Edited version of your written advice

Authorisation Number: 1051496778441

Date of advice: 20 March 2019

Ruling

Subject: Off-market share buy-back

Question 1

Are the proceeds of the off-market share buy-back assessable income?

Answer 1

Yes

Question 2

Are the proceeds of the off-market share buy-back capital gains and taxable under the capital gains tax provisions?

Answer 2

No

Question 3

Does the Australian Taxation Office have any discretion as to how the sale proceeds can be classified?

Answer 3

No

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You were employed by your employer.

You purchased shares in your employer.

Due to your resignation from your employer, you offered your shares for sale in accordance with the shareholder agreement.

Your employer entered into an off-market share buy-back for your shares.

You were paid an amount for the shares.

Your employer elected not to pay the sale proceeds from the share capital account.

Your employer classified the entire payment for the shares as a dividend.

The dividend was fully franked.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 159GZZZK

Income Tax Assessment Act 1936 paragraph 159GZZZM(a)

Income Tax Assessment Act 1936 subsection 159GZZZP(1)

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Reasons for decision

Summary

The proceeds of the off-market share buy-back are assessable income.

Detailed reasoning

Section 159GZZZK of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where a company buys a share in itself from a shareholder in the company (a share buy-back), the share is not a share that is listed on a stock exchange and the buy-back is not made in the ordinary course of trading on that stock exchange, the buy-back is an off-market purchase.

Paragraph 159GZZZM(a) of the ITAA 1936 states that the purchase price in respect of a buy-back is, if the seller as a shareholder has received or is entitled to receive an amount or amounts of money as a result of or in respect of the buy-back, that amount or the sum of those amounts.

Subsection 159GZZZP(1) of the ITAA 1936 provides that where a buy-back of a share is an off-market purchase, the difference between the purchase price and the part (if any) of the purchase price which is debited against amounts standing to the credit of the company’s share capital account, is a dividend (dividend component). The dividend is taken to be paid by the company to the seller in the company out of profits derived by the company on the day the buy-back occurs. The dividend is required to be included in the seller’s assessable income under section 44 of the ITAA 1936.

In your circumstances

As the shares sold to your employer were not listed on the stock exchange, the buy-back is an off-market purchase. In this case, the purchase price of the shares bought back by your employer was $X. As no amount was debited against amounts standing to the credit of your employer’s share capital account, the full amount of the buy-back purchase price is taken to be a dividend paid by your employer to you. This dividend is assessable income under section 44 of the ITAA 1936.

Summary

The proceeds of the off-market share buy-back are not capital gains and are not taxable under the capital gains tax provisions.

Detailed reasoning

Subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law.

Section 159GZZZQ of the ITAA 1936 outlines how to calculate the consideration received for the disposal of the shares in an off-market share buy-back. Subsection 159GZZZQ(3) provides that the total amount received is reduced by the dividend component. The remaining amount is the consideration received for the disposal of the shares (capital component) and is used to determine whether the taxpayer has made a capital gain or a capital loss.

In your circumstances

As discussed above, the entire amount of the proceeds from the sale of the shares to your employer was a dividend component. Therefore, the balance of the consideration, being nil, is regarded as consideration received on the disposal of the shares. You paid $X for the shares. As you received no consideration for the disposal of the shares, you have a capital loss. This capital loss can only be offset against capital gains and not ordinary income.

Summary

The Australian Taxation Office does not have any discretion as to how the sale proceeds are classified.

Detailed reasoning

Division 16K of the ITAA 1936 provides the rules in relation to share buy-backs. That division provides that the classification of what is the dividend component and what is the capital component is at the discretion of the company purchasing its shares.