Edited version of private advice

Authorisation Number: 1051975044504

Date of advice: 10 November 2022

Ruling

Subject: Off market share buy-back

Question 1

Will the Buy-Back be an off-market purchase within the meaning given by subsection 159GZZZK(d) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Will the Buy-Back and subsequent cancellation of shares bought back be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936?

Answer

Yes.

Question 3

Will the Commissioner accept that the Dividend Component of the Buy-Back Price is a dividend paid by Company A to the shareholder in accordance with subsection 159GZZZP(1) of the ITAA 1936?

Answer

Yes.

Question 4

Will the difference between the Buy-Back Price and the portion of the Buy-Back Price debited to Company A's share capital account be taken to be a dividend paid out of the company's retained profits under subsection 159ZZZP(1) of the ITAA 1936, and will that dividend be a frankable distribution within the meaning given by subsection 202-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 5

Will the Commissioner make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or any part of the Capital Component of the Buy-Back Price for the shares bought back?

Answer

No.

Question 6

Will the Commissioner make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 in relation to the whole, or a part, of the Capital Component of the Buy-Back Price, or a further determination under subsection 45C(3) of the ITAA 1936 in respect of any part of the Capital Component of the Buy-Back Price?

Answer

No.

Question 7

Will the Commissioner make a determination pursuant to paragraph 204-30(3)(a) of the ITAA 1997 that a specified franking debit arises in the franking account of Company A in respect of the whole or part of the franked Dividend Component of the Buy-Back Price?

Answer

No.

Question 8

Will the Commissioner exercise his discretion to make a determination pursuant to paragraph 177EA(5)(a) of the ITAA 1936, which the company will accept, that a franking debit arises in Company A's franking account in respect of the whole or part of the franked Dividend Component of the Buy-Back Price?

Answer

Yes.

Question 9

Will the Commissioner make a determination under paragraph 177EA(5)(a) of the ITAA 1936, which the company will accept, that a franking debit arises in the franking account of Company A in respect of the franked dividends paid as part of the off-market share buy-back, calculated in accordance with the following formula?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

DD MM 20XX

Relevant facts and circumstances

Company A

1.   Company A is an Australian-resident public company listed on the Australian Securities Exchange (ASX).

2.   As at DD MM 20XX, Company A had X fully paid ordinary shares on issue, held by a mix of individuals, companies, trusts, partnerships and superannuation funds.

3.   As at DD MM 20XX X% of Company A's total shareholders were non-residents of Australia, holding X% of Company A shares.

4.   Company A has a history of paying fully franked dividends to its shareholders.

The Buy-Back

5.   On DD MM 20XX (First Announcement Date), Company A announced its intention to undertake an off-market share buy-back of Company A shares up to $X million, equivalent of up to X% of issued shares, using existing cash reserves.

6.   Participation in the buy-back was open to all eligible Company A shareholders who held ordinary shares on DD MM 20XX, with limited exceptions.

7.   Participation in the off-market share buy-back was voluntary. Any shareholders who did not want to participate were not required to take any action and did not receive any compensation for not participating in the buy-back.

8.   Under the tender process, eligible shareholders could make an offer to sell some or all of their ordinary shares to Company A at one of the specified discount percentages or at the Final Tender Price.

9.   The Buy-Back Price was subject to two overriding limits:

•            Company A would not buy back shares at a discount greater than 14% applied to the VWAP of Company A's shares sold on the ASX for the five trading days leading up to and including the Closing Date, and;

•            The buy-back price would not exceed the market value of a Company A share determined in accordance with Taxation Determination TD 2004/22 Income tax: for Off-Market Share Buy-Backs of listed shares, whether the buy-back Price is set by tender process or not, what is the market value of the share for the purposes of subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936?

10. On DD MM 20XX Company A announced that:

•            It has successfully completed the buy-back of XX Company A shares, representing X% of their issued shares.

•            The total value of the Company A shares bought back under the buy-back was $X

•            The buy-back price was $XX per Company A share

•            Tenders at a discount of XX% or as a final price tender were successful, subject t any minimum price condition and scale back,

•            Tenders at discounts of xx% or below were not accepted, and

•            Due to excess demand for the buy-back, shareholders whose tenders were subject to scale back had a priority allocation of xx shares bought back before a scale back of xx% applied.

11. Under the buy-back, Company A debited $XX per share bought back to its share capital account and the balance of the buy-back price (the Dividend Component) was debited to their retained earnings account.

12. The sale consideration for each Company A share sold in the buy-back was $xx. The sale consideration is less than the trading price of Company A shares.

13. The Dividend Component was fully franked by Company A.

14. All shares bought back under the off-market share buy-back were cancelled by Company A, as required by subsection 257H(3) of the Corporations Act 2001.

Other Information

15. Company A's share capital account was not tainted for the purposes of section 187-50 of the ITAA 1997.

16. As of DD MM 20XX no non-residents, either alone or together with any associates, beneficially held more than 10% of the shares in Company A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 45A

Income Tax Assessment Act 1936 Section 45B

Income Tax Assessment Act 1936 Subsection 45B(2)

Income Tax Assessment Act 1936 Subsection 45B(3)

Income Tax Assessment Act 1936 Subsection 45B(5)

Income Tax Assessment Act 1936 Subsection 45B(8)

Income Tax Assessment Act 1936 Subsection 45B(9)

Income Tax Assessment Act 1936 Section 45C

Income Tax Assessment Act 1936 Subsection 45C(1)

Income Tax Assessment Act 1936 Subsection 45C(3)

Income Tax Assessment Act 1936 Section 177EA

Income Tax Assessment Act 1936 Subsection 177EA(3)

Income Tax Assessment Act 1936 Subsection 177EA(5)

Income Tax Assessment Act 1936 Subsection 177EA(17)

Income Tax Assessment Act 1936 Subsection 177EA(18)

Income Tax Assessment Act 1936 Subsection 177EA(19)

Income Tax Assessment Act 1936 Division 16K

Income Tax Assessment Act 1997 Section 187-50

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 Section 204-30

Income Tax Assessment Act 1997 Subsection 204-30(1)

Income Tax Assessment Act 1997 Subsection 204-30(2)

Income Tax Assessment Act 1997 Subsection 204-30(3)

Income Tax Assessment Act 1997 Subsection 204-30(4)

Income Tax Assessment Act 1997 Subsection 204-30(5)

Income Tax Assessment Act 1997 Subsection 204-30(6)

Income Tax Assessment Act 1997 Subsection 204-30(7)

Income Tax Assessment Act 1997 Subsection 204-30(8)

Income Tax Assessment Act 1997 Subsection 204-30(9)

Income Tax Assessment Act 1997 Subsection 204-30(10)

Income Tax Assessment Act 1997 Section 975-300

Corporations Act 2001 Subsection 257B(2)

Corporations Act 2001 Subsection 257D(4)

Corporations Act 2001 Subsection 257H(3)

Reasons for decision

Question 1

Summary

The Buy-Back will be an off-market purchase for the purposes of subsection 159GZZZK(d) of the ITAA 1936.

Detailed Reasoning

Division 16K of Part III of the ITAA 1936 deals with the effect of buy-backs of shares.

For the purposes of Division 16K, where a company buys a share in itself from a shareholder, the purchase is a 'buy-back' (subsection 159GZZZK(a) of the ITAA 1936).

Division 16K categorises a buy-back as either an 'on-market purchase' or an 'off-market purchase'.

A buy-back is an on-market purchase if the share bought back is listed for quotation in the official list of a stock exchange in Australia or elsewhere, and the buy-back is made in the ordinary course of trading on that stock exchange (subsection 159GZZZK(c) of the ITAA 1936). A buy-back that is not an on-market purchase is an off-market purchase (subsection 159GZZZK(d) of the ITAA 1936).

Question 2

Summary

The Buy-Back and subsequent cancellation of any shares bought-back will be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936 by Company A.

Detailed Reasoning

Under section 159GZZZN of the ITAA 1936, if a company buys back a share, then the buy-back, and any subsequent cancellation of the share, are disregarded for the purposes of:

(a)  determining for the purposes of the ITAA 1936 or the ITAA 1997:

(i)            whether an amount is included in the assessable income of the company under a provision of the ITAA 1936 or the ITAA 1997 (other than a provision of Part 3-1 or 3-3 of the ITAA 1997 (about CGT); or

(ii)           whether an amount is allowable as a deduction to the company; or

(b)  determining whether the company makes a capital gain or capital loss.

As discussed in the Detailed Reasoning for Question 1 above, Company A will buy-back shares within the meaning given by paragraph 159GZZZK(a) of the ITAA 1936 under the Buy-Back. Accordingly, the Buy-Back and any subsequent cancellation of the shares will be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936. That is, for the purposes of determining whether Company A:

•         includes an amount in its assessable income under a provision of the ITAA 1936 or the ITAA 1997 (other than a provision of Part 3-1 or 3-3 of the ITAA 1997 (about CGT))

•         is entitled to an allowable deduction under the ITAA 1936 or the ITAA 1997, and

•         makes a capital gain or a capital loss under Part 3-1 or 3-3 of the ITAA 1997.

Question 3

Summary

The Commissioner accepts the dividend/capital split of the Buy-Back Price determined using the average capital per share (ACPS) methodology as outlined in Law Administration Practice Statement PS LA 2007/9 Share Buy-Backs (PS LA 2007/9). Therefore, for the purposes of subsection 159GZZZP(1) of the ITAA 1936, the amount of $XX will represent the Capital Component of the Buy-Back Price for each share bought back. The remainder of the Buy-Back Price, being $XX per share bought back, will be a dividend paid by Company A to the shareholder.

Detailed Reasoning

An essential aspect of the Buy-Back is the 'split' between the return of capital and dividend paid to the participating shareholders. Subsection 159GZZZP(1), (1A) and 2 of the ITAA 1936 state:

(1) For the purposes of this Act, ... where a buy-back of a share ... by a company is an off-market purchase, the difference between:

(a) the purchase price; and

(b) the part (if any) of the purchase price in respect of the buy-back of the share or non-share equity interest which is debited against amounts standing to the credit of:

(i) the company's share capital account if it is a share that is bought back; or

(ii) the company's share capital account or non-share capital account if it is a non-share equity interest that is bought back;

is taken to be a dividend paid by the company:

(c) to the seller as a shareholder in the company; and

(d) out of profits derived by the company; and

(e) on the day the buy-back occurs.

(1A) If the dividend is included to any extent in the seller's assessable income of any year of income, it is not taken into account to that extent under section188-20 of the Income Tax Assessment Act 1997.

(2) The remainder of the purchase price is taken not to be a dividend for the purposes of this Act.

According to PS LA 2007/9, at paragraph 12, the Average Capital Per Share (ACPS) method is, prima facie, the preferred methodology for determining the 'Dividend/Capital Split' in an off-market share buy-back unless companies can demonstrate exceptional circumstances for the use of an alternative method (paragraph 69 of PS LA 2007/9).

The ACPS is worked out by dividing the company's ordinary issued capital by the number of shares on issue (paragraph 62 of PS LA 2007/9). Since Company A had X ordinary shares on issue with a total issued capital of $XX, the result is therefore that part of the purchase price, being the capital component as per the ACPS methodology is $XX, which will not be a dividend under the ITAA 1936 or ITAA 1997.

The Commissioner accepts that the ACPS methodology used by Company A is the appropriate method for determining the 'dividend/capital split' of the Buy-Back Price. As a result, for the purposes of section 159GZZZP of the ITAA 1936, $XX per Company A share represents the Capital Component of the Buy-Back Price and the balance of the Buy-Back Price, being $XX, will be the Dividend Component for each share bought back.

Question 4

Summary

The Dividend Component of the Buy-Back Price will be a frankable distribution within the meaning given by subsection 202-40(1) of the ITAA 1997.

Detailed Reasoning

Subsection 202-40(1) of the ITAA 1997 states:

A distribution is a frankable distribution, to the extent that it is not unfrankable under section 202-45.

The term 'distribution' is defined in section 960-120 of the ITAA 1997. Pursuant to item 1 of the table in subsection 960-120(1) of the ITAA 1997, it includes a dividend or something that is taken to be a dividend. As discussed above, in question 3, section 159GZZZP of the ITAA 1936 will apply to the Buy-Back. Accordingly, the difference between the Buy-Back Price of $XX and the Capital Component of $XX debited to Company A's share capital will be taken to be a dividend paid by Company A (the Dividend Component) to the participating shareholders out of the profits derived by Company A on the day the Buy-Back occurred. Therefore, the Dividend Component of the Buy-Back Price will be a 'distribution' within the meaning given by section 960-120 of the ITAA 1997.

Section 202-45 of the ITAA 1997 sets out a list of circumstances when distributions are unfrankable.For present purposes, paragraph 202-45(c) is relevant. Paragraph 202-45(c) states:

The following are unfrankable:

...

(c) where the purchase price on the buy-back of a share by a company from one of its members is taken to be a dividend under section 159GZZZP of that Act - so much of that purchase price as exceeds what would be the market value (as normally understood) of the share at the time of the buy-back if the buy-back did not take place and were never proposed to take place;

The requirements of the paragraph depend on the Buy-Back Price and the relevant market value of the Company A shares.

Under the Buy-Back, the Buy-Back Price was $XX. For listed companies, the formula set out in TD 2004/22 for the purposes of subsection 159GZZZQ(2) of the ITAA 1936 equally applies for the purposes of paragraph 202-45(c) of the ITAA 1997. The Buy-back Price was not greater than the market value of the shares calculated in accordance with TD 2004/22 and the methodology set out at Example 7 of Appendix A of PSLA 2007/9. There was no amount which could be treated as an unfrankable distribution under paragraph 202-45(c) of the ITAA 1997.

Therefore, paragraph 202-45(c) of the ITAA 1997 will not apply to the Dividend Component of the Buy-Back Price and in turn subsection 202-40(1) of the ITAA 1997 will operate to treat the entire Dividend Component of the Buy-Back Price as a frankable distribution.

Question 5

Summary

The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole, or a part, of the Capital Component of the Buy-Back Price. The Commissioner will therefore not make a further determination under subsection 45C(3) of the ITAA 1936 in respect of Company A.

Detailed Reasoning

Noting that a capital benefit will be provided to participating shareholders under the Buy-Back, the circumstances of the Buy-Back nevertheless indicate that there is no streaming of capital benefits to some shareholders and dividends to other shareholders. In particular:

• the Buy-Back was subject to ASIC relief to operate as an 'equal access scheme', and participation was open to all Eligible Shareholders registered on the Record Date (except for certain Excluded Shareholders)
• the decision whether or not to participate in the Buy-Back was at the discretion of each shareholder
• each participating shareholder received the same Dividend Component and Capital Component
• shareholders who did not participate in the Buy-Back did not receive any other dividend or distribution as compensation for not participating in the Buy-Back
• both participating shareholders and non-participating shareholders will, to the extent that they remain shareholders, continue to be eligible to receive ordinary dividends on an equal basis.

Accordingly, the Commissioner considers that section 45A of the ITAA 1936 does not apply to the Buy-Back and the Commissioner will not make a determination under subsection 45A(2) that section 45C of the ITAA 1936 applies to the whole, or a part, of the Capital Component of the Buy-Back Price.

Question 6

Summary

The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole, or a part, of the Capital Component of the Buy-Back Price. The Commissioner will also not make a determination under subsection 45C(3) of the ITAA 1936 in respect of any part of the Capital Component of the Buy-Back Price.

Detailed Reasoning

The purpose of section 45B is to ensure that capital benefits are treated as dividends for taxation purposes if they are provided in substitution for dividends.

Pursuant to paragraph 45B(2) of the ITAA 1936, section 45B of the ITAA 1936 applies when:

(a)  there is a scheme under which a person is provided with a... capital benefit by a company; and

(b)  under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the ...capital benefit, obtains a tax benefit; and

(c)   having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit.

For section 45B of the ITAA 1936 to apply, each of the requirements set out in paragraphs (a) to (c) of subsection 45B(2) of the ITAA 1936 must be present.

Scheme

The Buy-Back constitutes a 'scheme' within the meaning given by subsection 995-1(1) of the ITAA 1997. participating shareholders were 'provided with a capital benefit' under the Buy-Back as share capital was distributed to participating shareholders under the Buy-Back (paragraph 45B(5)(b)). Therefore, paragraph 45B(2)(a) of the ITAA 1936 will be satisfied.

Tax Benefit

Pursuant to paragraph 45B(2)(b) of the ITAA 1936 and subsection 45B(9) of the ITAA 1936, a person will obtain a tax benefit under the Buy-Back if the amount of tax payable (or another amount payable under the Act) by the person in respect of the Buy-Back would be less than the amount of tax (or other amount) that would have been payable if the Capital Component of the Buy-Back Price were instead an assessable dividend.

The determination of whether a participating shareholder would obtain a tax benefit under the Company A Buy-Back depends on each participating shareholder's particular circumstances and needs to be considered on a case-by-case basis. Company A's shares are held by a wide variety of shareholders. As a result, it is likely that certain participating shareholders will obtain a tax benefit under the Buy-Back if the capital component were an (unfranked) dividend and therefore the paragraph 45B(2)(b) of the ITAA 1936 requirement may be satisfied.

Purpose

Paragraph 45B(2)(c) of the ITAA 1936 provides that it is necessary to have regard to the 'relevant circumstances' of the Buy-Back to determine whether Company A or a participating shareholder entered into or carried out the Buy-Back for a more than incidental purpose of enabling a participating shareholder to obtain a tax benefit.

The relevant circumstances to be considered are listed in subsection 45B(8) of the ITAA 1936 and include any of the matters listed in subsection 177D(2) of the ITAA 1936.

Having regard to the relevant circumstances of the Buy-Back, it is considered that neither Company A nor a participating shareholder entered into or carried out the Buy-Back for a more than incidental purpose of enabling a person to obtain a tax benefit. Correspondingly, the paragraph 45B(2)(c) of the ITAA 1936 requirement will not be satisfied in respect of the Buy-Back, and in turn, subsection 45B(2) will not apply to the Buy-Back. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that subsection 45C(1) of the ITAA 1936 applies to the whole, or a part, of the capital benefit provided under the Company A Buy-Back.

As the Commissioner will not make a determination that subsection 45C(1) of the ITAA 1936 applies, the Commissioner will not make a further determination under subsection 45C(3) of the ITAA 1936 in respect of any part of the capital benefit provided under the Company A Buy-Back.

Question 7

Summary

The Commissioner will not make a determination pursuant to paragraph 204-30(3)(a) of the ITAA 1997 that a specified franking debit arises in Company A's franking account in respect of the whole or part of the franked Dividend Component of the Buy-Back (noting that the Commissioner will make a determination under paragraph 177EA(5)(a) of the ITAA 1936 - see Question 8 below).

Detailed Reasoning

Section 204-30 of the ITAA 1997 gives the Commissioner the power to make a determination when distributions and other benefits are streamed. Subsection 204-30(1) of the ITAA 1997 states:

This section empowers the Commissioner to make determinations if an entity streams one or more distributions (or one or more distributions and the giving of other benefits), whether in a single franking period or in a number of franking periods, in such a way that:

(a) an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions; and

(b) the member would derive a greater benefit from franking credits than another member of the entity; and

(c) the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.

The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member.

If section 204-30 of the ITAA 1997 applies, the Commissioner may make a determination in writing:

(a)             that a specified franking debit arises in the franking account of the entity for a specified distribution or other benefit to a disadvantaged member (paragraph 204-30(3)(a) of the ITAA 1997)

(b)             that a specified exempting debit arises in the exempting account of the entity, for a specified *distribution or other benefit to a disadvantaged member (paragraph 204-30(3)(b) of the ITAA 1997)

(c)             that no imputation benefit is to arise in respect of a distribution that is made to a favoured member and specified in the determination (paragraph 204-30(3)(c) of the ITAA 1997).

For section 204-30 of the ITAA 1997 to apply, participating shareholders to whom distributions are streamed must derive a greater benefit from imputation benefits than non-participating shareholders. Subsection 204-30(8) of the ITAA 1997 provides that:

A *member of an entity *derives a greater benefit from franking credits than another member of the entity if any of the following circumstances exist in relation to the other member in the income year in which the distribution giving rise to the benefit is made, and not in relation to the first member:

(a)          the other members is a foreign resident;

(b)          the other members would not be entitled to any *tax offset under Division 207 because of the distribution;

(c)          the amount of the income tax that, apart from this Division, would be payable by the other members because of the distribution is less than the tax offset to which the other member would be entitled;

(d)          the other member is a *corporate tax entity at the time the distribution is made, but no *franking credit arises for the entity as a result of the distribution;

(e)          the other member is a *corporate tax entity at the time the distribution is made, but cannot use *franking credits received on the distribution to *frank distributions to its own members because:

(i)               it is not a *franking entity; or

(ii)              it is unable to make *frankable distributions;

(f)           the other member is an *exempting entity.

A key driver for an off-market share buy-back arrangement is the substantial discount to the market value of the shares to be bought back (which enables a company to buy-back shares in itself for a lesser amount than on-market). Prima facie, from the perspective of shareholders, selling shares through a buy-back at a discount to the market value would not be attractive when the shareholders could otherwise sell more profitably in cash terms on-market. However, a shareholder may be inclined to participate if the combined lower cash consideration and provision of imputation benefits gives a better outcome than the higher cash consideration from an on-market sale. Foreign resident shareholders however do not benefit from franking credits.

As set out in the Relevant Facts and Circumstances, XX% of Company A's shares were held by non-residents at the time of the Buy-Back, XX% of Company A shares were held by residents of countries with whom Australia has signed a Double Tax Agreement. Non-resident shareholders do not benefit from franking to the same extent as resident shareholders that are likely to participate in the Buy-Back. Non-resident shareholders, other than those in New Zealand, were not able to participate in the Buy-Back. Given the structural franking credit streaming incentive afforded by the Buy-Back for Australian resident shareholders, the Commissioner is of the view that an Australian resident shareholder would derive a greater benefit from franking credits than would foreign residents who hold membership interests (paragraph 204-30(8)(a) of the ITAA 1997). Therefore, the conditions in subsection 204-30(1) of the ITAA 1997 will be met and the Commissioner is empowered to make a determination (paragraph 204-30(1)(b) of the ITAA 1997).

Although, section 204-30 of the ITAA 1997 may apply to Company A in relation to the Buy-Back, the Commissioner will not make a determination pursuant to paragraph 204-30(3)(a) of the ITAA 1997 noting that the Commissioner, as set out in the Reasons for Question 8 below, will exercise his discretion under section 177EA to make a determination to debit the franking account balance of Company A under paragraph 177EA(5)(a) of the ITAA 1997.

Question 8

Summary

The Commissioner will exercise his discretion to make a determination pursuant to paragraph 177EA(5)(a) of the ITAA 1936, which the company will accept, that a franking debit arises in Company A's franking account in respect of the franked Dividend Component of the Buy-Back.

Detailed Reasoning

Section 177EA applies if a scheme involving a disposition of shares is entered into with a purpose of enabling the taxpayer to obtain franking credit benefits. In these circumstances, it enables the Commissioner to deny the franking credit benefits arising from the scheme or, if the company is a party to the scheme, to post a debit to the company's franking account.

Subsection 177EA(3) states that the section applies if:

(a) there is a scheme for disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and

(b) either:

(i) a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or

(ii) a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and

(c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and

(d) except for this section, the person (the relevant taxpayer) would receive, or could reasonably receive, imputation benefits as a result of the distribution; and

(e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

Where the provision applies, the Commissioner may make a determination that a debit arises in the franking account of the corporate tax entity which made the distribution pursuant to paragraph 177EA(5)(a) of the ITAA 1936. Alternatively, the Commissioner may make a determination that no imputation benefit arises for the relevant (recipient) taxpayer pursuant to paragraph 177EA(5)(b) of the ITAA 1936.

For section 177EA of the ITAA 1936 to apply, each of the five specific conditions set out in subsection 177EA(3) must be present. For the proposed Buy-Back, the conditions of paragraphs 177EA(3)(a) to (d) will be satisfied.

Paragraph 177EA(3)(e) of the ITAA 1936 requires a conclusion that Company A, its shareholders or any other relevant party entered into the Buy-Back with a more-than-incidental-purpose of enabling the participating shareholders (each a relevant taxpayer) to obtain an imputation benefit. In arriving at a conclusion as to purpose under paragraph 177EA(3)(e), the Commissioner must have regard to the relevant circumstances of the arrangement which are not exhaustively outlined in subsection 177EA(17) of the ITAA 1936. Having regard to all of the 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).

Therefore, the Commissioner will exercise his discretion to make a determination under paragraph 177EA(5)(a) of the ITAA 1936 to debit Company A's franking account, to compensate the revenue for avoided, wasted or streamed franked dividends in respect of the dividend component of the Buy-Back.

Question 9

Summary

The Commissioner will make a determination under paragraph 177EA(5)(a) of the ITAA 1936, which Company A will accept, that a franking debit arises in the franking account of Company A in respect of the franked dividends paid as part of the off-market share buy-back, calculated in accordance with the following formula:

Detailed Reasoning

As discussed in the Detailed Reasoning for Question 8 above, in view of the present circumstances of the Buy-Back, and recognising the acceptable level of discount applied in setting the Buy-Back Price, the Commissioner will exercise the discretion to make a determination to debit the franking account of Company A pursuant to paragraph 177EA(5)(a) of the ITAA 1936. The amount of the franking debit will be calculated as set out in the formula in paragraph 126 of PS LA 2007/9.