Edited version of private advice

Authorisation Number: 1052379810432

Date of advice: 04 April 2025

Ruling

Subject: Share buy-back

Question 1

Will the Buyback be an on-market share buy-back for the purposes of Division 16K of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

Yes

Question 2

Will the Buyback and subsequent cancellation of any shares bought back by Company A be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936?

Answer 2

Yes

Question 3

Will a franking debit arise to Company A as a consequence of the Buyback under item 1 or item 9 of the table in subsection 205-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 3

No

Question 4

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

Answer 4

No

Question 5

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

Answer 5

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company A

Company A is a company incorporated and tax resident in Australia. Company A is listed on the Australian Securities Exchange (ASX).

Company A is a services company. Company A has significant overseas operations.

Company A is the head company of an Australian tax consolidated group.

Company A's financial year end is 30 June.

As of 31 December 20XX, the issued share capital of Company A was A$XX and there were circa YYm ordinary shares on issue. The retained earnings as of 31 December 20XX4 were approximately A$ZZm (on a consolidated level).

Company A's franking account balance was A$AA as at 30 June 20XX.

Company A has historically paid six-monthly unfranked dividends.

As at 6 February 20XX (noting that Company A's shareholder base regularly changes), the top shareholders in Company A were Entity B (X%) Entity C (Y%) and Entity D (Z%). Offshore shareholders held less than 50% of the shares in Company A.

Buyback

On YYY, Company A announced its intention to undertake an on-market share buyback (the Buyback). The share Buyback will commence in 20XX and the timing and value of shares purchased will be dependent on prevailing market conditions, share price and other factors.

The Buyback is undertaken to implement a more efficient capital structure, improve shareholder returns and support the share price of the company.

The Buyback will not be a special buyback under the ASX rules.

The shares bought back will be cancelled shortly after the Buyback.

Shareholder approval for the Buyback will not be sought as it is not required under the Corporations Act 2001. The Buyback will be offered to all shareholders of Company A equally and Company A will not be able to limit the Buyback to any particular subset or class of shareholders. The Buyback will be undertaken on the ASX as per the normal trading operations of ASX. Accordingly, Company A will not be able to determine which shareholders will participate in the Buyback.

The proceeds for the Buyback will be debited wholly to the share capital account of Company A.

The share capital account is not tainted within the meaning of Division 197 of the ITAA 1997.

Company A's dividend policy will not change as a result of the Buyback.

The funding for the Buyback proceeds may be sourced, wholly or partly, from external borrowing facilities of Company A in Australia and overseas entities.

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

All legislative references in this Reasons for decision are to the Income Tax Assessment Act 1936, unless otherwise indicated.

Question 1

Summary

The Buyback will be an on-market share buy-back for the purposes of Division 16K.

Detailed reasoning

Section 159GZZZJ states that in Division 16K, 'buy-back' and 'on-market purchase' have the meaning given by paragraphs 159GZZZK(a) and 159GZZZK(c) respectively.

Section 159GZZZK states that, for the purposes of Division 16K, where a company buys a share in itself from a shareholder in the company:

(a) the purchase is a buy-back; and

(b) the shareholder is the seller; and

(c) if:

(i) the share is listed for quotation in the official list of a stock exchange in Australia or elsewhere; and

(ii) the buy-back is made in the ordinary course of trading on that stock exchange;

the buy-back is an on-market purchase; and

(d) if the buy-back is not covered by paragraph (c) - the buy-back is an off-market purchase.

Section 159GZZZL further provides that a buy-back is not made in the ordinary course of trading on a stock exchange in Australia if it is reported under the stock exchange rules as special.

Therefore, Company A's share purchase is a 'buy-back' (as per paragraph 159GZZZK(a)), specifically an 'on-market buy-back' (as per paragraph 159GZZK(c)) because:

       Company A is a company that will buy shares in itself from its shareholders

       Company A's shares are listed for quotation on the ASX

       the Buyback was made in the ordinary course of trading on the ASX, and

       the Buyback was not special as per the ASX rules.

Question 2

Summary

The Buyback and subsequent cancellation of shares will be disregarded for the purposes listed in section 159GZZZN.

Detailed reasoning

Section 159GZZZN states:

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 this Act:

(i) whether an amount is included in the assessable income of the company under a provision of this Act (other than a provision of Part 3-1 or 3-3 of the Income Tax Assessment Act 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, Company A will buy-back shares within the meaning given by paragraph 159GZZZK(a). Accordingly, the Buyback and any subsequent cancellation of the shares will be disregarded for the purposes listed in section 159GZZZN.

Question 3

Summary

No franking debits will arise to Company A under items 1 or 9 of the table in subsection 205-30(1) of the ITAA 1997.

Detailed reasoning

Franking debit under item 1 of the table in subsection 205-30(1) of the ITAA 1997

Item 1 states that a franking debit arises where an entity franks a distribution. For this to apply, the distribution must be frankable.

A distribution will be a frankable distribution to the extent that it is not unfrankable under section 202-40 of the ITAA 1997. An unfrankable distribution under paragraph 202-45(e) of the ITAA 1997 includes a distribution that is sourced, directly or indirectly, from a company's share capital account.

Furthermore, section 960-120 of the ITAA 1997 contains a table which sets out what constitutes a distribution by various corporate tax entities. Under item 1 of this table, a company will be taken to have made a distribution when it pays a dividend, or something that is taken to be a dividend under the ITAA 1936 or ITAA 1997.

Section 159GZZZR provides that where a buy-back of a share is an on-market purchase, no part of the purchase price will be taken to be a dividend.

The Buyback is an on-market buy-back so no part of the purchase price is taken to be a dividend, nor a frankable distribution in accordance with section 202-40 of the ITAA 1997. Therefore, item 1 of the table in subsection 205-30(1) of the ITAA 1997 does not apply.

Franking debit under item 9 of the table in subsection 205-30(1) of the ITAA 1997

Under item 9 of the table in subsection 205-30(1) of the ITAA 1997, where a company purchases a membership interest in itself and the purchase is an on-market buy-back (such as the Buyback per the detailed reasoning for Question 1) then a franking debit can arise.

The franking debit that arises in the company's franking account is an amount equal to the debit that would have arisen if:

(a)   the purchase of the interest were a frankable distribution equal to the one that would have arisen if the company purchased the interest off-market, and in the case of a listed public company - were not a listed public company, and

(b)   the distribution were franked at the entity's benchmark franking percentage for the franking period in which the purchase was made, or if the entity does not have a benchmark franking percentage for the period, at a franking percentage of 100%.

Under subsection 159GZZZP(1), the difference between the purchase price of an off-market share buy-back and any part of the purchase price that is debited against amounts standing to the credit of the company's share capital account is taken to be a dividend paid by the company.

Company A proposes to debit the total purchase price against the share capital account. Accordingly, if Company A was not a listed company and the Buyback was to be an off-market buy-back, no part of the purchase price would be taken to be a dividend. Therefore, as there is no frankable distribution, no franking debit will arise under item 9 of the table in subsection 205-30(1).

Question 4

Summary

The Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the whole, or a part, of the Buyback.

Detailed reasoning

Section 45A is an anti-avoidance rule that applies in circumstances where a company streams capital benefits to certain shareholders who derive a greater benefit from the receipt of capital benefits (advantaged shareholders), and it is reasonable to assume that other shareholders (disadvantaged shareholders) have received or will receive dividends.

The Commissioner may make a determination under subsection 45A(2) to the effect that section 45C applies to all or part of a capital benefit. Such a capital benefit is then deemed to be an unfranked dividend under subsection 45C(1).

Subsection 45A(3) states that a reference to the 'provision of a capital benefit' includes the distribution to the shareholder of share capital or share premium.

Subsection 45A(4) lists a non-exclusive set of circumstances in which a shareholder (advantaged shareholder) may derive a greater benefit from a capital benefit than another shareholder (disadvantaged shareholder).

However, in this case:

• the Buyback is available to all public shareholders without discrimination
• the seller will not know that they are selling the shares to Company A under an on-market buy-back, as the identity of the buyer will be unknown to them
• Company A will not be aware of the identity or nature of the shareholders who will participate in the Buyback
• at the time of the Buyback, Company A will not be aware of a particular class or nature of shareholder or their tax profile that will benefit under the Buyback or influence particular classes of shareholders to benefit
• there will be no special dividends paid to any particular shareholders, and
• Company A's dividend policy will remain unchanged and any dividends paid to all shareholders will not be adjusted solely as a consequence of the Buyback being undertaken.

It is therefore considered that Company A is not discriminating between shareholders in relation to the Buyback. There are no facts to establish that there are advantaged shareholders (and disadvantaged shareholders) under this arrangement.

Accordingly, the Commissioner considers that section 45A does not apply to the Buyback and the Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the Buyback.

Question 5

Summary

The Commissioner will not make a determination under subsection 45B(3) that section 45C applies to the whole or a part of the Buyback.

Detailed reasoning

Specifically, subsection 45B(2) does not apply to the Buyback. Subsection 45B(2) is where:

(a) there is a scheme under which a person is provided with a demerger benefit or 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 demerger benefit or 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..

'Scheme' is defined broadly, including 'any arrangement, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise' per subsection 995-1(1) of the ITAA 1997. The Buyback arrangement would meet this definition of scheme. 'Capital benefit' includes the distribution to a person of share capital (subsection 45B(5)). Since the Buyback involves the distribution of share capital, this represents a capital benefit. (Note, in this case the Buyback is not made in relation to a demerger, so this does not need to be considered further).

The 'relevant taxpayer' in this instance would include any of the shareholders who sell their shares back to the company. Where the relevant taxpayer would have a greater tax liability if they receive a dividend rather than a capital benefit, they obtain a 'tax benefit' (subsection 45B(9)). Some taxpayers, for example, would make a capital gain and could also be entitled to the CGT discount. This may produce less income tax than if dividend income had been included in assessable income and subject to the full rate of personal income tax. Accordingly, it is reasonable to conclude that some taxpayers will obtain a tax benefit from the Buyback.

However, the Commissioner is of the view that the Buyback is not for the purpose of enabling the vendor shareholders to obtain a tax benefit. The relevant circumstances to consider in reaching this conclusion are listed in subsection 45B(8). In particular:

•       The Buyback forms part of Company A's on-going capital management and funding may be sourced, wholly or partly, from external borrowing facilities of Company A in Australia and overseas entities

•       It is not undertaken in substitution for, or as an alternative to, a payment of a dividend to shareholders and Company A's dividend policy will not change as a result of the Buyback

•       The Buyback involves the buy-back and cancellation of the entire share, and is not merely a distribution of capital with a proportionate reduction in cost base of shares

•       Company A is a widely held company and the Buyback is to be made on-market so the tax characteristics (including the pre-CGT status, cost base, shareholder residency and availability of tax losses) of the shareholders that accept the buy-back remain unknown, and

•       All shareholders will have an equal and arm's length opportunity to participate in the Buyback.

Accordingly, the Commissioner is satisfied there is no more than an incidental purpose that shareholders receive a tax benefit and the conditions of subsection 45B(2) are not satisfied. Section 45B does not apply to the Buyback and no determination will be made under subsection 45B(3).

This conclusion accords with the decision in ATO Interpretative Decision ATO ID 2003/1094 Income tax: On-market share buy-backs - application of section 45B.