA 1936.

In this case the market value of the shares bought back does exceed the buy back price, however the transaction is not caught by any general income tax provision as the shares were not acquired or held for instance for the purpose of obtaining a profit on resale nor were they held as trading stock.

A capital gain however has been made as the deemed capital proceeds, in terms of section 116-30 of the Income Tax Assessment Act 1997 (ITAA 1997), equals the market value of the shares. However the capital gain is exempt in terms of paragraph 104-10(5)(a) of the ITAA 1997, as the shares were acquired before 20 September 1985.

Date of decision: 5 September 2001

Year of income: Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   section 159GZZZP
   subsection 159GZZZQ(1)
   subsection 159GZZZQ(2)

Income Tax Assessment Act 1997
paragraph 104-10(5)a
section 116-30

Keywords
Capital gains tax
Family Court cases
Companies
Share buy backs
Disposal of shares
Shares

Siebel/TDMS Reference Number: CIC296086; 1-5TG4BWY; 1-BOL3POB

Business Line: Private Groups and High Wealth Individuals

Date of publication: 15 September 2001
Date reviewed: 14 June 2017

ISSN: 1445-2782

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