Edited version of private advice

Authorisation Number: 1052192576028

Date of advice: 18 December 2023

Ruling

Subject: Off-market share buy-back

Question 1

Will any part of the Proposed Buy-Back received by Australian resident shareholders satisfy the ordinary definition of 'dividend' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will any part of the Proposed Buy-Back paid be taken to be a dividend under section 159GZZZP of the ITAA 1936?

Answer

No.

Question 3

Will the Commissioner make a determination in relation to the Proposed Buy-Back under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies?

Answer

No.

Question 4

Will the Commissioner make a determination in relation to the Proposed Buy-Back under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies?

Answer

No.

Question 5

Will the Commissioner make a further written determination in relation to the Proposed Buy-Back under subsection 45C(3) of the ITAA 1936?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

Company A is incorporated in, and tax resident of, New Zealand.

Company A is a non-trading holding company and only has ordinary shares on issue. The majority of shareholders are New Zealand based with a minority being Australian based.

As a result of the Australian and New Zealand operations and shareholder base, Company A elected to maintain a franking account for both Australian and New Zealand tax purposes under the Trans-Tasman imputation special rules and is a NZ franking company for the purpose of this ruling.

The directors of Company A have identified that the group is excessively equity funded, relative to its operational requirements, and propose to undertake an off-market share buy-back (the Proposed Buy-Back) to set the group's debt-to-equity ratio at a more appropriate level.

The full amount of the proceeds paid in respect of the buy-back will be debited to Company A's share capital account and will be sourced from external debt.

Company A's share capital account (as defined in section 975-300 of the Income Tax Assessment Act 1997 (ITAA 1997) is not tainted (within the meaning of Division 197 of the ITAA 1997).

The directors of Company A anticipate the company will continue paying dividends following the share buy-back, in a manner consistent with the company's dividend paying practice.

On completing the Proposed Buy-Back, Company A will not make any further share issuances prior to 30 June XXXX, except where certain scenarios may arise.

Company A has not previously undertaken any share buy-back.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 paragraph 6(1)(a)

Income Tax Assessment Act 1936 paragraph 6(1)(d)

Income Tax Assessment Act 1936 subsection 6(4)

Income Tax Assessment Act 1936 section 45A

Income Tax Assessment Act 1936 subsection 45A(1)

Income Tax Assessment Act 1936 subsection 45A(2)

Income Tax Assessment Act 1936 paragraph 45A(3)(b)

Income Tax Assessment Act 1936 paragraph 45B(2)(a)

Income Tax Assessment Act 1936 paragraph 45B(2)(b)

Income Tax Assessment Act 1936 paragraph 45B(2)(c)

Income Tax Assessment Act 1936 subsection 45B(3)

Income Tax Assessment Act 1936 paragraph 45B(5)(b)

Income Tax Assessment Act 1936 subsection 45B(8)

Income Tax Assessment Act 1936 paragraph 45B(8)(a)

Income Tax Assessment Act 1936 paragraph 45B(8)(b)

Income Tax Assessment Act 1936 paragraph 45B(8)(c)

Income Tax Assessment Act 1936 paragraph 45B(8)(d)

Income Tax Assessment Act 1936 paragraph 45B(8)(e)

Income Tax Assessment Act 1936 paragraph 45B(8)(f)

Income Tax Assessment Act 1936 paragraph 45B(8)(h)

Income Tax Assessment Act 1936 paragraph 45B(8)(i)

Income Tax Assessment Act 1936 paragraph 45B(8)(j)

Income Tax Assessment Act 1936 paragraph 45B(8)(k)

Income Tax Assessment Act 1936 subsection 45B(9)

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1936 subsection 45C(3)

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 Part III Division 16K

Income Tax Assessment Act 1936 paragraph159GZZZK (a)

Income Tax Assessment Act 1936 paragraph159GZZZK (c)

Income Tax Assessment Act 1936 paragraph159GZZZK (d)

Income Tax Assessment Act 1936 section159GZZZP

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Division 115A

Income Tax Assessment Act 1997 Division 197

Income Tax Assessment Act 1997 subsection 202-45(e)

Income Tax Assessment Act 1997 section 220-30

Income Tax Assessment Act 1997 section 975-300

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Act 2007 (NZ) paragraph CD 22(3)(b).

Reasons for decision

Question 1

No part of the Proposed Buy-Back received by Australian resident shareholders satisfies the ordinary definition of 'dividend' in subsection 6(1) of the ITAA 1936.

Detailed reasoning

Subsection 6(1) of the ITAA 1936 provides the definition of a dividend includes:

(a) any distribution made by a company to any of its shareholders, whether in money or other property; and

...

but does not include:

(d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or ...

The Proposed Buy-Back will be a distribution of money to shareholders which satisfies paragraph 6(1)(a) of the ITAA 1936. However, paragraph 6(1)(d) excludes the distribution, subject to an exception in subsection 6(4), as this amount of money will be debited against an amount standing to the credit of the share capital account of Company A.

The term 'share capital account' is defined in section 975-300 of the ITAA 1997 broadly as an account which the company keeps of its share capital. Subsection 975-300(3) provides that an account is generally not taken to be a share capital account if it is tainted. Company A has confirmed that its share capital account is not tainted within the meaning of Division 197.

Subsection 6(4) of the ITAA 1936 provides that the exclusion in paragraph 6(1)(d) does not apply if:

... under an arrangement:

(a) a person pays or credits any money or gives property to the company and the company credits its share capital account with the amount of the money or the value of the property; and

(b) the company pays or credits any money, or distributes property to another person, and debits its share capital account with the amount of the money or the value of the property so paid, credited or distributed.

Company A has not previously undertaken any share buy-back, and there is no arrangement to which subsection 6(4) of the ITAA 1936 would apply. As such, paragraph (d) of the definition of dividend in subsection 6(1) applies and the consideration from the Proposed Buy-Back is not a dividend.

Question 2

No part of the Proposed Buy-Back will be taken to be a dividend under section 159GZZZP of the ITAA 1936.

Detailed reasoning

Where a company buys a share in itself from a shareholder, the purchase is a 'buy-back' under paragraph 159GZZZK(a) of the ITAA 1936..

A buy-back is 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 under paragraph 159GZZZK(c) of the ITAA 1936. A buy-back that is not an on-market purchase is an off-market purchase under paragraph 159GZZZK(d).

Given Company A is not a company listed on any stock exchange, the Proposed Buy-Back is an off-market purchase within the meaning given by paragraph 159GZZZK(d).

Section 159GZZZP of the ITAA 1936 applies to off-market purchases and treats the difference between the purchase price and that part of the purchase price (if any) which is debited against amounts standing to the credit of the company's share capital account as a dividend paid by the company to the shareholder out of the company profits on the day the buy-back occurs.

As the full purchase price will be debited against Company A's share capital account, no amount of the Proposed Buy-Back is taken to be a dividend.

Question 3

The Commissioner will not make a determination in relation to the Proposed Buy-Back under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies.

Detailed reasoning

Section 45A states:

(1)       This section applies in respect of a company that, whether in the same year of income or in different years of income, streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that:

(a)       The capital benefits are, or apart from this section would be, received by shareholders (the advantaged shareholders) who would, in the year of income in which the capital benefits are provided, derive a greater benefit from the capital benefits than other shareholders; and

(b)       It is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received, or will receive, dividends

A reference to the 'provision of a capital benefit to a shareholder in a company' is defined in paragraph 45A(3)(b) to include the distribution to shareholders of share capital.

Although a capital benefit will be provided to shareholders of Company A through the Proposed Buy-Back, there is no streaming of capital benefits as all shareholders have and will continue to participate in receiving dividends from Company A and will participate in the Proposed Buy-Back in proportion to their respective shareholding.

Accordingly, the Commissioner will not make a determination under subsection 45A(2) that section 45C applies in relation to the Proposed Buy-Back received by Australian resident shareholders.

Question 4

The Commissioner will not make a determination in relation to the Proposed Buy-Back under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies.

Detailed reasoning

Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends. Under subsection 45B(2), section 45B 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.

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

Under paragraph 45B(2)(b) and subsection 45B(9) of the ITAA 1936, a taxpayer will obtain a tax benefit under the Proposed Buy-Back if the amount of tax payable by the taxpayer in respect of the Proposed Buy-Back would be less than the amount of tax that would have been payable if the Proposed Buy-Back had instead been an assessable dividend.

While this determination can extend to an analysis on each Australian resident shareholder's particular circumstances the following is highlighted:

•         The Proposed Buy-Back would ordinarily be taxed under the capital gains provisions in Part 3-1 of the ITAA 1997. Shareholders may be eligible for the CGT discount under Division 115 of the ITAA 1997, which could reduce the assessable gain by up to 50%.

•         Where the Proposed Buy-Back was an assessable dividend, each shareholder would be assessed on an unfranked dividend. This is because the Proposed Buy-Back is debited to Company A's share capital account, which makes it an unfrankable distribution under subsection 202-45(e) of the ITAA 1997.

•         The potential preservation of franking credits by Company A for use in the future can itself mean that a tax benefit is obtained within the meaning of subsection 45B(9) of the ITAA 1936.

As such, paragraph 45B(2)(b) of the ITAA 1936 will be satisfied.

Paragraph 45B(2)(c) of the ITAA 1936 provides that it is necessary to have regard to the 'relevant circumstances' of the Proposed Buy-Back to determine whether Company A or the shareholders entered into or carried out the Proposed Buy-Back for a more than incidental purpose of enabling the shareholders to obtain a tax benefit. This purpose does not have to be the most influential or prevailing purpose but it must be more than an incidental purpose. The test is objective and based on the facts of each case.

The relevant circumstances to be considered include the non-exhaustive factors set out in subsection 45B(8) of the ITAA 1936 and include any of the matters listed in subsection 177D(2) of the ITAA 1936.

In this instance the offer to participate in the Proposed Buy-Back is to be made to all shareholders of Company A regardless of individual shareholder circumstances. As such, paragraphs 45B(8)(c) to 45B(8)(h) do not point towards or against a conclusion as to purpose. The circumstances covered by paragraphs 45B(8)(i) and 45B(8)(j) pertaining to the provision of ownership interests and demerger schemes respectively are also not relevant.

In this case, the relevant matters are those covered by the circumstances described in paragraphs 45B(8)(a), 45B(8)(b) and 45B(8)(k) which are considered in turn below:

•         The extent to which the capital benefit is attributable to profits of the company (paragraph 45B(8)(a)) - as a significant portion of the Proposed Buy-Back can be traced to (unrealised) profits of Company A, this circumstance points towards the requisite purpose.

•         The pattern of distributions of dividends and returns of capital by the company (paragraph 45B(8)(b)) - Company A has an established pattern of paying regular dividends since incorporation and will continue to do so after the Proposed Buy-Back and has not to date undertaken any return of capital. This circumstance does not point towards the requisite purpose.

•         Any of the matters referred to in subsection 177D(2) of the ITAA 1936 (paragraph 45B(8)(k)) - the matters referred to in these subparagraphs are matters of reference for 'the dominant purpose' test in Part IVA. However, in the context of section 45B they facilitate the 'more than incidental purpose test' and do not introduce a difference purpose test. They are matters by reference to which a return of capital is examined from a broad, practical perspective in order to identify and compare its tax and non-tax objectives.

In the present case the following factors demonstrate that in the context of the overall scheme, any purpose of obtaining an Australian tax benefit was no more than incidental.

­   Most Company A shareholders are New Zealand based, and it is the consequences to these shareholders that were of primary concern to Company A in structuring the transaction and in particular the provisions under New Zealand tax law.

­   Company A has established a pattern of regular dividend payments and will continue to pay dividends in line with historic levels and the established dividend payment policy.

­   Company A is of the view that the company had excess capital. After consideration, Company A's board decided that a share buy-back was the method that best met its objectives. This needs to be considered within the context of New Zealand's tax provisions.

­   All Company A's shareholders must participate in the buy-back.

On balance of the relevant circumstances to the Proposed Buy-Back, it is considered that neither Company A or its shareholders entered into or carried out the Proposed Buy-Back for a more than incidental purpose of enabling a taxpayer to obtain a tax benefit.

The requirement of paragraph 45B(2)(c) of the ITAA 1936 will not be satisfied in respect of the Proposed Buy-Back. The Commissioner will not make a determination under subsection 45B(3) that section 45C applies to treat the Proposed Buy-Back as an unfranked dividend.

Question 5

The Commissioner will not make a further written determination in relation to the Proposed Buy-Back under subsection 45C(3) of the ITAA 1936.

Detailed reasoning

Where the Commissioner has made a determination under section 45B in relation to a capital benefit, under subsection 45C(3) of the ITAA 1936 the Commissioner can also make a further written determination that the capital benefit was paid under a scheme to avoid franking debits arising in relation to the distribution.

As the Commissioner will not make a determination in relation to the Proposed Buy-Back under section 45B then subsection 45C(3) has no application.