Edited version of your private ruling

Authorisation Number: 1012580532181

Ruling

Subject: Share buy-back

Question 1

Will any part of the consideration paid in relation to the selective share buy-back be treated as capital in accordance with section 159GZZZP of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will section 159GZZZQ of the ITAA 1936 apply to deem any additional consideration to be paid in relation to the selective buy-back?

Answer

No.

This ruling applies for the following periods:

year ending 30 June 2012

year ending 30 June 2013

year ending 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The Company formed part of a family group of entities. Several years ago a Deed of Partition was entered into to separate the business interests and assets between some of the family members.

The Deed of Partition stated that the Company was to be either liquidated, or that the shares owned by the 2 of the shareholders should be bought back.

The decision to undertake the share buy-back, rather than liquidate the company, has now been made via a Heads of Agreement.

Prior to the share buy-back, the Company had a number of shareholders. Each shareholder held a parcel of ordinary fully paid shares. There were also a number of special classes of fully paid shares on issue.

All share classes have identical voting and capital rights.

The shares subject to the buy-back are:

· all of the ordinary and special class shares held by X as trustee for X Trust, and

· all of the ordinary and special class shares held by Y as trustee for the Y Trust.

No other shareholders will participate in the buy-back.

The funds used as consideration for the buy-back were sourced from the sale of assets and forgiveness of a loan account:

Following the sale of the assets, the agreed proceeds were paid to X and initially debited to the X Trust Fund loan account.

On 30 June 20XX a fully franked dividend was declared in full consideration for the share buy-back.

Due to an historic accounting error, the share capital was never brought to account. Therefore, there is no journal entry required to recognise the cancellation of the shares that are subject to the buy-back.

The Company will continue to exist following the buy-back.

The Company has been paying dividends in the years prior to the share buy-back.

The applicant confirms that the share capital account is not tainted for the purposes of section 197-50 of the ITAA 1997.

The applicant has advised their calculation of the market value of the shares which are subject to the buy-back.

The ownership of the shares, the subject of the buy-back, have now been transferred back to the company and cancelled.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 159GZZZP and

Income Tax Assessment Act 1936 section 159GZZZQ.

Reasons for decision

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 between the Company and two of its shareholders 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.

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

Under subsection 159GZZZQ(1) the amount of consideration received by the seller under an off-market buy-back will be an amount equal to the purchase price in respect of the buy-back.

However, under subsection 159GZZZQ(2) where the purchase price is less than the market value of the share at the time of the buy-back, the consideration received by the seller is deemed to be the market value of the share at the time of the buy-back.

As there was no amount debited against the company's share capital account, the entire purchase price will be a dividend under section 159GZZZP.

You have advised the market value of the parcel of shares held by each of the affected shareholders at the time of the buy-back. Because this was less than the dividend amount that each shareholder received under the buy-back, no adjustment under subsection 159GZZZQ(2) is necessary.

However, It is noted that paragraph 202-45(c) of the ITAA 1997 provides that where the purchase price on the buy-back of a share by a company from one of its members (such as a shareholder) is taken to be a dividend under section 159GZZZP, so much of that purchase price that exceeds the market value of the share is unfrankable.

Therefore, the amount by which the purchase price on the buy-back of the shares is above market value, will be an unfrankable dividend to the seller.