Class Ruling

CR 2004/149

Income tax: Share Buy-Back: BHP Billiton Limited

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FOI status:

may be released

What this Class Ruling is about
Date of effect
Withdrawal
Arrangement
Ruling
Explanation
Detailed contents list

Preamble

The number, subject heading, What this Class Ruling is about (including Tax law(s), Class of persons and Qualifications sections), Date of effect, Withdrawal, Arrangement and Ruling parts of this document are a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953. CR 2001/1 explains Class Rulings and Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a 'public ruling' and how it is binding on the Commissioner.

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 the ITAA 1936;
•
Division 1A of Part IIIAA of the ITAA 1936;
•
Section 177EA of the ITAA 1936;
•
Section 118-20 of the Income Tax Assessment Act 1997 (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.
•
Section 207-145 of the ITAA 1997

Note: Consequential amendments for company and tax exempt shareholders with effect from 1 July 2002 dealing with the simplified imputation system have been introduced in Tax Laws Amendment (2004 Measures No. 6) Bill 2004. This ruling deals only with the laws as presently enacted and does not extend to the application of the proposed laws.

Class of persons

3. The class of persons to which this Ruling applies is the shareholders of BHP Billiton Limited ('BHP Billiton'), a publicly listed company, who disposed of shares under the BHP Billiton's off-market share buy back ('the Buy-Back') which was announced by BHP Billiton on 5 October 2004 and described in the Arrangement part of this Ruling.

4. The class of persons to which this Ruling applies does not include BHP Billiton. The Ruling does not deal with how the taxation law applies to BHP Billiton 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
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CANBERRA ACT 2601
or by e-mail to: commonwealth.copyright@dcita.gov.au

Date of effect

9. This Class Ruling applies to the year ended 30 June 2005 unless and until it is withdrawn. 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 Class 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 6 August 2004;
•
Correspondence dated 20 August 2004; 31 August 2004; 20 September 2004 and 28 September 2004.

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

12. On 5 October 2004, BHP Billiton announced its intention to make an off-market Buy-Back of its own shares. BHP Billiton announced it would spend between $1,000 million and $1,500 million in purchasing its ordinary shares. Under the terms of the Buy-Back BHP Billiton could choose to spend a higher or lower amount, or none at all.

13. As at 30 June 2004, the Share Capital comprised of approximately 3,759 million fully paid ordinary shares and a small number of partly paid shares. The financial statements of BHP Billiton at 30 June 2004 show total share capital of $3,335 million and retained profits of $15,880 million.

14. The shareholders in BHP Billiton are a mix of individuals, companies, superannuation funds and non-residents.

15. The Buy-Back forms part of BHP Billiton's continuing capital management strategy that aims to return capital that is surplus to its needs. BHP Billiton anticipates that the Buy-Back will have positive effects over the longer term on earnings per share and returns on equity.

16. The Buy-Back was conducted through a tender process during a specified tender period and was open to all eligible shareholders who were registered as such on the record date for the Buy-Back (15 October 2004). Shares acquired on an ex-entitlement basis on or after the Ex-entitlement date (11 October 2004) 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.

17. The tender period opened on 1 November 2004 and closed on 19 November 2004. Under the tender process, shareholders were able to submit offers to sell their shares at specified discount percentages within a specified range of 5% to 14% per share, in 1% intervals. In doing so, shareholders could also submit tenders to sell different parcels of shares at different percentage discounts or, as a Final Price Tender which is at the price as finally determined under the tender process.

18. Shareholders were also provided with a choice to nominate a 'minimum Buy-Back price' in addition to the required selection of a tender discount percentage. The available minimum Buy-Back prices ranged from $10.00 to $13.00 in 50 cent steps. Shareholders who failed to nominate a discount percentage and who attempted to specify only a 'minimum Buy-Back price' were not accepted.

19. The relevant discount was applied to the volume weighted average share price over the last five trading days of the Buy-Back period.

20. Shareholders who tendered a discount percentage less than the accepted discount percentage determined by BHP Billiton were not accepted. Shareholders who tendered a discount percentage greater than the accepted discount percentage or at the Final Price Tender [subject to the 'minimum Buy-Back price'] were accepted and would receive the Buy-Back price for each share bought back, even if they tendered a greater discount percentage.

21. Where shareholders elected to nominate a 'minimum Buy-Back price' greater than the Buy-Back price, their tender was not accepted. Where shareholders elected to nominate a 'minimum Buy-Back price' lower than or equal to the Buy-Back price, their tender was accepted.

22. Where the number of shares tendered that satisfied the Buy-Back criteria exceeded the number of shares BHP Billiton determined to buy back, shareholders with tenders equal to the accepted discount percentage were scaled back on a pro-rata basis. A priority allocation of 200 shares was bought back from each successful tendering shareholder before the scale back was applied.

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

24. Notwithstanding the scale back, any shareholder who tendered all of their shares at or below the accepted discount percentage or as Final Price Tenders [subject to the 'minimum Buy-Back price'] and would have 200 or fewer shares as a result of the scale back, all of the shares they tendered are bought back in full.

25. Under the Buy-Back, $2.10 per share was debited to BHP Billiton's untainted share capital account and the balance of the Buy-Back price was debited to BHP Billiton's retained profits.

26. On 23 November 2004, BHP Billiton announced that:

•
It had successfully completed the off-market share Buy-Back of 180.72 million BHP Billiton Limited shares.
•
The total amount of capital repurchased under the Buy-Back was increased to $2.272 billion, representing 4.8% of the issued capital of BHP Billiton Limited.
•
The final price for the Buy-Back was set at A$12.57 per share, representing a discount of 12% to the volume weighted average price of BHP Billiton shares over the 5 days up to and including the closing date of the Buy-Back.
•
Shares tendered at a discount of 12% or greater or as a final price tender were accepted in full, subject to any minimum price condition.
•
Shares tendered at discounts from 5% to 11% were not accepted. Shares tendered subject to a minimum price of A$13.00 were also not accepted.
•
No scale back was applied to any of the accepted tenders.

Ruling

The Dividend Component

27. Participating shareholders will be taken to have been paid a dividend of $10.47 ('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.

29. 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

Note: Consequential amendments for company and tax exempt shareholders with effect from 1 July 2002 dealing with the simplified imputation system have been introduced in Tax Laws Amendment (2004 Measures No. 6) Bill 2004. This ruling deals only with the laws as presently enacted and does not extend to the application of the proposed laws.

30. Participating shareholders are taken to have received $4.04 as consideration in respect of the sale of each of their shares on 23 November 2004 pursuant to section 159GZZZQ of the ITAA 1936.

31. Taxation Determination TD 2004/22 (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. 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, in accordance with TD 2004/22, then 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 $2.10 per share.

32. The treatment of the consideration amount 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 amount by which the Consideration of $4.04 exceeds the cost base of each share will be a capital gain to the shareholder and, unless any capital losses are available to the shareholder, will be included in the shareholder's assessable income. If the share's reduced cost base exceeds $4.04, the difference will be a capital loss.

(b)
Shares held on revenue account

•
Where the shares are held as trading stock, the consideration of $4.04 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 $4.04 exceeds the cost of each share will be included in the shareholder's assessable income. Correspondingly, if the cost exceeds $4.04, the difference will be an allowable deduction.

Qualified Persons

33. 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 8 October 2004; 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

34. 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.

35. 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.

36. 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

37. The purchase price received by participating shareholders 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

38. Section 159GZZZP provides that where the buy-back of a share is an off-market purchase, the difference between the purchase price and the part (if any) of the purchase price which is debited against the share capital account, is taken to be a dividend paid by the company to the seller on the day the buy-back occurs. In this case the purchase price was $12.57 per share and $2.10 of this was debited to the share capital account. Thus the dividend amount is $10.47 per share.

39. The dividend amount of $10.47 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. In this case, the Buy-Back price did not exceed the market value determined in accordance with TD2004/22.

40. For Australian resident individual and corporate tax entity shareholders, and also for Australian complying superannuation funds, the dividend amount is included in their assessable income under subsection 44(1) of the ITAA 1936. 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 and they are also entitled to a tax offset under subsection 207-20(2) of the ITAA 1997 reflecting the franking credit attached to the dividend.

41. Paragraph 207-145(1)(a) of the ITAA 1997 provides that in relation to a franked dividend made by 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 paid under the Buy-Back, the participating shareholder must satisfy both the holding period rule (or certain alternative rules) and the related payments rule. These two rules are discussed later in this Class Ruling.

42. As the dividend component of the consideration received under the Buy-Back is fully franked, a non-resident shareholder is not liable to Australian withholding tax on the dividend component (paragraph 128B(3)(ga).

The Capital Component

Note: Consequential amendments for company and tax exempt shareholders with effect from 1 July 2002 dealing with the simplified imputation system have been introduced in Tax Laws Amendment (2004 Measures No. 6) Bill 2004. This ruling deals only with the laws as presently enacted and does not extend to the application of the proposed laws.

43. Participating shareholders are taken to have disposed of those shares accepted under the Buy-Back on 23 November 2004. The disposal may have different taxation implications for shareholders depending on how the shares were held, for instance:

•
an investor who held their shares on capital account will be subject to the capital gains tax provisions; and
•
a share trader who held their shares on revenue account will be subject to the ordinary income provisions.

44. 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.

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

46. Subsection 159GZZZQ(1) of the ITAA 1936 provides that the shareholder is taken to have received an amount equal to the purchase price (in this case the $12.57 received for each share bought back) as consideration in respect of the sale of the share bought back. However, this amount is subject to certain adjustments in order to arrive at the Sale Consideration.

47. Subsection 159GZZZQ(2) of the ITAA 1936 is one of the adjusting provisions. It provides that if the purchase 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.

48. For the purposes of determining the application of subsection 159GZZZQ(2) the following methodology has been proposed by BHP Billiton Limited and accepted by the Commissioner in accordance with TD 2004/22; the market value of each share is the volume weighted average price of the shares over the last five trading days before the first announcement of the Buy-Back, adjusted for the movement in the BHP Billiton Plc share price from the close of trading in London on 4 October 2004 to the opening of trading in London on 19 November 2004 . Under this methodology, the market value of a share bought back under the Buy-Back was calculated to be $14.51. Thus, the shareholders are taken to have received $14.51 for the sale of each share rather than $12.57.

49. Pursuant to subsection 159GZZZQ(3) of the ITAA 1936, the deemed consideration of $14.51 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 Amount, that is, $10.47. Therefore, the Sale Consideration for each share disposed of under the Buy-Back is $4.04 ($14.51 less $10.47).

Qualified Person

50. Paragraph 207-145(1)(a) of the ITAA 1997 provides that in relation to a franked dividend made by 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.

51. Broadly, a shareholder will not satisfy the related payments rule if the shareholder, or 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.

52. 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.

53. 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.

54. 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.

55. There are 45 clear days between 8 October 2004 and 23 November 2004, that is, the date the tender offer was accepted. Therefore, a shareholder who acquired shares on or before 8 October 2004 satisfies the holding period rule as long as those shares were held at risk for at least 45 continuous days. A shareholder who acquired shares after 8 October 2004 that were subsequently bought back under the Buy-Back is not a qualified person in relation to the dividend paid under the Buy-Back for the purposes of Division 1A of Part IIIAA of the ITAA 1936.

56. 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. The 45 day 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. Accordingly, shareholders who, on or after 9 October, acquired any additional BHP Billiton shares which conferred an entitlement to participate in the Buy-Back, may not qualify for the franking credits attached to the dividends paid on some or all of their shares sold into the Buy-Back.

The Anti-Avoidance Provisions

Sections 45A and 45B of the ITAA 1936

57. 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.

58. 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.

59. 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.

60. 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)).

61. 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.

62. Having regard to the 'relevant circumstances' of the scheme (the Buy-Back), as set out in subsection 45B(8), it is apparent that there was no requisite purpose, by way of capital distribution, of enabling the shareholders to obtain a tax benefit. 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 BHP Billiton in the past indicate that the Capital Component was being paid in substitution for a dividend.

Section 177EA of the ITAA 1936

63. 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.

64. 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.

65. 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 BHP Billiton, 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.

66. 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.

67. 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 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.

68. 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

69. Section 204-30 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)); and
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)).

70. 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)).

71. 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.

72. A significant portion of BHP Billiton 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

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

  Paragraph
What this Class Ruling is about 1
Tax law(s) 2
Class of persons 3
Qualifications 5
Date of effect 9
Withdrawal 10
Arrangement 11
Ruling 27
The Dividend Component 27
The Capital Component 30
Qualified Persons 33
The Anti-avoidance Provisions 34
Explanation 37
The Dividend and Capital Components 37
The Dividend Component 38
The Capital Component 43
Qualified Persons 50
The Anti-Avoidance Provisions 57
Sections 45A and 45B of the ITAA 1936 57
Section 177EA of the ITAA 1936 63
Section 204-30 of the ITAA 1997 69
Detailed contents list 73

Commissioner of Taxation
15 December 2004

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