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Edited version of your written advice
Authorisation Number: 1012864424646
Date of advice: 10 September 2015
Ruling
Subject: Share buy-back
Question 1
Will the on-market share buy-back that is fully funded from the Company's share capital account as described give rise to a franking debit in the franking account of the Company under Item 9 of the table in section 205-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
This ruling applies for the following periods:
1 July 2015 to 30 June 2016
The scheme commences on:
3 August 2015
Relevant facts and circumstances
You are a public resident company listed on the Australian Stock Exchange (ASX).
You have offered to buy-back the shares of shareholders.
The buy-back will be conducted under the ASX listing rules and be made in the ordinary course of trading on the ASX. The offer to buy-back shares will be made to all public shareholders without discrimination.
The buy-back price has been set with reference to the market value of the share and will be the same for each share regardless of the identity or status of the shareholder.
The Company will debit the entire proceeds against their share capital account with no amount of the buy-back price being funded from retained earnings.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 159GZZZK
Income Tax Assessment Act 1936 section 159GZZZP
Income Tax Assessment Act 1936 section 159GZZZR
Income Tax Assessment Act 1936 section 159GZZZS
Income Tax Assessment Act 1997 section 202-40
Income Tax Assessment Act 1997 section 202-45
Income Tax Assessment Act 1997 section 205-30
Reasons for decision
Summary
No debit to the franking account is necessary under Item 9 of subsection 205-30(1) of the ITAA 1997 as a result of the on-market share buy-back that is being fully funded from the company's share capital account.
Detailed reasoning
As the shares are listed on the ASX and the buy-back will be conducted in the ordinary course of trading on the ASX, the buy-back is considered an on-market purchase pursuant to subsection 159GZZZK(c) of the ITAA 1936.
Item 9 of subsection 205-30(1) of the ITAA 1997 provides that if a company conducts an on-market buy-back of their membership interests, a franking debit is to be made to the franking account of an entity equal to the debit that would have arisen if:
(a) the purchase of the interest were a frankable distribution equal to the one that would have arisen if the company had purchased the interest off-market; and
(b) the distribution were franked at the entity's benchmark franking percentage for the franking period in which the purchase was made or, if the entity does not have a benchmark franking percentage for the period, at a franking percentage of 100%.
A frankable distribution according to section 202-40 of the ITAA 1997 is one that is not unfrankable. An unfrankable distribution is relevantly defined by paragraph 202-45(e) as:
a distribution that is sourced, directly or indirectly, from a company's *share capital account;
As the buy-back will be fully funded from the company's share capital account, the entire payment is considered unfrankable, even when conducted off-market.
This is explained in more detail in paragraphs 162 to 164 of Law Administration Practice Statement PS LA 2007/9. Paragraph 163 explains that 'where the on-market buy-back is sourced by debiting the company's share capital account only, then item 9 [of subsection 205-30(1) of the ITAA 1997] has no application.'
Therefore, no franking debit arises as a result of the share buy-back under subsection 205-30 of the ITAA 1997.