Edited version of your private ruling

Authorisation Number: 1012480166565

Ruling

Subject: Off-market share buy-back - assessable income - capital gains tax

Question 1

Does Division 16K of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) apply to treat part of the amount received by you for shares sold back to the company as an assessable dividend?

Answer

Yes.

Question 2

Did a capital gains tax (CGT) event A1 occur on the disposal of your shares in the company?

Answer

Yes.

Question 3

Did CGT event K6 occur on the disposal of your shares in the company?

Answer

No.

Question 4

Is any capital gain made on the disposal of your shares in the company disregarded?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You acquired a number of shares in a company some time prior to 20 September 1985. You did not acquire your shares as part of any business activity or as an isolated transaction with a profit making intention. The shares were not held as trading stock.

The company was founded by your relative and you held your shares out of the total issued capital of ordinary shares. The company was set up as a vehicle for accumulating and protecting the family's wealth.

The company's assets comprised mainly real property purchased prior to 20 September 1985.

The properties were sold some time after 20 September 1985 and a CGT exempt gain was realised by the company. The gain was credited to a pre-CGT profits reserve in the company's accounting records.

There was no capital improvements made to the properties held by the company that exceeded the improvement threshold of the financial year in which the property was sold and that constituted more than 5% of the capital proceeds from the CGT event. The gain on disposal related solely to the original pre-CGT assets, and not the original pre-CGT assets plus separate post CGT assets as defined in subdivision 108-D of the Income Tax Assessment Act 1997 (ITAA 1997).

Following the death of your relative, a dispute between the family members arose and as a result you agreed to dispose of your shares in the company.

Some time during the 2011-12 income year you signed an agreement to transfer your shares back to the company for a certain amount of consideration. The consideration was paid to you in cash.

In accounting for the disposal, the company debited a certain amount to their "issued capital" account and debited another amount to their "capital profits reserve" account.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 16K of Part III,

Income Tax Assessment Act 1936 Subsection 44(1) ,

Income Tax Assessment Act 1936 Section 159GZZZK,

Income Tax Assessment Act 1936 Section 159GZZZM,

Income Tax Assessment Act 1936 Section 159GZZZP,

Income Tax Assessment Act 1936 Section 159GZZZQ,

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Subsection 104-10(5) and

Income Tax Assessment Act 1997 Section 104-230.

Reasons for decision

Assessable income

Division 16K of the ITAA 1936 deals with share buy-backs.

Where a company buys a share in itself from a shareholder in the company the purchase is a share buy-back. If the share is not listed for quotation on the stock exchange, the buy-back is an off-market purchase (section 159GZZZK of the ITAA 1936).

The buy-back arrangement you entered into with the company during the 2011-12 income year is an off-market buy-back in accordance with section 159GZZZK of the ITAA 1936.

When a shareholder sells their shares to a company in an off-market buy-back, the tax consequences for the shareholder are set out in Subdivision C of Division 16K (sections 159GZZZP and 159GZZZQ of the ITAA 1936).

Under section 159GZZZM of the ITAA 1936, the purchase price in respect of shares the company acquired through the buy-back is the amount of money the participating shareholder received or is entitled to receive as a result of or in respect of the buy- back.

Section 159GZZZP of the ITAA 1936 specifies when part of the purchase price paid by a company in an off-market buy-back situation is treated as a dividend. It acts to treat the difference between the purchase price and that part of the purchase price (if any) which is debited against a credit in the company's share capital account as a dividend paid by the company to the seller out of profits derived by the company, on the day the buy-back occurs.

Under section 159GZZZP of the ITAA 1936, the purchase price contains a dividend component only if the buy-back price exceeds the amount debited against the company's share capital account.

Subsection 44(1) of the ITAA 1936 provides that dividends paid to you by a company out of profits are included in your assessable income.

In your case, the difference between the purchase price and the amount debited against the company's share capital account, is taken to be a dividend paid by the company to you as a shareholder. The ultimate result in your circumstances is that the difference between these amounts is required to be included in your assessable income as a dividend.

Capital gains tax

You make a capital gain or capital loss if a CGT event happens to a CGT asset. CGT event A1 happened when you disposed of your shares.

Generally, any capital gain or capital loss that is made on the disposal of shares that you acquired prior to 20 September 1985 (pre-CGT) is disregarded.

However, special rules apply to pre-CGT shares in a company if 75% or more of the company's net value is made up of post-CGT property. In these circumstances, a capital gain may arise at the time that a CGT event happens to your pre CGT shares because of the special rules in CGT event K6.

In your situation, less than 75% of the company's net value was made up of post-CGT property and therefore CGT event K6 will not apply.

As your shares were acquired pre-CGT and CGT event K6 does not apply, any capital gain or capital loss that you made on the disposal of your shares is disregarded.