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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1013067022481

Date of advice: 5 August 2016

Ruling

Subject: Off market share buy-back

Question 1

Will the Buy-Back be an off-market buy-back for the purposes of Division 16K of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will the Buy-Back and subsequent cancellation of any shares bought-back be disregarded by the Company for income tax purposes?

Answer

Yes

Question 3

Will the determination of the 'market value' of shares in the manner proposed by the Company in accordance with TD 2004/22 be the market value for the purposes of subsection 159GZZZQ(2) of the ITAA 1936?

Answer

Yes

Question 4

Will the amount debited against the amount standing to the credit of the untainted share capital account of the Company represent the Capital Component of the Buy-Back Price for the purposes of subsection 159GZZZP(1) of the ITAA 1936?

Answer

Yes

Question 5

Will the difference between the Buy-Back Price and the amount debited to the Company's share capital account per share that is purchased in the Buy-Back be taken to be a dividend that is paid out of the Company's retained profits under subsection 159GZZZP(1) of the ITAA 1936, and will that dividend be a frankable distribution within the meaning given by subsection 202-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 6

Will the Commissioner make a determination under section 45A of the ITAA 1936 to the transactions constituting the Buy-Back?

Answer

No

Question 7

Will the Commissioner make a determination under section 45B of the ITAA 1936 and make a further determination under 45C of the ITAA 1936 to the transactions constituting the Buy-Back?

Answer

No

Question 8

Will the Commissioner make a determination pursuant to paragraph 204-30(3)(a) of the ITAA 1997 that a specified franking debit arises in the Company's franking account in respect of the whole or part of the franked Dividend Component of the Buy-Back?

Answer

No

Question 9

Will the Commissioner exercise his discretion to make a determination pursuant to paragraph 177EA(5)(a) of the ITAA 1936 that a franking debit arises in the Company's franking account in respect of the whole or part of the franked Dividend Component of the Buy-Back?

Answer

Yes

Question 10

If yes to Question 9, will the franking debit to the Company's franking account, arising as a consequence of the Commissioner's determination pursuant to paragraph 177EA(5)(a) of the ITAA 1936, be calculated in accordance with the following formula?

Number of shares brought back

x

Franking Credit attaching to each share bought back

x

% non-residents in tax treaty nations

x

0.5

Answer

Yes

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 proposes to use a VWAP formula for its Buy-Back which is consistent with the formula in TD 2004/22 adapted to its circumstances for the purposes of subsection 159GZZZQ(2) of the ITAA 1936.

The Company will not purchase its shares for an amount that is greater than the relevant market value.

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

Reasons for decision

All legislative references are to provisions of the Income Tax Assessment Act 1936 (ITAA 1936) unless specified otherwise.

Question 1

Summary

The Buy-Back will be an off-market buy-back for the purposes of Division 16K.

Detailed reasoning

For the purposes of Division 16K, where a company buys a share in itself from a shareholder, the purchase is a 'buy-back' (paragraph 159GZZZK(a)).

A buy-back is an on-market purchase if the share bought back is listed for quotation in the official list of a stock exchange in Australia or elsewhere, and the buy-back is made in the ordinary course of trading on that stock exchange (paragraph 159GZZZK(c)). A buy-back that is not an on-market purchase is an off-market purchase (paragraph 159GZZZK(d)).

Under the Buy-Back, the Company will buy-back some of its ordinary shares from Participating Shareholders which will not be made in the ordinary course of trading on the ASX, and therefore, the Buy-Back will be an off-market purchase (an off-market buy-back) for the purposes of Division 16K.

Question 2

Summary

The Buy-Back and subsequent cancellation of any shares purchased by the Company will be disregarded by the Company for income tax purposes.

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 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 3

Summary

The determination of the market value of the shares that the Company will purchase in the Buy-Back in the manner proposed by the Company in accordance with TD 2004/22 will be the market value for the purposes of subsection 159GZZZQ(2).

Detailed reasoning

The market value of a share purchased under the Buy-Back is relevant for determining the amount of consideration that Participating Shareholders are taken to have received or are entitled to receive in respect of the sale of a share under the Buy-Back (subsection 159GZZZQ(2)).

Subsection 159GZZZQ(2) requires determination of:

The Commissioner considers that for off-market buy-backs carried out by listed companies, the market value should be determined using the formula set out in paragraph 1 of Taxation Determination TD 2004/22 Income tax: for Off-market Share Buy-Backs of listed shares, whether the buy-back price is set by tender process or not, what is the market value of the share for the purposes of subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936?

The Company proposes to use a VWAP formula for its Buy-Back which is consistent with the formula in TD 2004/22 adapted to its circumstances for the purposes of subsection 159GZZZQ(2).

Further, the Company will adjust the formula to reflect the number of days leading up to the Announcement Date that the shares traded cum the final dividend.

For the purposes of subsection 159GZZZQ(2), the Company is entitled to adopt the formula as proposed.

Question 4

Summary

The amount debited against the amount standing to the credit of the untainted share capital account of the Company will represent the Capital Component of the Buy-Back Price for the purposes of subsection 159GZZZP(1).

Detailed reasoning

Subsection 159GZZZP(1) provides that the difference between the Buy-Back Price and the debit to the amounts standing to the credit of a company's share capital account is taken to be a dividend.

The Company will debit an amount per share purchased in the Buy-Back to its untainted share capital account.

The Commissioner accepts that the amount debited per share represents the Capital Component of the Buy-Back Price.

Question 5

Summary

The difference between the Buy-Back Price and the debit to the amounts standing to the credit of a company's share capital account is taken to be a dividend pursuant to subsection 159GZZZP(1).

Detailed reasoning

Subsection 159GZZZP(1) provides that the difference between the Buy-Back Price and the debit to the amounts standing to the credit of a company's share capital account is taken to be a dividend.

The Company will debit an amount per share purchased in the Buy-Back to its untainted share capital account, and as stated above, the Commissioner accepts that the debit of that amount per share represents the Capital Component of the Buy-Back Price. Therefore the difference per share between the Buy-Back Price and the amount debited to the share capital account is taken to be a dividend.

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.

The Buy-Back Price will not be greater than the market value of the shares therefore, paragraph 202-45(c) of the ITAA 1997 will not apply to the Dividend Component of the Buy-Back Price and in turn subsection 202-40(1) will operate to treat the entire Dividend Component of the Buy-Back Price as a frankable distribution.

The Company is a franking entity and will allocate 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 6

Summary

The Commissioner will not make a determination under subsection 45A that section 45C applies to the whole, or a part, of the Capital Component of the Buy-Back Price.

Detailed reasoning

Section 45A is an anti-avoidance rule that applies where a company streams 'capital benefits' to shareholders who derive a greater benefit from the receipt of capital benefits (advantaged shareholders), and it is reasonable to assume that other shareholders (disadvantaged shareholders) have received or will receive dividends.

Participating Shareholders will be provided with a capital benefit by way of the Capital Component as part of the Buy-Back Price. The circumstances of the Buy-Back indicate that there is no streaming of capital benefits to some shareholders and dividends to other shareholders.

Accordingly, the Commissioner considers that section 45A will not apply to the Buy-Back and the Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the whole, or a part, of the Capital Component of the Buy-Back Price.

Question 7

Summary

The Commissioner will not make a determination under subsection 45B that section 45C applies to the whole, or a part, of the Capital Component of the Buy-Back Price.

The Commissioner will also not make a further determination under subsection 45C(3) in respect of any part of the Capital Component of the Buy-Back Price.

Detailed reasoning

The purpose of section 45B is to ensure that capital benefits are treated as dividends for taxation purposes if they are provided in substitution for dividends.

Paragraph 45B(2) states that section 45B applies if:

The Buy-Back constitutes a 'scheme' within the meaning given by subsection 995-1(1) of the ITAA 1997, and Participating Shareholders will be 'provided with a capital benefit' in the form of the Capital Component of the Buy-Back price (paragraph 45B(5)(b). Therefore the paragraph 45B(2)(a) requirement is satisfied in respect of the Buy-Back.

Pursuant to paragraph 45B(2)(b) and subsection 45B(9), a person will obtain a tax benefit under the Buy-Back if the amount of tax payable (or another amount payable under the Act) by the person in respect of the Buy-Back would be less than the amount of tax (or other amount) that would have been payable if the Capital Component of the Buy-Back Price were instead an assessable dividend.

Whether a Participating Shareholder will obtain a tax benefit under the Buy-Back depends on each person's particular circumstances, and needs to be considered on a case by case basis. The Company's shares are widely held, therefore it is likely that certain Participating Shareholders will obtain a tax benefit under the Buy-Back if the capital component were a dividend and in turn the paragraph 45B(2)(b) requirement will be satisfied.

Paragraph 45B(2)(c) provides that a conclusion as to purpose with regard to the 'relevant circumstances' of the Buy-Back must be made that the Company or one or more Participating Shareholders entered into or carried out the Buy-Back for a more than incidental purpose of enabling a taxpayer to obtain a tax benefit.

The relevant circumstances of the scheme are not exhaustively listed in subsection 45B(8), and also include any of the matters listed in subsection 177D(2).

The Commissioner considers that neither the Company nor a Participating Shareholder entered into or carried out the Buy-Back for a more than incidental purpose of enabling a person to obtain a tax benefit. In arriving at the conclusion as to insufficient purpose, the Commissioner notes the following particular matters:

• the Dividend and Capital Components of the Buy-Back Price are acceptable in the Company's circumstances

• the Company's dividend history and policy indicate that the Capital Component of the Buy-Back Price is not a substitute for dividends

• The Company has paid fully-franked dividends, and this will not be affected by the Buy-Back, and

• the Buy-Back will result in a reduction of the number of ordinary shares held by Participating Shareholders, and therefore the number of shares on issue.

Correspondingly, the paragraph 45B(2)(c) requirement will not be satisfied and in turn subsection 45B(2) will not apply to the Buy-Back. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) that subsection 45C(1) applies to the whole, or a part, of the capital benefit provided under the Buy-Back.

As the Commissioner will not make a determination that subsection 45C(1) applies, the Commissioner will be unable to make a further determination under subsection 45C(3) in respect of any part of the capital benefit provided under the Buy-Back.

Question 8

Summary

The Commissioner will not make a determination pursuant to paragraph 204-30(3)(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 9 below, exercise his discretion under paragraph 177EA(5)(a).

Question 9

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).

Question 10

Summary

If the Commissioner makes a determination under paragraph 177EA(5)(a), the amount of the debit to the Company's franking account will be worked out in accordance with the formula set out in Practice Statement Law Administration PS LA 2007/9.

Detailed reasoning

As per the Detailed reasoning in Question 9 above ,the Commissioner will make 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.

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