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Edited version of private advice
Authorisation Number: 1051484711976
Date of advice: 16 May 2019
Ruling
Subject: Off-market share buy-back
Question 1
Will the buy-back and subsequent cancellation of any shares bought-back by Company K be disregarded by the Company for income tax purposes under section 159GZZZN of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
Yes
Question 2
Will the dividend be a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (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
This ruling applies for the following period:
Income year ended 30 June 20XX
The scheme commences on:
2 May 20XX
Relevant facts and circumstances
Company K is a resident for Australian taxation purposes.
Company K completed an off-market share buy-back, and all shares it purchased in the buy-back were cancelled.
For each share bought back by Company K, it debited an amount (capital component) to its untainted share capital account and the balance of the buy-back price (dividend component) to its retained earnings.
Company K fully franked the dividend component
Reasons for decision
All legislative references are to provisions of the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997 unless specified otherwise.
Question 1
Summary
The buy-back and subsequent cancellation of shares bought-back by Company K will be disregarded by Company K for income tax purposes under section 159GZZZN.
Detailed reasoning
Section 159GZZZN provides that if a company buys-back a share, then the buy-back and any subsequent cancellation of the share, is disregarded by the company for income tax purposes.
Following completion of the off-market share buy-back, Company K's shares were cancelled pursuant to section 257H of the Corporations Act 2001.
As Company K bought-back its shares, the buy-back and any subsequent cancellation of the shares will be disregarded by Company K for income tax purposes under section 159GZZZN.
Question 2
Summary
The dividend component was a frankable distribution under section 202-40.
Detailed reasoning
Subsection 202-40(1) provides that a distribution is a frankable distribution to the extent it is not unfrankable under section 202-45.
Section 202-45 sets out a list of unfrankable distributions.
Company K is a franking entity and is not subject to section 202-45, the terms of the buy-back are such that the dividend component was a frankable distribution pursuant to section 202-40 and the dividend component was capable of being franked in accordance with section 202-5.
Question 3
Summary
The Commissioner will make a determination under paragraph 177EA(5)(a).
Detailed reasoning
Section 177EA is a general anti-avoidance provision that applies to franking credit trading schemes where, having regard to the relevant circumstance of the scheme, one of the purposes (other than an incidental purpose) of the scheme is to obtain a franking credit benefit.
Having considered all relevant circumstances of the buy-back, the Commissioner is of the view that section 177EA applies to the buy-back.
Where section 177EA applies, the Commissioner has a discretion pursuant to subsection 177EA(5) to make a determination to debit the company's franking account pursuant to paragraph 177EA(5)(a), or to deny the imputation benefit arising to each participating shareholder pursuant to paragraph 177EA(5)(b).
The Commissioner will exercise his discretion to make a determination under paragraph 177EA(5)(a).
Question 4
Summary
The Commissioner will not make a determination under paragraph 204-30(3)(a).
Detailed Reasoning
The Commissioner will not make a determination pursuant to paragraph 204-30(3)(a) on the basis that the Commissioner will, as set out in the Detailed reasoning for Question 3, exercise his discretion under paragraph 177EA(5)(a).