Edited version of private advice

Authorisation Number: 1052308503279

Date of advice: 09 October 2024

Ruling

Subject: Off-market share buy-back

Question 1

Will the amount of the purchase price paid by Company A to a Selling Shareholder, under an off-market share buy-back made pursuant to the Company A Employee Ownership Plan, that is debited against Company A's share capital account be required to be included in the Annual Investment Income Report that Company A is required to lodge pursuant to section 393-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA), on the basis that the amount constitutes a return on a Company A's Share that is a "dividend" as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

No

Question 2

Will Company A be required to give a copy of the Commissioner's determination made under section 45A of the ITAA 1936 to affected shareholders under subsection 45D(1A) of the ITAA 1936?

Answer 2

No

Question 3

Will Company A be required to give a copy of the Commissioner's determination made under section 45B of the ITAA 1936 to affected shareholders under subsection 45D(1A) of the ITAA 1936?

Answer 3

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background

1.            Company A is the ultimate parent company of several Australian and non-Australian companies operating an international professional services business. (the Company A Group).

2.            Company A is an entity incorporated in and solely a tax resident of Australia.

3.            Company A is the head company of a tax consolidated group.

4.            Company A is an Australian public company for corporate law purposes pursuant to section 163 of the Corporations Act 2001 (Corporations Act) and is not listed on any stock exchange.

5.            Company A is not a "listed public company" within the meaning of the definition for that term contained in section 995-1 of the Income Tax Assessment Act 1997.

6.            Company A is a solely employee-owned business and has been employee-owned throughout its history, with no public shareholding or external shareholders.

7.            The Company A Group employs in excess of XX people globally, in a number of offices.

8.            As at 30 June 20XX, there were in excess of XX ordinary shares of Company A (Company A Shares) on issue, held by approximately XX Shareholders (individuals and other entities).

9.            No individual shareholder holds more than XX% of the total Company A Shares on issue.

10.         Australian resident shareholders hold approximately XX% of the Company A Shares on issue.

11.         Shareholders of Company A Shares include individuals and entities related to the relevant employees, including trusts, self-managed superannuation funds (SMSFs) and companies.

12.         On a bi-annual basis the Company A Board (Board) engages an external valuer to provide advice on the market value of Company A Shares for the purpose of operating the Company A Employee Ownership Plan (the Plan). The most recent market value as at XX October 20XX was $X per Company A Share.

13.         As a global employee-owned business and as part of the Group's ordinary practice, the Plan is a central feature in Company A's unique inter-generational ownership profile and culture. It provides employees with a long-term ownership interest in the business, for as long as they remain employees of the Company A Group.

14.         The Company A Group has a history of distributing approximately XX% of its annual after-tax profits by way of dividends paid on a quarterly basis with the remaining amount retained in the business for debt reduction, business growth and working capital requirements.

15.         Each quarterly dividend paid by Company A on Company A Shares since XX July 20XX has been XX% franked.

16.         It is expected, subject to the history of profitability of Company A continuing, that the after-tax profit payout ratio, payment frequency and (subject to the future availability of franking credits) the fully-franked nature of dividends paid on Company A Shares will continue throughout the period 1 July 20XX to 30 June 20XX.

Participation in the plan and the issue of Company A shares:

17.         The Board sets the strategy of employee ownership having regard to experience and diversity, intergenerational shareholder shifts to enhance talent and ownership through new shareholders and requirements for certain employee designations to have increased ownership in Company A. While business managers are responsible for recommending the targeted employee participation for their region or business division in line with the defined strategy, the share offer proposals are discussed with the Chair on behalf of the Board and approved by the Board.

18.         As part of the annual budget process, the Board will consider the appropriate number of Company A Shares which should be on issue, taking into account the projected revenue and profit growth and the strategic targets of the Company A Group.

19.         In each financial year, there are typically two share offer periods with the share acquisitions occurring in October and April (a Share Acquisition Month).

20.         In determining the number of shares available for issue to each region or business division for a Share Acquisition Month, the Board balances the number of shares currently on issue, the number of employees in the region or business division, the performance and profits made in the region or business division and the capital requirements of the Company A Group.

21.         Selected employees are then invited to apply to purchase shares up to the approved specified maximum number. However, there is no requirement that selected employees must participate in the Plan and Company A has no certainty that any particular employee will apply to purchase shares. Historically, the share offers have had an acceptance rate of approximately XX%.

22.         Where an employee is invited to participate and chooses to apply to purchase shares (Acquiring Shareholders), the shares may be acquired by the employee directly or via a related entity such as a family trust, SMSF or company. Company A Shares acquired under the Plan are acquired by way of Acquiring Shareholders subscribing for additional shares issued by Company A.

23.         The shares are offered at market value and no financial support is provided by Company A to an Acquiring Shareholder. Acquiring Shareholders are required to source their own funds for the acquisitions.

Circumstances when shareholders dispose of their Company A shares:

24.         The Company A Constitution permits only employees to hold Company A Shares. When a shareholder ceases to be an employee, the Board will direct the shareholder to sell their Company A Shares.

25.         The Company A Constitution provides that the Board "may at any time by written notice require the holder of any share or shares in the Company to sell or transfer to such person or persons, whether a member or not, as the directors may select, some or all of the shares held by the holder". The Board ordinarily only requires a Company A shareholder to sell their Company A Shares in limited circumstances.

26.         Company A shareholders can also request to their Company A shares brough-back under the Plan. These requests are generally acceded to where a shareholder's personal circumstances have changed, such as financial hardship or a permanent relocation to another country.

27.         These are the only instances when a Company A shareholder disposes of their Company A shares (Selling Shareholder)

Disposal via the proposed share buy-back mechanism:

28.         Where the Board requires or approves the disposal of Company A Shares by a Company A shareholder, the disposal will occur by way of Company A undertaking a share buy-back of the relevant shares and, subsequently, cancelling the shares that have been bought back in accordance with the Corporations Act (Proposed Share Buy-back Mechanism).

29.         Each share buy-back will be funded from Company A's existing cash reserves and will occur approximately once a month (given that shareholders retire or resign throughout any particular year).

30.         Each share buy-back will be undertaken at market value and the entire purchase price will be debited solely against the amount standing to the credit of Company A's share capital account.

31.         Each shareholder who participates in a share buy-back under the Proposed Share Buy-back Mechanism will receive capital proceeds. Any shareholder who does not have shares bought-back will not be compensated by way of dividends or otherwise.

32.         Each share buy-back will be bespoke to the relevant individual employee. None of the buy-backs will be dependent on any other buy-back or share subscription and none of the share subscriptions will be dependent upon any other share subscription or any share buy-back.

33.         Both resident and non-resident shareholders in Company A will dispose of Company A Shares under the Proposed Share Buy-back Mechanism.

34.         The Proposed Share Buy-back Mechanism will be the only mechanism for future sales of Company A Shares.

Share capital account:

35.         Company A's share capital account has had no journal entries posted to it other than those which pertain to dealings in Company A's share capital. This means that Company A's share capital account (as defined in section 975-300 of the ITAA 1997) is not tainted within the meaning of Division 197 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

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

Income Tax Assessment Act 1936 subsection 6(4)

Income Tax Assessment Act 1936 paragraph 6(4)(a)

Income Tax Assessment Act 1936 paragraph 6(4)(b)

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1936 section 45A

Income Tax Assessment Act 1936 subsection 45A(1)

Income Tax Assessment Act 1936 paragraph 45A(1)(a)

Income Tax Assessment Act 1936 subsection 45A(2)

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

Income Tax Assessment Act 1936 subsection 45A(4)

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 paragraph 45B(1)(b)

Income Tax Assessment Act 1936 subsection 45B(2)

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

Income Tax Assessment Act 1936 subsection 45B(3)

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

Income Tax Assessment Act 1936 subsection 45B(5)

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)(k)

Income Tax Assessment Act 1936 subsection 45B(9)

Income Tax Assessment Act 1936 subsection 45B(10)

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1936 subsection 45C(1)

Income Tax Assessment Act 1936 subsection 45D(1A)

Income Tax Assessment Act 1936 Division 16K

Income Tax Assessment Act 1936 paragraph 159GZZZK(d)

Income Tax Assessment Act 1936 section 159GZZZP

Income Tax Assessment Act 1936 subsection 159GZZZP(1)

Income Tax Assessment Act 1936 subsection 159GZZZP(2)

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 paragraph177D(2)(a)

Income Tax Assessment Act 1936 paragraph177D(2)(b)

Income Tax Assessment Act 1936 paragraph177D(2)(c)

Income Tax Assessment Act 1936 paragraph177D(2)(d)

Income Tax Assessment Act 1936 paragraph177D(2)(e)

Income Tax Assessment Act 1936 paragraph 177D(2)(f)

Income Tax Assessment Act 1936 paragraph177D(2)(g)

Income Tax Assessment Act 1936 paragraph177D(2)(h)

Income Tax Assessment Act 1936section 202D

Income Tax Assessment Act 1936subsection 202D(1)

Income Tax Assessment Act 1997 section 104-135

Income Tax Assessment Act 1997 subsection 104-135(3)

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

Income Tax Assessment Act 1997 subsection 995-1(2)

Taxation Administration Act 1953 section 393-10

Taxation Administration Act 1953 subsection 393-10(1)

Reasons for decision

Question 1

Summary

Company A will not be required to include in its Annual Investment Income Report (AIIR) the amount of the buy-back price paid by Company A to a Selling Shareholder that is debited against Company A's share capital account, under an off-market share buy-back made pursuant to the Company A Employee Ownership Plan, on the basis that the amount is not a "dividend" as defined in subsection 6(1).

Detailed reasoning

AIIR

Subsection 393-10(1) in Schedule 1 to the TAA provides that an entity must give the Commissioner an annual financial year report[1] on all investments of a kind mentioned in section 202D in relation to which it was an investment body at any time during the year.

As Company A Shares are shares in a public company, Company A is an investment body in relation to those shares.[2] Further, as Company A is expected to pay quarterly dividends on Company A Shares throughout the period 1 July 20XX to 30 June 20XX, it is expected to be required to lodge an AIIR for each of those financial years.

Company A expects to buy-back Company A Shares from Selling Shareholders approximately once a month throughout the period 1 July 20XX to 30 June 20XX under the Proposed Share Buy-back Mechanism.

Company A intends to debit the entire purchase price of a Company A Share brought-back solely against the amount standing to the credit of its share capital account.

If any amount of the purchase price paid were to satisfy the definition of a dividend in subsection 6(1), Company A would be required to include the amount of the dividend paid to a Selling Shareholder in its AIIR on the basis that the dividend amount would represent investment income paid on the Company A Share brought-back.

Dividend

The term 'dividend' is defined in subsection 6(1) to include:

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

(b) any amount credited by a company to any of its shareholders as shareholders;

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

Importantly, the note to the definition provides a signpost to subsection 6(4). It states that "Subsection (4) sets out when paragraph (d) of this definition does not apply."

Subsection 6(4)

Subsection 6(4) states that the paragraph (d) definition of dividend in subsection (1) 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.

Subsection 6(4) can therefore operate to 'reverse' the effect of the paragraph (d) exclusion in subsection 6(1) such that an amount that would be taken to not be a dividend is treated as a dividend. The reversal takes place if under an arrangement:

•                     a company credits its share capital account by an amount that was paid, credited or given by way of property by a person, and

•                     the company debits its share capital account by an amount of money or value that it pays, credits or distributes to another person.

The purpose of the arrangement, or of any person entering into or carrying out any part of the arrangement, is not relevant under subsection 6(4).

Arrangement

The term 'arrangement' in subsection 6(4) takes its ordinary meaning.[3]

The Macquarie Concise Dictionary (2nd ed., 1988) defines:

•                     'arrangement' as

1. the act of arranging.

2. the state of being arranged.

3. the manner in which things are arranged.

•                     'arrange' (and its inflected forms of 'arranged' and 'arranging') as

1. to place in proper, desired, or convenient order; adjust properly.

2. to come to an agreement or understanding regarding.

3. to prepare or plan.

In Bell v FCT (1953) 87 CLR 548 at 573 (Bell), in the context of section 260 which referred to "Every contract, agreement, or arrangement ...", the High Court unanimously stated:

... the word [arrangement] extends beyond contracts and agreements so as to embrace all kinds of concerted action by which persons may arrange their affairs for a particular purpose or so as to produce a particular effect.

While the interpretation that an arrangement is different from a contract and agreement was influenced by the specific wording of section 260, the remainder of the passage in Bell is relevant to the ordinary meaning of an arrangement - "all kinds of concerted action by which persons may arrange their affairs" to achieve something.

The ordinary meaning of an arrangement (including for the purposes of subsection 6(4)) would encompass a contract or agreement.

In FCT v Lutovi Investments Pty Ltd (1978) 140 CLR 434, the High Court considered subsection 44(2D), paragraph (b) of which stated "the share was issued in pursuance of, or as part of, an agreement or arrangement, whether oral or in writing and whether entered into before or after the commencement of this sub-section, that had the purpose, or purposes that included the purpose, of ..."

Gibbs and Mason JJ (with whom Murphy J agreed, forming the 3:2 majority) stated at 444:

In the context of sec. 260 an arrangement is something less than a binding contract or agreement, something in the nature of an understanding which may not be enforceable at law (Newton v. F.C. of T., at p. 7). A similar view has been taken of an arrangement falling within sec. 80B(5) (see K. Porter & Co. Pty. Ltd. v. F.C. of T., 74 ATC 4093, at p. 4100; (1974) 1 N.S.W.L.R. 536, at pp. 542-544; 77 ATC 4472; (1978) 52 A.L.J.R. 41; F.C. of T. v. Students World (Australia) Pty. Ltd. 78 ATC 4040; (1978) 52 A.L.J.R. 298). It is, however, necessary that an arrangement should be consensual, and that there should be some adoption of it. But in our view it is not essential that the parties are committed to it or are bound to support it. An arrangement may be informal as well as unenforceable and the parties may be free to withdraw from it or to act inconsistently with it, notwithstanding their adoption of it.

Therefore, for the purposes of subsection 6(4), an arrangement consists of:

•                     the acts, transactions or events which happen or are proposed to happen, and under which the conditions in paragraph 6(4)(a) and paragraph 6(4)(b) are satisfied; and

•                     the documents (whether or not they are legally enforceable) which specify a plan, expectations, intentions, rights and/or obligations pursuant to which those acts, transactions or events happen or are proposed to happen.

There is no statutory basis for confining an 'arrangement' to a single legally enforceable document. Such a narrow interpretation of 'arrangement' would almost guarantee that key acts, events, rights and obligations are overlooked even though they form part of an integrated and pre-ordained plan.

An 'arrangement' will definitely consist of things that actually happen which satisfy paragraphs 6(4)(a) and 6(4)(b) if they were intended to happen. An 'arrangement' suggests something planned and co-ordinated.

Acts, transactions or events which happen coincidentally or fortuitously are unlikely to constitute an 'arrangement'. Mere temporal proximity is not sufficient.

For example, if a company undertakes a reduction of share capital and a few days or weeks before or after that event, there is a vesting of the interests of certain employees under an employee share scheme (resulting in the company issuing new shares for which those employees pay the company money), that combination of events would not constitute an 'arrangement'. The employee share scheme is a separate arrangement from the reduction of share capital. The employee share scheme has written terms that are unrelated to the reduction of share capital (even if the terms accommodate the possibility of a reduction of share capital, for example by reducing the issue price of shares). The employee share scheme was created before, and will continue to exist after, the reduction of share capital.

The ordinary meaning of an arrangement encompasses something unilateral, involving the acts of only one person. However, in the specific context of subsection 6(4):

•                     the reference to a company crediting and debiting its share capital account implies that the company must be a party to, and participant in, an 'arrangement' to which subsection 6(4) applies, and

•                     there must also be at least two separate persons participating in an 'arrangement' to which subsection 6(4) applies - one person who gives money or property to the company and one person who receives money or property from the company.

There is no temporal element to an 'arrangement' under subsection 6(4). The arrangement can stretch over any period of time. What matters is that "under an arrangement" the conditions in paragraph 6(4)(a) and paragraph 6(4)(b) are satisfied.

In this case, the Constitution of Company A and the Company A Employee Ownership Plan Rules collectively establish the terms upon which new shares will be issued by Company A and existing shares will be bought back by Company A. We consider that these documents collectively establish an arrangement for the purposes of subsection 6(4).

Pay money to the company which is credited to the share capital account

Acquiring Shareholders who are invited to initially subscribe for shares in Company A, or who are existing Company A shareholders and are invited to subscribe for further shares in Company A, will satisfy paragraph 6(4)(a).

The company pays money to shareholders and debits the share capital account

Selling Shareholders who have their shares bought back by Company A (having first been required or permitted by the directors of Company A to offer their shares for participation in the buy-back) will satisfy paragraph 6(4)(b).

These persons will always be different to the person or persons who subscribe for shares in Company A under paragraph 6(4)(a).

The effect of subsection 6(4) applying is that a distribution of money by a company is not excluded from being a 'dividend' (as defined in paragraph 6(1)(d)) even though that amount was debited to the share capital account of the company.

In relation to the Proposed Share Buy-back Mechanism, the effect of subsection 6(4) applying would result in amounts paid to Selling Shareholders being treated as the receipt of a dividend for those shareholders for income tax purposes.

Interaction of subsection 6(4) with Division 16K

Section 159GZZZP applies to an 'off-market purchase' (as defined in paragraph 159GZZZK(d)) of shares. Subsection 159GZZZP(1) specifies how to calculate the dividend component of the purchase price:

For the purposes of this Act, but subject to subsection (1A), where a buy-back of a share or non-share equity interest 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 Selling Shareholder as a shareholder in the company; and

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

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

Subsection 159GZZZP(2) states:

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

Read in isolation, subsection 159GZZZP(2) supports the view that section 159GZZZP establishes what amount (if any) is a dividend as a result of an off-market purchase of shares, and no other provision (including subsection 6(4)) can apply to cause an amount to be a dividend under an off-market purchase of shares.

On this view, section 159GZZZP exclusively governs the calculation of the dividend and non-dividend components of the purchase price of shares under an off-market purchase. The words "for the purposes of this Act" used at the beginning of subsection 159GZZZP(1) and the end of subsection 159GZZZP(2) support the view that section 159GZZZP is an exclusively code.

However, as the High Court has repeatedly said, no statutory provision should be read in isolation. It is essential to consider the context (including other relevant statutory provisions), the history and the purpose of statutory provisions (for example, Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-2; [1998] HCA 28 at [69] - [70]; FCT v Consolidated Media Holdings Limited (2012) 250 CLR 503 at 519; [2012] HCA 55 at [39]; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27 at 46-47; [2009] HCA 41 at [47]).

The High Court has also stated that considering the context and purpose of a statutory provision is not an afterthought. It should be done from the beginning of the interpretative exercise. In SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362 at 368; [2017] HCA 34 at [14], the majority judgment stated:

The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.

In considering and applying those authorities, the Commissioner considers that section 159GZZZP, in prescribing definitively the dividend component of a buy-back price, is more specific than, and therefore prevails over, subsection 6(4). The following matters were persuasive in forming our view:

Section 159GZZZP in Division 16K is more specific than the subsection 6(1) definition of 'dividend' as modified by subsection 6(4)

The maxim generalia specialibus non derogant means that a specific provision prevails over a general provision.

The maxim "applies only where there are two inconsistent provisions which cannot be reconciled as a matter of ordinary interpretation" (the majority judgment of the High Court in Purcell v Electricity Commission of NSW (1985)59 ALJR 689 at 692; 60 ALR 652 at 657 [16]). It is considered there is such an inconsistency in this matter.

We consider that section 159GZZZP in Division 16K is more specific than subsection 6(4).

Subsection 159GZZZP(2) is part of Division 16K which comprehensively deals with off-market share buy-backs (conducted by companies that are not listed public companies) whereas subsection 6(4) applies in respect of a variety of arrangements where amounts credited to a share capital account are distributed to shareholders, e.g. a return of capital payment or a share cancellation transaction.

Division 16K is and was introduced as a code for the income tax treatment of off-market share buy-backs and sets out specific income tax treatment provisions. Section 159GZZZP is straightforward and specific in its operation by treating amounts as dividends where those amounts are not debited to the company's share capital account. Subsection 159GZZZP(2) then specifically applies to 'the remainder', to treat that amount debited to the share capital account to not be a dividend.

In contrast, subsection 6(4) is contained in the definition section of the ITAA 1936 and modifies an exception to the general definition of a dividend.

Therefore, on a plain reading, subsection 159GZZZP(2) is more specific than subsection 6(4). While subsection 6(4) might contain more elements to it, and in that sense be said to be more specific, the fact that subsection 6(4) may apply where share capital is provided to a second group of shareholders in other ways is persuasive.[4]

Additionally, the definitions in subsection 6(1) apply and open with 'In this Act, unless a contrary intention appears:'. Division 16K may be seen as this contrary intention.

Section 159GZZZP in Division 16K also applies 'for the purposes of this Act' ('this Act' itself a defined term but relevantly includes the ITAA 1936 and ITAA 1997, and relevant parts of the TAA).

Division 16K also includes provisions addressing its interaction with other provisions of income tax legislation such as CGT, including modifying the CGT anti-overlap rule. It was open to Parliament to introduce a provision in Division 16K which gives priority to the definition of dividend in section 6 if the intention was for the modification in subsection 6(4) to override the operation of section 159GZZZP.

Division 16K was introduced after subsection 6(4) (and the modification to subsection 6(4) in 1998 does not relevantly alter this)

In Pearce and Geddes' Statutory Interpretation in Australia (9^th ed., 2019), it is stated at [7.23] that where a specific provision is enacted after a general provision, the enactment of the specific provision causes an implied repeal of the relevant part of the general provison.

Division 16K was introduced in 1990 after subsection 6(4) was introduced in 1967 and the modification to subsection 6(4) in 1998 does not relevantly alter this.

The amendments to subsection 6(4) in 1998 enabled its continued operation following the abolition of par value and the introduction of share capital account concepts in 1998. These amendments did not refresh the policy intent of subsection 6(4) but rather maintained its policy intent. There is no suggestion in the text of the provision, the relevant Explanatory Memorandum or elsewhere that the mischief to which subsection 6(4) is directed is any different from that which led to the inclusion of the provision in 1967.

It is also noted that section 159GZZZP and other provisions in Division 16K were similarly amended for the abolition of par value and the introduction of share capital account concepts in 1998.

We also consider that the purposes of the ITAA 1936 are best served by giving the provisions in Division 16K primacy in regard to the tax treatment for shareholders who participate in an off-market share buy-back over distribution treatment (and unmodified CGT treatment). Further, adopting this view does not render subsection 6(4) superfluous, as subsection 6(4) can continues to apply where a share buy-back is not involved.

Conclusion

While subsection 6(4) is capable of application in regard to the Proposed Share Buy-back Mechanism, subsection 159GZZZP(2) applies in priority over subsection 6(4).

Accordingly, that part of the purchase price paid by Company A to a shareholder in Company A, under an off-market share buy-back made pursuant to the Company A Employee Ownership Plan, that is debited against Company A's share capital account, will not constitute a dividend.

For Company A, because the entirety of the buy-back price will be debited against Company A's share capital account, Company A will not be required to include any amounts paid by Company A to a Selling Shareholder under the Proposed Share Buy-back Mechanism in its AIIR, on the basis that no amount of the buy-back price will be a dividend for income tax purposes.

Question 2

Summary

The Commissioner will not make a determination under subsection 45A(2) that section 45C applies in relation to Selling Shareholders who dispose of their shares to Company A via the Proposed Share Buy-back Mechanism.

Accordingly, Company A will not be required to provide a copy of a notice under subsection 45D(1A) as a determination under subsection 45A(2) will not be made.

Detailed reasoning

Section 45A

Subsection 45A(1) states:

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 a distribution of share capital to shareholders.

Under subsection 45A(2), the Commissioner may make, in writing, a determination that section 45C applies in relation to the whole, or a part, of the capital benefits.

Subsection 45C(1) provides that, if the Commissioner makes a determination under subsection 45A(2), that the amount of the capital benefit, or part of the benefit is taken to be an unfranked dividend paid by the company for income tax purposes.

Subsection 45D(1A) also states that a company must, in the case of a determination under section 45A, give a copy of the notice to the advantaged shareholder referred to in section 45A.

Provision of a capital benefit

In the context of section 45A, streaming means that capital benefits are provided to some shareholders of a company and it is reasonable to assume that all other shareholders of the company will receive dividends. The type of streaming is defined in subsection 45A(1) by the word "streams" being followed by the identification of the two relevant attributes and then the expression "in such a way that" after which the precise events that must happen to the two attributes are specified.

The circumstances in which a shareholder would derive a 'greater benefit' from capital benefits than another shareholder include, but are not limited to, the circumstances in subsection 45A(4).

Deriving a greater benefit

Subsection 45A(4) states:

The circumstances in which a shareholder would, in a year of income, derive a greater benefit from capital benefits than another shareholder include, but are not limited to, any of the following circumstances existing in relation to the first shareholder and not in relation to the other shareholder:

(a)          some or all of the shares in the company held by the shareholder were acquired, or are taken to have been acquired, before XX September 19XX;

(b)          the shareholder is a non-resident;

(c)           the cost base (for the purposes of Part IIIA ) of the relevant share is not substantially less than the value of the applicable capital benefit;\

(d)          the shareholder has a net capital loss for the year of income in which this capital benefit is provided;

(e)          the shareholder is a private company who would not have been entitled to a rebate under former section 46F if the shareholder had received the dividend that was paid to the disadvantaged shareholder;

(f)            the shareholder has income tax losses.

Although a capital benefit will be provided to Selling Shareholders via the Proposed Share Buy-back Mechanism, we have concluded, after considering the 6 separate tax attributes listed in subsection 45A(4), that Selling Shareholders would not necessarily derive a greater benefit from the provision of a capital benefit than other Company A shareholders that continue to hold and receive dividends on their Company A shares. That is, selling shareholders are not 'advantaged shareholders', as defined in paragraph 45A(1)(a).

The following facts and circumstances informed the Commissioner's decision:

•                     The commercial context of the buy-back (i.e. transfer of employee ownership pursuant to the Plan).

•                     All Company A Shareholders hold post-CGT shares.

•                     Acquiring Shareholders are offered Company A Shares in accordance with Company A's intergenerational shareholder strategy. These employees are predominately resident employees of Company A who are likely to be high performing salary and wage earners.

•                     The share price for Company A Shares has increased by XX% in X years. Further, the intergenerational shareholder strategy is likely to result in Company A Shareholders holding their shares for many years.

o        This indicates that the cost base of Company A Shares is likely to be substantially less than buy-back price paid under the Proposed Share Buy-back Mechanism.

o        This indicates that resident Selling Shareholders will realise a not insignificant capital gain on disposal of their Company A Shares (mitigated somewhat by the possibility of CGT discounts).

•                     That other tax attributes, such as whether a Selling Shareholder has net capital losses or tax losses, are unlikely to be known by Company A when a Selling Shareholder sells their Company A Shares (i.e. Company A will not be informed of which shareholders are likely to be advantaged by disposing of their Company A Shares.

•                     The Proposed Share Buy-back Mechanism may apply to non-resident employee shareholders, although as non-residents currently hold around XX% of Company A Shares this is not considered to be a material factor.

•                     It is noted that under the Plan the Board, in conjunction with Management, have a seemingly unfettered discretion to initiate a buy-back requiring a shareholder to sell their shares.

o        Arguably, this could provide the Board with a broad power that could be exercised to stream capital benefits to advantaged shareholders. That is, capital benefits are received by some selected shareholders and it is reasonable to assume that other shareholders will receive dividends (especially considering Company A's historical dividend payout ratio of roughly XX% of profits).

o        Therefore, while this discretion indicates section 45A could apply in theory, the Commissioner considers it is unlikely to practically occur, as streaming is dependent on specific shareholder attributes (such as location, discount entitlements etc.) which the Board is unlikely to have considered given the stated commercial considerations they take into account in approving a buy-back.

Overall, it is not apparent or obvious that an intended differentiation exists that objectively separates shareholders into advantaged shareholders (that participate) and disadvantaged shareholders (that otherwise receive dividends) by reference to the Plan.

Therefore, the Commissioner will not make a determination under subsection 45A(2) that section 45C applies in relation to Selling Shareholders who dispose of their shares to Company A under the Proposed Share Buy-back Mechanism.

Question 3

Summary

The Commissioner will not make a determination under subsection 45B(3) that section 45C applies in relation to Selling Shareholders who dispose of their shares to Company A via the Proposed Share Buy-back Mechanism.

Accordingly, Company A will not be required to provide a copy of a notice under subsection 45D(1A) as a determination under subsection 45B(3) will not be made.

Detailed reasoning

The purpose of section 45B is to ensure that relevant amounts are treated as dividends for taxation purposes if certain payments, allocations and distributions are made in substitution for dividends (paragraph 45B(1)(b)).

Subsection 45B(2) states:

This section applies if:

(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.

Under paragraph 45B(3)(b), the Commissioner may make, in writing, a determination that section 45C applies in relation to the whole, or a part, of the capital benefit.

Subsection 45C(1) provides that, if the Commissioner makes a determination under subsection 45B(3), that the amount of the capital benefit, or part of the benefit is taken to be an unfranked dividend paid by the company for income tax purposes.

Subsection 45D(1A) also states that a company must, in the case of a determination under section 45B, give a copy of the notice to the relevant taxpayer referred to in section 45B.

Scheme

Subsection 45B(10) states that 'scheme' in section 45B has the meaning given by subsection 995-1(1) of the ITAA 1997. A 'scheme' is defined in subsection 995-1(1) of the ITAA 1997 to mean:

(a) any arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct whether unilateral or otherwise.

An 'arrangement' is defined in subsection 995-1(1) of the ITAA 1997 as "any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings."

The Proposed Share Buy-back Mechanism constitutes a scheme for the purposes of section 45B.

Provided with a capital benefit

Subsection 45B(5) defines when a person is 'provided with a capital benefit' which includes a distribution of share capital (paragraph 45B(5)(b)).

Any amount debited to Company A's share capital account under the Proposed Share Buy-back Mechanism constitutes a distribution to a Selling Shareholder of share capital under paragraph 45B(5)(b).

Tax benefit

Pursuant to subsection 45B(9), a 'tax benefit' will be obtained from a capital benefit if the amount of tax payable by the relevant taxpayer would, apart from section 45B, be less than the amount that would have been payable if the capital benefit had been a dividend.

A relevant taxpayer obtains a tax benefit if they have a reduced liability to income tax and/or dividend withholding tax as compared to what would have been their tax liability if the capital benefit had been an assessable dividend.

Each relevant taxpayer will be a Selling Shareholder who disposes of their Company A Shares to Company A pursuant to the Proposed Share Buy-back Mechanism.

CGT event G1 in section 104-135 of the ITAA 1997 happens when a company makes a non-assessable payment to a shareholder of a company in respect of their shares.

A shareholder makes a capital gain from CGT event G1 where the non-assessable payment exceeds the cost base of the share (subsection 104-135(3)).

Where the non-assessable payment does not exceed the cost base of the share, the cost base of the share will be reduced by the amount of the non-assessable payment but the shareholder will not make a capital gain or derive any other type of assessable income.

If the capital benefit had been an assessable dividend, it would have been assessable income under subsection 44(1) of the ITAA 1936 and income tax would generally be payable on it.

As the amount of tax payable by at least some Selling Shareholders would be less than the amount of tax that would have been payable if the capital benefit had been an assessable dividend, those shareholders will obtain a tax benefit for the purposes of subsection 45B(9).

A more than incidental purpose of obtaining a tax benefit?

Paragraph 45B(2)(c) prescribes that the 'relevant circumstances' of the scheme as set out in 45B(8) are considered to form a conclusion as to whether or not any person who entered into or carried out any part of the scheme did so for a more than incidental purpose of enabling a relevant taxpayer to obtain a tax benefit.

The purpose does not have to be the most influential or prevailing purpose, but it must be more than an incidental purpose.

There is no case law on the meaning of 'incidental purpose' for the purpose of s 45B. The phrase has, however, been considered by the High Court in Mills v FCT (2012) 250 CLR 171; [2012] HCA 51 in the context of section 177EA (Mills). While some caution must be exercised in applying Mills to section 45B, it is considered the definition of 'incidental purpose' in Mills is a useful guide to its meaning in paragraph 45B(2)(c), partly because the Explanatory Memorandum explanations of the meaning of incidental in sections 45B and 177EA are identical[5].

According to the EM to Taxation Laws Amendment (Company Law Review) Bill 1998:

1.31 New section 45B requires a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit. The words in parentheses are inserted for more abundant caution; a reference to a purpose of a scheme is usually understood to include any main or substantial purpose of the scheme, and the words in parentheses clarify that this is the intended meaning here. Thus while new section 45B does not require the purpose of obtaining a tax benefit to be the ruling, most influential or prevailing purpose, neither does it include any purpose which is not a significant purpose of the scheme.

1.32 A purpose is an incidental purpose when it occurs fortuitously or in subordinate conjunction with one of the main or substantial purposes of the scheme, or merely follows that purpose as its natural incident.

According to Mills:

•                     at [64], 'a purpose of a person, in entering into or carrying out the scheme for the disposition of equity interests, of enabling a holder to obtain a franking credit is "an incidental purpose" ... if that purpose does no more than further some other purpose or follow from some other purpose.'

•                     at [66], 'that a purpose can be incidental even where it is central to the design of a scheme if that design is directed to the achievement of another purpose. Indeed, the centrality of a purpose to the design of a scheme directed to the achievement of another purpose may be the very thing that gives it a quality of subsidiarity and therefore incidentally.'

Relevant circumstances, including those listed in s 45B(8)

The weight to be given to any of the circumstances in each case varies according to the extent to which that circumstance is probative of non-incidental purpose. (Mills at [47])

Paragraph 45B(8)(a) - the extent to which the capital benefit is attributable to capital or profits (realised and unrealised).

Company A Group had substantial consolidated retained earnings as at XX June 20XX.

In providing more information about the quantum, location and likelihood of distribution of Company A Group retained earnings, Company A indicated that:

•                     the consolidated balance includes the retained earnings of Company A US and Company A Canada as well as the retained earnings of a number of operating subsidiaries,

•                     the retained earnings of these subsidiaries are not ordinarily available for distribution by Company A because paying out these retained earnings would weaken the balance sheets of these operating entities,

•                     as the customers of Company A regularly assess the financial statements of the Company A operating subsidiary they are engaging, that those financial statements disclose a robust financial position, and

•                     in the case of the Company A US and Company A Canada, these entities also pay quarterly dividends to holders different classes of shares. Accordingly, the profits of the US and Canadian subsidiaries are required to support these dividend payments.

The amount of Company A Group retained earnings realistically available for distribution has not been quantified, however, for the purpose of this analysis it has been assumed that, notwithstanding the suggestion that a significant quantum of the retained earnings of offshore operating subsidiaries are not ordinarily available for distribution, a substantial part is distributable and will be retained.

This inclines towards non-incidental purpose.

Paragraph 45B(8)(b) - the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company.

This factor examines the pattern of distributions by the company. Paragraph 77 of PS LA 2008/10 states:

The inference here is that an interruption to the normal pattern of profit distribution and its replacement with a distribution of capital may suggest dividend substitution. It may become apparent after having regard to the general pattern of distributions of the company that the company has a pattern of making capital distributions (with the capital performing the function of dividends).

Company A has a long-standing practice (since at least the income year ended 30 June 20XX) of paying out around XX% of the group's after-tax profits. Further, each quarterly dividend paid by Company A since the beginning of the 20XX income year has been XX% franked. It expects to continue this practice throughout the ruling period to 30 June 20XX.

Further, there is no practice of making capital distributions through buy-backs, and there is no evidence of the company having paid any special dividends.

The Proposed Share Buy-back Mechanism would not interrupt the normal pattern of profit distribution. The buy-backs would not perform the function of dividends and would not be a substitute for a special dividend. If Company A debited a substantial amount of the buy-back price against retained earnings, after a number of years it would be unable to continue its dividend practice.

This inclines away from non-incidental purpose.

Paragraphs 45B(8)(c)-(f) - shareholder characteristics.

These factors examine whether the relevant taxpayer has capital losses, whether some of the ownership interests are pre-CGT, whether the relevant taxpayer is a non-resident and whether the cost base is not substantially less than value of the applicable capital benefit.

Capital losses are examined as they can be applied against any capital gain made from the provision of a capital benefit (but cannot be deducted against a dividend).

Company A has not provided, and is unlikely to know, whether Selling Shareholders have net capital losses. There is also no evidence that Company A will require or permit a shareholder to participate in a buy-back of shares for reasons that include the shareholder having capital losses.

All Company A Shares were acquired after XX September 19XX.

Around XX% of Company A Shares are held by non-residents. There is no evidence that Company A will require or permit a shareholder to participate in a buy-back of shares for reasons that include the shareholder being a non-resident.

It is also likely, given the consistent and significant increase in the value of Company A Shares in recent years, that many shareholders would make material capital gains on disposal of their Company A Shares.

Overall, shareholder characteristics are of relatively limited probative value. The likelihood of material capital gains inclines slightly away from non-incidental purpose, however, the availability of a CGT discount mitigates against this.

All of these factors taken together incline away from non-incidental purpose.

Paragraph 45B(8)(h) - if the scheme involves the distribution of share capital or share premium - whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium.

The Proposed Share Buy-back Mechanism involves the distribution of share capital, but the very nature of a buy-back of shares is that shareholders will cease to own those shares that are bought back. The relevant taxpayer will not hold those interests (the shares that are bought back) after the distribution.

When a dividend is paid on a Company A Share the shareholder's interest remains unchanged. When a Company A Share is brought-back under the Proposed Share Buy-back Mechanism, the Selling Shareholder's interest is cancelled. The distribution of capital is therefore not be performing the same function as a dividend. Furthermore, in contrast with a dividend, a buy-back under the Proposed Share Buy-back Mechanism is selective given the limited circumstances when shareholders can dispose of their Company A Shares.

This inclines away from non-incidental purpose.

Paragraph 45B(8)(i) - if the scheme involves the provision of ownership interests or an increase in the value of ownership interests (and the later disposal of those interests).

As the Proposed Share Buy-back Mechanism does not involve the provision of ownership interests or an increase in the value of ownership interests, this circumstance is not relevant.

Paragraph 45B(8)(k) - any of the matters referred to in subsection 177D(2)

The eight matters in subsection 177D(2) are those considered in objectively determining the purpose of any person who enters into or carries out any part of a scheme that is being analysed under the main provision in Part IVA.

The matters referred to in subsection 177D(2) considered relevant to this scheme are discussed below.

Paragraphs 177D(2)(a)-(c) - the manner, form and substance of, and the time and duration of the scheme.

Except for the need to raise capital to maintain the Proposed Share Buy-back Mechanism, the manner of the proposed buy-back scheme is conventional and serves a commercial benefit. The form and substance are the same, and the timing[6] is not designed to maximise or provide the tax benefits.

These facts incline away from non-incidental purpose.

The most recent valuation of Company A shares is $X per share. Company A expects to buy-back approximately XX% of the ordinary shares on issues as at XX June 20XX. Company A would therefore need to raise substantial capital on an ongoing basis if a high proportion of the buy-back price is debited against Company A's ordinary share capital account.

This need for ongoing capital raisings inclines towards non-incidental purpose.

Paragraph 177D(2)(d) - the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme.

This matter requires consideration of all relevant Australian tax consequences produced by the scheme.

Paragraph 108 of PS LA 2008/10 explains why the reference to "this Part" (being Part IVA) should be construed as a reference to section 45B, so that this factor is "a matter of identifying the tax results of the scheme if section 45B were not to apply."

But for section 45B, the result for Selling Shareholders consisting of a buy-back of shares for capital only at a time when Company A has profits available for distribution is that they would receive money from Company A that (for residents) is not a dividend which must be included in their assessable income or (for non-residents) is not subject to dividend withholding tax.

It is therefore likely that some shareholders would obtain a tax benefit as a result of paying less tax on a capital gain than a dividend.

This inclines towards non-incidental purpose.

Paragraph 177D(2)(e) - any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme.

A buy-back of shares means that the Selling Shareholder will cease to own those shares and will receive money from Company A as payment for giving up their shares. This will be a real change in the financial position of those Company A shareholders as their shareholding interest in Company A will cease.

This inclines away from non-incidental purpose.

Paragraph 177D(2)(f) - any change in the financial position of any person who has, or has had, any connection (whether of a business, family, or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme.

The company would pay the buy-back price out of share capital and would be expected to raise additional capital on an ongoing basis to maintain the buy-back program. This factor overlaps with matter (a) The manner.

This inclines away from non-incidental purpose.

Paragraph 177D(2)(g) - any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out.

There are none.

Paragraph 177D(2)(h) - the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f)

All of the ordinary shares are held by employees. This factor is neutral.

Conclusion - incidental purpose

The presence of distributable profits in the Company A Group and need to raise capital in future as result of providing the capital benefits incline towards a non-incidental purpose of obtaining a tax benefit.

However, when these factors are considered with the other factors which incline away from non-incidental purpose, such as that:

                     the proposed buy-backs would not interrupt the normal pattern of profit distribution or perform the function of dividends,

                     resident Selling Shareholders are likely to realise material capital gains on disposal (mitigated somewhat by the possibility of CGT discounts),

                     each shareholder's interest is cancelled, so the distribution of capital would not be performing the same function as a dividend, and

                     the commercial context of the buy-back (i.e. transfer of employee ownership), it is concluded that buy-backs undertaken by Company A over the ruling period pursuant to the Proposed Share Buy-back Mechanism give rise to an overall conclusion of incidental purpose.

Therefore, the Commissioner will not make a determination under subsection 45B(3) that section 45C applies in relation to Selling Shareholders who dispose of their shares to Company A under the Proposed Share Buy-back Mechanism.

[1] Defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 as an 'annual investment income report' (AIIR).

[2] Item 6 in the table in subsection 202D(1).

[3] Noting that the definition of 'arrangement' in subsection 995-1(1) of the ITAA 1997, while offering some useful guidance, is not directly relevant to subsection 6(4) - see subsection 995-1(2) of the ITAA 1997.

[4] For example, a return of capital (whether or not shares are cancelled (CGT events C2 or G1)), or a redemption of shares (CGT event C2). Many share buy-backs occur in circumstances where the requirements of subsection 6(4) are not present.

[5] Section 45B was inserted by Taxation Laws Amendment (Company Law Review) Bill 1998 and section 177EA was inserted by Taxation Laws Amendment Bill (No. 3) 1998.

[6] Buy-backs may occur at any time throughout the year.