Edited version of private advice

Authorisation Number: 1051794758023

Date of advice: 21 January 2021

Ruling

Subject: Off-market share buy-back

Question 1

Where the company had total issued capital with a paid up value of $xxx (of which $xx was the paid up value of the A class shares held by the Former Shareholder), under the circumstances outlined, will the amount paid by the Company in excess of the $xx be treated as capital by the Company?

Answer

No

Question 2

If no, is the buy-back amount in excess of the amount previously credited to the share capital account of the Company a dividend paid by the Company under section 159GZZZP of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Company was incorporated on xx Month 20xx.

At incorporation, the Company had on issue a variety of different share classes, including a number of Class A shares.

The Company intends to enter into a selective share buy-back.

Immediately prior to the buy-back, the shareholders in the Company are:

•         Shareholder 1 as to xx Class A shares;

•         Shareholder 2 as to xx Class A shares;

•         Shareholder 3 as to xx Class A shares;

•         Shareholder 3 as to x Class B share;

•         Shareholder 2 as to x Class C share;

•         Shareholder 1 as to x Class D share;

•         Shareholder 4 as to x Class E share; and

•         Shareholder 5 Ltd as to x Class F share.

Each of the Class A shares has a paid up value of $x.

The Company has total paid up capital of $xxx.

Subsequent to the proposed buy-back, the shareholders in the Company will be:

•         Shareholder 1 as to xx Class A shares;

•         Shareholder 2 as to xx Class A shares;

•         Shareholder 1 as to x Class B share;

•         Shareholder 2 as to x Class C share;

•         Shareholder 1 as to x Class D share;

•         Shareholder 4 as to x Class E share; and

•         Shareholder 5 as to x Class F share.

The Company intends to buy-back the Class A shares of Shareholder 3 for an amount of money and to cancel those shares.

The negotiations were conducted on an arm's length basis and the proceeds were established on the same basis.

The Company will debit a portion of the purchase price to the share capital account.

Relevant legislative provisions

Income Tax Assessment Act 1936

section 44

division 16K

section 159GZZZK

paragraph 159GZZZM(a)

section 159GZZZP

section 159GZZZQ

Income Tax Assessment Act 1997

section 202-40

section 202-45

Reasons for decision

Question 1 and 2

Summary

The amount debited to the share capital account is the capital component of the off-market share buy-back. The remainder of the purchase price is the dividend component.

Detailed reasoning

The tax consequences of a share buy-back are dealt with under special rules contained in Division 16K of Part III of the ITAA 1936.

Off-market purchase

In accordance with section 159GZZZK of the Income Tax Assessment Act 1936 (ITAA 1936), 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.

As the shares sold to the Company were not listed on the stock exchange the buy-back by the Company is an off-market purchase.

Purchase price

Under paragraph 159GZZZM(a) of the ITAA 1936, 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.

In the case of an off-market buy-back, the purchase price may include both a dividend and a capital component.

Dividend component

The dividend component of the purchase price is determined under section 159GZZZP of the ITAA 1936. According to this provision, the difference between:

•         the purchase price; and

•         that part of the purchase price in respect of the buy-back of the share which is debited against amounts standing to the credit of the company's share capital account,

is deemed to be a dividend paid to the seller out of the profits derived by the company on the day the buy-back occurs.

A section 159GZZZP dividend is required to be included in the seller's assessable income under section 44 of the ITAA 1936. A section 159GZZZP dividend is a frankable distribution except to the extent that the 'purchase price' exceeds the market value of the share; sections 202-40 and 202-45 of the Income Tax Assessment Act 1997 (ITAA 1997).

Capital component

The capital component of the purchase price is determined under section 159GZZZQ of the ITAA 1936. Section 159GZZZQ(3) of the ITAA 1936 provides that the purchase price is reduced by the amount deemed to be a dividend under section 159GZZZP of the ITAA 1936.