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Edited version of your written advice
Authorisation Number: 1012743615089
Ruling
Subject: Off-market share buy-back
Question 1
If the Commissioner makes a determination under paragraph 177EA(5)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) that a franking debit arises in the company's franking account as a result of the buy-back, will the franking debit be determined in accordance with the formula set out in Practice Statement Law Administration PS LA 2007/9 (at Example 5 following paragraph 126)?
Answer
Yes.
Question 2
Will the buy-back and subsequent cancellation of shares under the buy-back be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936?
Answer
Yes.
Relevant facts and circumstances
The company is an Australian resident company limited by shares.
The company intends to buy-back (off-market) a certain number of its shares.
All shares bought back under the buy-back will be cancelled.
A percentage of the company's shareholders are non-residents within the meaning given by subsection 6(1) of the ITAA 1936.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 159GZZZN
Income Tax Assessment Act 1936 paragraph 177EA(5)(a)
Reasons for decision
Question 1
Summary
If the Commissioner makes a determination under paragraph 177EA(5)(a) of the ITAA 1936 that a franking debit arises in the company's franking account as a result of the buy-back, he will use the formula set out in Practice Statement Law Administration PS LA 2007/9 (at Example 5 following paragraph 126) to determine the amount of the franking debit.
Detailed reasoning
Typically, the Commissioner calculates the franking debit in respect of a determination made under paragraph 177EA(5)(a) of the ITAA 1936 using the following formula:
Number of shares bought back |
x |
Franking credit attaching to each |
x |
Non-residents |
x |
0.5 |
If the Commissioner makes a determination under paragraph 177EA(5)(a) of the ITAA 1936 that a franking debit arises in the company's franking account as a result of the buy-back, he will use this formula.
The Commissioner accepts the percentage given to him for the 'non-residents' part of the formula, and will use this percentage if a determination is made.
Question 2
Summary
The buy-back and subsequent cancellation of shares under the buy-back will be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936.
Detailed reasoning
Under section 159GZZZN of the ITAA 1936, if a company buys-back a share the buy-back, and any subsequent cancellation of the share, are disregarded for the purposes of:
(a) determining for the purposes of the ITAA 1936 or the ITAA 1997:
(i) whether an amount is included in the assessable income of the company under a provision of the ITAA 1936 or the ITAA 1997 (other than a provision of Part 3-1 or 3-3 of the ITAA 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.
Under the buy-back, the company will buy-back shares within the meaning given by paragraph 159GZZZK(a) of the ITAA 1936 and cancel them. Accordingly, the buy-back and subsequent cancellation of shares under the buy-back will be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936.