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Edited version of your written advice
Authorisation Number: 1051292551213
Disclaimer
You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.
The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.
Date of advice: 27 October 2017
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 circumstance
The Company is a resident for Australian taxation purposes.
The Company completed an off-market share buy-back and all shares it bought back were cancelled.
For each share bought back by the Company, it debited an amount (capital component) to its untainted share capital account and the balance of the buy-back price (dividend component) to its retained earnings.
The Company fully franked the dividend component.
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 1936 Section 202-5
Income Tax Assessment Act 1936 Section 202-40
Income Tax Assessment Act 1936 Section 202-30
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 shares bough-back by the Company will be disregarded by the Company for income tax purposes under section 159GZZZN.
Detailed reasoning
Section 159GZZZN provides 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.
Following completion of the off-market share buy-back, the Company’s shares were cancelled pursuant to section 257H of the Corporations Act 2001.
As the Company bought-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 component was a frankable distribution under section 202-40 of the ITAA 1997.
Detailed reasoning
Subsection 202-40(1) of the ITAA 1997 provides 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 sets out a list of unfrankable distributions.
The Company is a franking entity and is not subject to section 202-45 of the ITAA 1997, the terms of the buy-back are such that the dividend component was a frankable distribution pursuant to section 202-40 of the ITAA 1997 and the dividend component was 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 the relevant circumstance 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 participating shareholder pursuant to paragraph 177EA(5)(b).
The Commissioner will exercise his discretion to make a determination under paragraph 177EA(5)(a).
Question 4
Summary
The Commissioner will not make a determination under paragraph 204-30(3)(a) of the of the ITAA 1997.
Detailed Reasoning
The Commissioner will not make a determination pursuant to paragraph 204-30(3)(a) of the ITAA 1997 on the basis that 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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