Edited version of private advice

Authorisation Number: 1051792044562

Date of advice: 18 December 2020

Ruling

Subject: Off market share buy-back

Question 1

Do the general value shifting rules under Division 725 of the Income Tax Assessment Act 1997 ('ITAA 1997') apply in relation to the shares held in The Company by The Taxpayer?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20YY

The scheme commences on:

Year ended 30 June 20XX

The Buy-Back

1.      The Taxpayer holds ordinary shares (Shares) in a company (The Company) which is a private company that was incorporated in Australia. It is an Australian proprietary company limited by shares.

2.      The Company proposes to undertake the Buy-Back to allow certain shareholders (Participating Shareholders) to exit their investment.

3.      The Company proposes to offer to buy-back ordinary shares in The Company for a particular purchase price per share (Purchase Price).

4.      The Buy-Back will be effected as an off-market buy-back.

5.      All of the shareholders of The Company (Shareholders) are residents of Australia for tax purposes.

6.      All of the Shareholders have consented to the Buy-Back.

7.      Participation in the Buy-Back was offered to all Shareholders. Not all Shareholders chose to participate in the Buy-Back.

8.      The Buy-Back will take place at a future date.

9.      The Buy-Back Purchase Price is the same for all Participating Shareholders.

10.   Non-participating shareholders have not received and are not entitled to receive any property, dividends or distributions as compensation for not participating in the Buy-Back.

11.   The dividend component of the Buy-Back Purchase Price will be fully franked.

12.   The purchase price for the Buy-Back and the market value of the Shares are the same per Share. This price was negotiated between the parties involved in the Buy-Back and takes into account a number of factors.

Allocation of the Buy-Back Price

13.   The Buy-Back Price will be apportioned as follows per share:

•   An amount will be debited against The Company's share capital account (Capital Component); and the balance of the Buy-Back Price will be debited against the retained earnings account of The Company (Dividend Component).

•   These amounts had been determined using the average capital per share (ACPS) methodology.

14.   For the purposes of the ruling a number of documents provided with The Taxpayer's private binding ruling application also form part of the facts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 725

Reasons for Decision

Question 1

Summary:

The Buy-Back will not give rise to a direct value shift under Division 725 of the ITAA 1997.

Detailed reasoning

Division 725 of the ITAA 1997 deals with a direct value shift which occurs under a scheme involving equity or loan interests in an entity where there is a decrease in the market value of some equity or loan interests and an increase or issue at a discount of other equity or loan interests.

A direct value shift is defined at subsection 725-145(1) of the ITAA 1997 as follows:

There is a direct value shift under a scheme involving equity or loan interests in an entity (the target entity) if:

(a) there is a decrease in the market value of one or more equity or loan interests in the target entity; and

(b) the decrease is reasonably attributable to one or more things done under the scheme, and occurs at or after the time when that thing, or the first of those things is done; and

(c) either or both of subsections (2) and (3) are satisfied.

Subsection 725-145(2) of the ITAA 1997 states:

One or more equity or loan interests in the target entity must be issued at a discount. The issue must be, or must reasonably be attributable to, the thing, or one or more of the things, referred to in paragraph 1(b). It must also occur at or after the time referred to in that paragraph.

Subsection 725-145(3) of the ITAA states:

Or, there must be an increase in the market value of one or more equity or loan interests in the target entity. The increase must be reasonably attributable to the thing, or to one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph.

PS LA 2007/9 states that there may be a direct value shift in the context of a share buy-back where the buy-back is part of a broader capital restructure and consideration should also be given to the existence of any direct value shift prior to the share buy-back. Conducting an off-market share buy-back at a discount or premium may also give rise to direct value shifting consequences (paragraphs 149 to 152 of PSLA 2007/9).

Given the Buy-Back price is equal to the market value of the Shares there has been no buy-back at a premium or a discount. Therefore, section 725-145 of the ITAA 1997 will not be satisfied and the Buy Back will not give rise to a direct value shift.