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Edited version of your written advice
Authorisation Number: 1012742605207
Ruling
Subject: Share buy-back
Question
Is any part of the buyback amount of $X considered a dividend under section 159GZZZP of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
No
This ruling applies for the following period
Year ending 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts
The company is a private company.
The Company has excess funds and a share buyback of X ordinary shares on issue is being considered.
The paid up capital is $1 per share.
The company intends to treat all of the buyback funds as capital and will cancel X of the ordinary shares on issue once the buy-back has been completed.
$X will be debited from the Issued & Paid up capital account.
The X ordinary shares will be bought back at $1 each.
The Balance Sheet as at 30 June 2014 shows there is an amount in excess of $X in the issued and paid up capital account.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 159GZZZK
Income Tax Assessment Act 1936 Section 159GZZZP
Reasons for decision
Division 16K of the Income Tax Assessment Act 1936 (ITAA 1936) provides the basic consequences of a buy-back for income tax purposes. It applies where a company buys a share in itself from a shareholder and cancels the share.
Section 159GZZZK of the ITAA 1936 defines on-market and off-market purchases.
It states:
For the purposes of this Division, where a company buys a share in itself from a shareholder in the company:
(a) The purchase is a buy-back; and
(b) The shareholder is the seller; and
(c) If:
(i) the share is listed for quotation in the official list of a stock exchange in Australia or elsewhere; and
(ii) the buy-back is made in the ordinary course of trading on the stock exchange;
The buy-back is an on-market purchase; and
(d) If the buy-back is not covered by paragraph (c) - the buy-back is an off-market purchase.
In this case the company intends to buy X shares in itself back from shareholders. The shares in the company are not listed for quotation in the official list of a stock exchange in Australia or elsewhere and the buy-back is not made in the ordinary course of trading on that stock exchange. As the buy-back is not covered by paragraph (c) the buy-back is an off-market purchase.
Section 159GZZZP of the ITAA 1936 discusses what part of an off-market purchase price is a dividend.
Subsection 159GZZZP of the ITAA 1936 states for the purposes of this Act, but subject to subsection (1A), where a buy-back of a share or non-share equity interest by a company is an off-market purchase, the difference between:
(a) the purchase price; and
(b) the part (if any) of the purchase price in respect of the buy-back of the share or non-share equity interest which is debited against amounts standing to the credit of;
(i) the company's share capital account if it is a share capital account if it a share that is bought back; or
(ii) the company's share capital account or non-share capital account if it is a non-share equity interest that is bought back;
Is taken to be a dividend paid by the company;
(c) to the seller as a shareholder in the company; and
(d) out of profits derived by the company; and
(e) on the day the buy-back occurs.
In this case the purchase price will be $X. $X will be debited against the Issued & Paid up capital account. As there is no difference between these amounts no part of the buy-back is considered a dividend. The whole amount of X is considered capital.
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