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Edited version of your private ruling
Authorisation Number: 1012507182261
Ruling
Subject: Proposed off-market share buy-back
Question 1
Whether the share buy-back and any subsequent cancellation of shares bought-back will be disregarded under section 159GZZZN of the ITAA 1936 for the purposes of determining whether:
(a) an amount is included in the assessable income of Entity X;
(b) an amount is allowable as a deduction to Entity X; and
(c) Entity X makes a capital gain or capital loss.
Answer
Yes
Question 2
Will the Dividend Component of the share buy-back price be a frankable distribution pursuant to section 202-40 of the ITAA 1997 and, therefore, will be capable of being franked in accordance with section 202-5 of the 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 circumstances
Entity X will conduct a tender share buy-back as an equal access buy-back in accordance with Division 2 of Part 2J.1 of the Corporations Act 2001.
Under the share buy-back Entity X will acquire a number of shares such that no more than 10% of the voting rights were acquired in a 12 month period, in accordance with a share buy-back under subsections 257B(4) and 257B(5) of the Corporations Act 2001.
All shares acquired by Entity X under the share buy-back will be cancelled.
Entity X's share capital account has not been tainted for the purposes of section 197-50 of the ITAA 1997.
Entity X is an Australian resident and a franking entity for the purposes of the ITAA 1997 at the time of the share buy-back.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 159GZZZN
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
Question 1
Section 159GZZZN of the ITAA 1936 states:
If a company buys-backs a share then the buy-back, and any subsequent cancellation of the share, are disregarded for the purposes of:
(a) determining for the purposes of this Act:
(i) whether an amount is included in the assessable income of the company under a provision of this Act (other than a provision of Part 3-1 or 3-3 of the Income Tax Assessment Act 1997 (about CGT)); or
(ii) whether an amount is allowable as a deduction to the company; or
(b) determining whether the company makes a capital gain or capital loss.
Entity X will undertake an off-market share buy-back. The shares acquired as a result of the buy-back will be cancelled. Section 159GZZZN of the ITAA 1936 will therefore apply and any subsequent cancellation of the shares bought back will be disregarded for the purposes of determining whether:
(a) an amount is included in the assessable income of Entity X;
(b) an amount is allowable as a deduction to Entity X; and
(c) Entity X makes a capital gain or capital loss.
Question 2
The Dividend Component will be a frankable distribution pursuant to section 202-40 of the ITAA 1997 and, therefore, will be capable of being franked in accordance with section 202-5 of the ITAA 1997.
Question 3
The Commissioner will exercise his discretion and will make a determination under paragraph 177EA(5)(a) of the ITAA 1936. The amount of the franking debit will be calculated by the formula in paragraph 126 of Law Administration Practice Statement PS LA 2007/9 Share buy-backs.
Question 4
The Commissioner will not make a determination pursuant to subsection 204-30(3)(a) of the ITAA 1997.