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Ruling

Subject: Buy back of shares and leases

Question 1

Can you claim a deduction in this income year under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the total amount of the rent paid by you in the previous income years?

Answer

No.

Question 2

Will the buy back price in relation to the shares be included in your assessable income under subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 3

Will the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the ITAA 1997 apply in relation to the buy back of the leases?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased shares in a company a number of years ago.

You acquired leases of several properties from the company at the same time that you purchased the shares.

You paid rent to the company in relation to the leases for a number of years.

There was a selective buy back by the company of your shares and leases.

You received an amount as a buy back dividend in relation to your shares.

You also received a capital distribution which consisted of accumulated rent not previously distributed to shareholders/owners of the properties.

You received an amount in relation to the buy back of the leases.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Subsection 159GZZZP(1)

Income Tax Assessment Act 1936 Subsection 159GZZZQ(1)

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (except where the outgoings are of a capital, private or domestic nature).

For an expense to be deductible in a particular year under section 8-1 of the ITAA 1997, the expense must generally have been incurred in that year. In your case, you incurred the rental expenses in previous years, and therefore, provided that the above requirements of section 8-1 of the ITAA 1997 were satisfied, the expenses should have been claimed as deductions in these income years.

As the rental expenses were not incurred in this income year, they can not be claimed as a deduction under section 8-1 of the ITAA 1997 in this income year.

Question 2

Subsection 44(1) of the ITAA 1936 includes in the assessable income of a shareholder in a company dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it.

The definition of a 'dividend' contained in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders but excludes moneys debits against an amount standing to the credit of the share capital account.

Subsection 159GZZZP(1) of the ITAA 1936 provides that where a buy-back of a share by a company is an off-market purchase, the difference between the purchase price and the part (if any) of the purchase price in respect of the buy-back of the share which is debited against amounts standing to the credit of the company's share capital account, is taken to be a dividend paid by the company:

· to the seller as a shareholder in the company, and

· out of profits derived by the company, and

· on the day the buy-back occurs.

There is no indication in this case that any part of the buy back price was debited against an amount standing to the credit of the share capital account of the company. Part of the buy back price is clearly stated to be a dividend, and you have stated that the balance consisting of the capital distribution is accumulated rent which has not been previously distributed to shareholders/owners.

The full buy back price will therefore be taken to be a dividend under subsection 159GZZZP(1) of the ITAA 1936, and this amount is included in your assessable income under subsection 44(1) of the ITAA 1936.

Note

The amount which was paid by you for the shares will be included in the cost base of these shares for CGT purposes unless the shares were acquired or held for instance for the purpose of obtaining a profit on resale or were held as trading stock.

Subsection 159GZZZQ(1) of the ITAA 1936 provides that the buy back price of the shares is, for general income tax and CGT purposes, the amount actually received. However, this amount is subject to certain adjustments in order to arrive at the sale consideration.

Question 3

The buy back of your lease interests in the properties will be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997.

The lease interests in the properties held by you are CGT assets under section 108-5 of the ITAA 1997. When these lease interests were bought back by the company, CGT event A1, relating to the disposal of a CGT asset, happened.

The time of the event is:

· when you enter into the contract for the disposal or

· if there is no contract - when the change of ownership occurs.

You will make a capital gain if the capital proceeds from each disposal is more than the cost base of the relevant interest. You will make a capital loss if those capital proceeds are less than the reduced cost base of the relevant interest.

The amount paid to you by the company for the lease interests will be the capital proceeds from the disposal of the interests.