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Edited version of your written advice
Authorisation Number: 1013061285588
Date of advice: 10 August 2016
Ruling
Subject: Off-market share buy-back
Question 1
Will the buy-back and subsequent cancellation of any shares bought-back by the Company be disregarded by the Company for income tax purposes under section 159GZZZN of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
Yes
Question 2
Will the dividend be a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
Question 3
Will the Commissioner make a determination under paragraph 177EA(5)(a) of the ITAA 1936?
Answer
Yes
Question 4
Will the Commissioner make a determination under paragraph 204-30(3)(a) of the ITAA 1997?
Answer
No
Relevant facts and circumstances
The Company is a resident for Australian taxation purposes.
The Company undertook an off-market share buy-back and all shares bought back by the Company were cancelled.
For each share bought back by the Company, the Company debited an amount (capital component) to its share capital account and the balance of the buy-back price (dividend component) to its retained earnings.
The Company will fully frank the dividend component.
The Company's share capital account was not tainted.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 159GZZZN
Income Tax Assessment Act 1936 Section 159GZZZP
Income Tax Assessment Act 1936 Section 159GZZZQ
Income Tax Assessment Act 1936 Section 177EA
Income Tax Assessment Act 1997 Section 202-5
Income Tax Assessment Act 1997 Section 202-40
Income Tax Assessment Act 1997 Section 204-30
All legislative references are to provisions of the Income Tax Assessment Act 1936 (ITAA 1936) unless specified otherwise.
Reasons for decision
Question 1
Summary
The buy-back and subsequent cancellation of any shares bought-back by the Company will be disregarded by the Company for income tax purposes under section 159GZZZN of the ITAA 1936.
Detailed reasoning
Section 159GZZZN states that if a company buys-back a share, then the buy-back and any subsequent cancellation of the share, is disregarded by the company for income tax purposes.
As the Company buys-back will buy-back its shares, the buy-back and any subsequent cancellation of the shares will be disregarded by the Company for income tax purposes under section 159GZZZN.
Question 2
Summary
The dividend will be a frankable distribution under section 202-40 of the ITAA 1997.
Detailed reasoning
Subsection 202-40(1) of the ITAA 1997 states that a distribution is a frankable distribution to the extent it is not unfrankable under section 202-45 of the ITAA 1997.
Section 202-45 of the ITAA 1997 provides a list of unfrankable distributions.
The Company is a franking entity and has allocated a franking credit to the dividend distribution.
As the dividend distribution is not subject to section 202-45 of the ITAA 1997, it will be a frankable distribution pursuant to section 202-40 of the ITAA 1997 and will be capable of being franked in accordance with section 202-5 of the ITAA 1997.
Question 3
Summary
The Commissioner will make a determination under paragraph 177EA(5)(a).
Detailed reasoning
Section 177EA is a general anti-avoidance provision that applies to franking credit trading schemes where, having regard to relevant circumstances of the scheme, one of the purposes (other than an incidental purpose) of the scheme is to obtain a franking credit benefit.
Having considered all relevant circumstances of the buy-back, the Commissioner is of the view that section 177EA applies to the buy-back.
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 to deny the imputation benefit arising to each participant pursuant to paragraph 177EA(5)(b).
The Commissioner will exercise his discretion to make a determination under paragraph 177EA(5)(a).
If the Commissioner makes a determination under paragraph 177EA(5)(a), the amount of the debit will worked out in accordance with the formula set out in Practice Statement Law Administration PS LA 2007/9.
Question 4
Summary
The Commissioner will not make a determination under paragraph 204-30(a) of the ITAA 1997.
Detailed reasoning
The Commissioner will not make a determination pursuant to paragraph 204-30(3)(a) of the ITAA 1997 as the Commissioner will, as set out in the Detailed reasoning for Question 3, exercise his discretion under paragraph 177EA(5)(a).
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