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Subject: Share Buy-Back

Question 1

Will the share buy-back arrangement result in an off-market purchase as that term is defined in section 159GZZZK of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will the Commissioner make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the buy-back value or any part of it received by the taxpayer from the Company under the buy-back as an unfranked dividend?

Answer

No

Question 3

Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the buy-back value or any part of it received by the taxpayer from the Company under the buy-back as an unfranked dividend?

Answer

No

This ruling applies for the following periods:

Year ended 31 December 2012

The scheme commences on:

1 January 2012

Relevant facts and circumstances

The broad details of the arrangement are as follows:

1. The taxpayer intends to enter into an arrangement with a public company listed on the Australian Securities Exchange (ASX) (The Company) to acquire shares in The Company and sell them back to The Company.

2. The taxpayer will enter the ASX market to buy shares in The Company. The taxpayer will buy shares over a maximum period of time agreed between the parties.

3. At the end of the period, The Company will buy shares in itself from the taxpayer, not in the ordinary course of trading on the ASX. The Company will then immediately cancel those shares.

4. The Company will pay (and debit) the consideration for the shares entirely out of its share capital account (as that term is defined in section 975-300 of the Income Tax Assessment Act 1997 (ITAA 1997)).

5. The Company will not have a share capital account that is tainted within the meaning of section 197-50 of the ITAA 1997, and will provide a warranty to the taxpayer to that effect under the buy-back agreement.

6. The taxpayer is not acting as agent for The Company in acquiring shares under the buy-back.

7. The taxpayer will treat the shares that the taxpayer acquires and sells to The Company under the buy-back as trading stock for the purposes of the ITAA 1936 and the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 45A

Income Tax Assessment Act 1936 Subsection 45A(2)

Income Tax Assessment Act 1936 Subsection 45A(3)

Income Tax Assessment Act 1936 Paragraph 45A(3)(b)

Income Tax Assessment Act 1936 Subsection 45A(4)

Income Tax Assessment Act 1936 Section 45B

Income Tax Assessment Act 1936 Paragraph 45B(2)(a)

Income Tax Assessment Act 1936 Paragraph 45B(2)(b)

Income Tax Assessment Act 1936 Paragraph 45B(2)(c)

Income Tax Assessment Act 1936 Subsection 45B(3)

Income Tax Assessment Act 1936 Paragraph 45B(3)(b)

Income Tax Assessment Act 1936 Subsection 45B(5)

Income Tax Assessment Act 1936 Paragraph 45B(5)(b)

Income Tax Assessment Act 1936 Subsection 45B(8)

Income Tax Assessment Act 1936 Subsection 45B(9)

Income Tax Assessment Act 1936 Section 45C

Income Tax Assessment Act 1936 Subsection 45C(1)

Income Tax Assessment Act 1936 Section 159GZZZK

Income Tax Assessment Act 1936 Paragraph 159GZZZK(d)

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 Section 197-50

Income Tax Assessment Act 1997 Section 975-300

Reasons for decision

Question 1

Summary

The buy-back arrangement will result in an "off-market purchase" by the Company as that term is defined in section 159GZZZK of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

Section 159GZZZK of the ITAA 1936 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 that 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.

Therefore, a buy-back occurs when a company buys a share in itself from a shareholder and the buy-back will only be an on-market purchase if it is made in the ordinary course of trading on a stock exchange on which the share is listed.

In the present circumstances, there will be two share acquisitions:

(a) the taxpayer may acquire shares in the ordinary course of trading on the ASX, and

(b) The Company acquires shares in itself from the taxpayer.

The first share acquisition is neither an "on-market purchase" or an "off-market purchase" for the purposes of section 15GZZZK of the ITAA 1936 because it does not involve a company buy[ing] a share in itself from a shareholder in the company. Under the arrangement, the taxpayer is not acting as agent for The Company when it acquires shares in The Company.

The second acquisition is an "off-market purchase" for the purposes of section 15GZZZK of the ITAA 1936 because it does involve The Company buying shares in itself from the taxpayer. Further, it is not an on-market purchase because that acquisition is not made in the ordinary course of trading of share in The Company on the ASX. As such, it is an "off-market purchase" as described in paragraph 159GZZZK(d) of the ITAA 1936.

Question 2

Summary

The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the buy-back value or any part of it received by the taxpayer from The Company under the buy-back as an unfranked dividend.

Detailed reasoning

Section 45A of the ITAA 1936 requires there to be a streaming of dividends and capital benefits in such a way that there is:

(a) an 'advantaged shareholder' who would derive a greater benefit from the capital benefits than other shareholders, and

(b) a 'disadvantaged shareholder' who it is reasonable to assume has received or will receive dividends.

Where this arises, subsection 45A(2) of the ITAA 1936 permits the Commissioner to make a determination that section 45C of the ITAA 1936 applies in relation to the whole or part of a capital benefit. The effect of such a determination is to deem the whole or part of the capital benefit to a shareholder deemed advantaged for the purposes of section 45A to be an unfranked dividend.

The provision of a capital benefit is defined in subsection 45A(3) of the ITAA 1936. This includes, at paragraph 45A(3)(b) of the ITAA 1936, the distribution of share capital, which the taxpayer will receive under the arrangement.

Subsection 45A(4) of the ITAA 1936 sets out several non-exclusive examples when a shareholder receives a greater benefit from the capital benefit than another shareholder. In short they describe circumstances where the advantaged shareholder might enjoy a lower incidence of taxation than would be the case, had another shareholder of the company received the amount as a capital benefit.

In the present circumstances, there are no facts provided to the Commissioner to establish that:

(a) the taxpayer is an advantaged shareholder - this is because neither The Company nor its other shareholders are known, and so it cannot be said that the taxpayer will enjoy a lower incidence of taxation from the receipt of capital benefits than another shareholder, and

(b) there are disadvantaged shareholders - this is because neither The Company or its other shareholders are known.

Therefore, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies. However, should the proposed transaction take place, the attributes of the relevant company and its shareholders among other things, may require the reconsideration of the application of section 45A of the ITAA 1936.

Question 3

Summary

The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the buy-back value, or any part of it, received by the taxpayer from the Company under the buy-back as an unfranked dividend.

Detailed reasoning

Relevantly, section 45B of the ITAA 1936 broadly applies in this way:

(a) a person is provided a capital benefit by a company under a scheme (paragraph 45B(2)(a) of the ITAA 1936),

(b) a taxpayer, who may or may not be provided with the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936),

(c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons who entered into or carried out the scheme (or part of it), did so for a non incidental purpose to enable the taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936),

(d) then the Commissioner may determine that section 45C of the ITAA 1936 applies to the whole or part of the capital benefit (paragraph 45B(3)(b) of the ITAA 1936), and

(e) section 45C would operate to treat the capital benefit (or part of it) as an unfranked dividend paid by the company to the relevant taxpayer (subsection 45C(1) of the ITAA 1936).

The provision of a capital benefit is defined in subsection 45B(5) of the ITAA 1936, and includes the distribution of share capital (paragraph 45B(5)(b) of the ITAA 1936). The taxpayer will obtain a capital benefit under a scheme.

Subsection 45B(8) of the ITAA 1936 sets out the relevant circumstances in ascertaining whether or not the non-incidental purpose exists.

Tax benefit is defined in Subsection 45B(9) of the ITAA 1936 as:

A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend.

The applicant for this Ruling has identified the taxpayer as the relevant taxpayer to ascertain whether or not it obtains a tax benefit.

The taxpayer will calculate its assessable income and allowable deductions in relation to the shares it sells to The Company under the buy-back as trading stock and hence in accordance with Division 70 of the ITAA 1997. As a consequence, the taxpayer will derive no greater assessable income under the scheme were it to receive an assessable dividend from The Company instead of the capital benefit (ie. return of share capital). Accordingly, the amount of tax payable or that would be payable by the taxpayer would not be different under this alternative and the taxpayer does not obtain a tax benefit.

Therefore, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the taxpayer.

However, should the proposed buy-back transaction take place, the attributes of the relevant company and its other shareholders, among other things, may require the reconsideration of the application of section 45B of the ITAA 1936. For example, it may be appropriate that the 'other shareholders' be considered the relevant taxpayer for the purposes of determining whether or not someone obtains a tax benefit.