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Edited version of private advice
Authorisation Number: 1051557649027
Date of advice: 6 August 2019
Ruling
Subject: Capital Gains Tax applicable on share buy-back
Question 1
Is the disposal of your shares under a share buy-back arrangement a CGT event?
Answer
Yes
Question 2
Is the money received from the share buy-back arrangement considered to be capital proceeds?
Answer
Yes
Question 3
Is there a capital gain where the capital proceeds less the cost base of the shares results in that capital gain?
Answer
Yes
Question 4
Can you choose the discount method for application of the CGT discount?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commences on:
Year ending 30 June 20XX
Relevant facts and circumstances
You are an Australian resident for taxation purposes.
You have been an Australian citizen for approximately XX years, having become a permanent resident approximately XX years ago.
You have lodge tax returns in the Country B in the past, but as of this year had not done so for at least XX years.
Approximately XX years ago, you acquired several thousand shares in a company X.
Company X is a company registered in Country B.
Approximately XX years ago, you acquired another several thousand shares in Company X.
You therefore owned a total of XX,XXX shares in Company X.
During the last financial year, Company X made an offer to you to buy back all your shares in the company.
The offer was to purchase the shares at the market value for each share.
A purchase deed formalising this agreement between you and Company X was executed in the last financial year.
Under the terms of the deed, you agreed to sell all your shares in Company X free from encumbrances for an agreed consideration.
Separate to this agreement, Company X also paid you a pre-completion dividend.
Relevant legislative provisions
Reasons for decision
Share buy-backs are mainly governed, for taxation purposes, by Division 16K of Part III of the ITAA 1936 (Division 16K). Division 16K was enacted in 1990 to deal with changes to the Corporations Law that permitted companies to buy-back their own shares.
The Division applies where a company buys a share in itself from a shareholder and cancels the share. On-market and off-market share buy-backs are defined in section 159GZZZK of the ITAA 1936. If the share is listed on a stock exchange and the purchase is made in the ordinary course of business of that stock exchange, the buy-back will be an on-market purchase. All other buy-backs are treated as off-market purchases for taxation purposes.
The share buy-back in your circumstances is therefore an off-market transaction for taxation purposes.
The purchase price paid by the company to the shareholder is the amount of money and/or the market value of any property the shareholder receives as consideration for the buy-back: section 159GZZZM of the ITAA 1936.
In an off-market buy-back of shares, the difference between the purchase price and the part of the purchase price in respect of the buy-back which is debited against the company's share capital account is taken to be a dividend paid by the company to the seller. This dividend is paid to the seller as a shareholder out of profits derived by the company on the day the buy-back occurs: section 159GZZZP of the ITAA 1936.
In an off-market share buy-back, the consideration paid to a vendor shareholder will generally comprise a return of capital and a fully/partly/unfranked dividend.
However, it is possible for a company to conduct a capital-only off-market share buy-back.
If the buy-back price is what the market value of the share would have been if the buy-back hadn't occurred and was never proposed, the capital proceeds is the amount paid, excluding any dividend paid. On the facts provided, this appears to be your situation.
In your circumstances, the disposal of your shares to the company by way of a 'buy-back' arrangement is a capital gain event, and the resultant proceeds are capital proceeds. The shares will be taken to have been disposed of for CGT purposes pursuant to section 104-10 ITAA 1997 (CGT Event A1)
You will make a capital gain in respect of the disposal of a share under the buy-back if the sale consideration per share exceeds the cost base of the share (with the cost base being the market value of the shares at the date you became a permanent resident of Australia).
As your shares were acquired after 21 September 19XX, the discount capital gain methodology is available to you.