Edited version of private advice

Authorisation Number: 1052399223048

Date of advice: 23 May 2025

Ruling

Subject: Off market share buy-back

Question 1

Will the off-market share buy-back by Company A be an off-market purchase within the meaning given by paragraph 159GZZZK(d) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

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

Answer

Yes.

Question 3

Will section 159GZZZPA of the ITAA 1936 apply to Company A such that no part of the Buy-Back Price is taken to be dividend for the purposes of the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 4

Will Company A's benchmark franking percentage for the applicable franking period be 0% pursuant to Division 203 of the ITAA 1997?

Answer

Yes.

Question 5

Will a franking debit arise in Company A's franking account under item 9(A) of the table in subsection 205-30(1) of the ITAA 1997 in respect of the Buy-Back?

Answer

No.

Question 6

Will the Commissioner make a determination that paragraph 177EA(5)(a) of the ITAA 1936 applies to the Buy-Back such that a franking debit arises in Company A's franking account?

Answer

No.

Question 7

Will the Commissioner make a determination under subsection 45C(3) of the ITAA 1936 in relation to the Buy-Back such that a franking debit arises in Company A's franking account?

Answer

No.

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

A particular income year

Relevant facts and circumstances

1.  Company A is a public company listed on the Australian Securities Exchange (ASX) and is the head company of an Australian tax consolidated group for the purposes of Part 3-90 of the ITAA 1997.

2.  Company A is a global company with offices in Australia and Country B.

3.  Company A had recently completed the sale of various investments which generated significant cash proceeds.

4.  Company A sought shareholder approval to return surplus capital (generated from the sale of various investments) to shareholders by way of an equal access off-market share buy-back (Buy-Back).

5.  Majority of the shareholders voted in favour of the buy-back.

6.  Company A purchased a number of shares under the buy-back representing a percentage of total shares on issued.

7.  Participating shareholders received an amount per share they sold in the buy-back.

8.  Company A debited an amount per share purchased under the buy-back to its share capital account which was based on the average capital per share methodology. The balance of the buy-back price per share was debited to Company A's retained earnings.

9.  All Company A shares bought back under the buy-back were cancelled.

10.  Company A has a policy of paying dividends to its shareholders. Historically, Company A has paid a dividend every 6 months.

11.  Company A's intention is to follow its dividend policy to reflect its continuing business operations after the buy-back.

12.  On a particular date, Company A paid an unfranked dividend. This dividend will be the first and only frankable distribution made by Company A in the applicable franking period.

13.  Company A's share capital account (as defined in section 975-300 of the ITAA 1997) was not tainted within the meaning of Division 197 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 subsection 45B(2)

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

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

Income Tax Assessment Act 1936 subsection 45B(8)

Income Tax Assessment Act 1936 subsection 45B(9)

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1936 subsection 45C(3)

Income Tax Assessment Act 1936 paragraph 103A(2)(a)

Income Tax Assessment Act 1936 Division 16K

Income Tax Assessment Act 1936 subsection 159GZZZK(c)

Income Tax Assessment Act 1936 subsection 159GZZZK(d)

Income Tax Assessment Act 1936 section 159GZZZN

Income Tax Assessment Act 1936 section 159GZZZPA

Income Tax Assessment Act 1936 section 159GZZZQ

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 subsection 177EA(3)

Income Tax Assessment Act 1936 paragraph 177EA(3)(a)

Income Tax Assessment Act 1936 paragraph 177EA(3)(c)

Income Tax Assessment Act 1936 subsection 177EA(5)(a)

Income Tax Assessment Act 1936 subsection 177EA(14)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 197

Income Tax Assessment Act 1997 section 202-40

Income Tax Assessment Act 1997 section 202-45

Income Tax Assessment Act 1997 Division 203

Income Tax Assessment Act 1997 section 203-5

Income Tax Assessment Act 1997 section 203-10

Income Tax Assessment Act 1997 subsection 203-10(1)

Income Tax Assessment Act 1997 section 203-25

Income Tax Assessment Act 1997 section 203-30

Income Tax Assessment Act 1997 subsection 203-35(1)

Income Tax Assessment Act 1997 section 203-40

Income Tax Assessment Act 1997 subsection 203-40(2)

Income Tax Assessment Act 1997 section 205-30

Income Tax Assessment Act 1997 subsection 205-30(1)

Income Tax Assessment Act 1997 section 975-300

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

The Buy-Back will be an off-market buy-back for the purpose of paragraph 159ZZZK(d).

Detailed reasoning

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

For the purposes of Division 16K, where a company buys a share in itself from a shareholder, the purchase is a 'buy-back' (paragraph159GZZZK(a)).

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

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

Under the Buy-Back, Company A will buy-back its ordinary shares from Participating Shareholders. Although Company A's ordinary shares are listed for quotation in the official list of the ASX, the Buy-Back will not be made in the ordinary course of trading on the ASX. Therefore, the Buy-Back will be an off-market purchase (an off-market buy-back) as defined in paragraph 159GZZZK(d).

Question 2

Summary

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

Detailed reasoning

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

(a)          determining for the purposes of the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997):

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

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

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

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

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

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

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

Question 3

Summary

Pursuant to section 159GZZZPA, no part of the Buy-Back Price will be taken to be a dividend for the purposes of the ITAA 1936 and ITAA 1997.

Detailed reasoning

Under section 159GZZZPA, where a buy-back of a share by a listed public company is an off-market purchase, no part of the purchase price in respect of the buy-back of the share is taken to be dividend.

The term 'listed public company' is defined in section 995-1 of the ITAA 1997 as (relevantly) a company the shares in which are listed for quotation in the official list of an approved stock exchange. However, a company is not a listed public company if, broadly, 75% or more of the dividend or capital rights or voting power of the company are held by 20 or fewer persons (i.e., the company is closely held).

Company A is listed on the ASX and it is not closely held. Accordingly, Company A is a listed public company for the purposes of section 159GZZZZPA.

As discussed under the Detailed Reasoning in Question 1, the Buy-Back will be an off-market share buy-back for the purpose of paragraph 159ZZZK(d). Accordingly, no part of the Buy-Back Price will be taken to be a dividend pursuant to section 159GZZZPA for the purposes of the ITAA 1936 and ITAA 1997.

Question 4

Summary

Company A's benchmark franking percentage for the applicable franking period will be 0% pursuant to Division 203 of the ITAA 1997.

Detailed reasoning

Division 203 of the ITAA 1997 ensures distributions within a particular period must all be franked to the same extent. It does this by reference to the benchmark rule wherein a corporate tax entity must frank all frankable distributions made within a particular period at a franking percentage set as the benchmark for that period (section 203-5 of the ITAA 1997).

Section 203-40 of the ITAA 1997 is used to work out the franking periods for an entity in an income year where the entity is not a private company for the income year. A company is a private company in relation to the year of income if the company is not a public company in relation to the year of income (subsection 103A(1)).

Company A is a public company as defined in paragraph 103A(2)(a) on the basis that its shares, not being shares entitled to a fixed rate of dividend with or without a further right to participate in profits, are listed for quotation on the ASX. Accordingly, subsection 203-40(2) of the ITAA 1997 is relevant to working out its franking periods.

Subsection 203-40(2) of the ITAA 1997 states that if an entity's income year is a period of 12 months, each of the following is a franking period for the entity in that year:

•                     the period of 6 months beginning at the start of the entity's income year;

•                     the remainder of the income year.

Company A has a 12-month income year ending on 30 June and has historically paid a dividend every 6 months. In applying section 203-40 of the ITAA 1997, Company A's franking periods are:

(a)          1 July to 31 December and;

(b)          1 January to 30 June.

Subsection 203-10(1) of the ITAA 1997 states that the benchmark franking percentage for an entity is set by reference to the franking percentage for the first frankable distribution made by the entity during the relevant period.

A 'frankable distribution' is defined under section 202-40 to be a distribution to the extent that it is not unfrankable under section 202-45 of the ITAA 1997.

The benchmark rule under section 203-25 of the ITAA 1997 states that an entity must not make a frankable distribution whose franking percentage differs from the entity's benchmark franking percentage for the franking period in which the distribution is made.

Section 203-30 of the ITAA 1997 states that the benchmark franking percentage for an entity for a franking period is the same as the franking percentage for the first frankable distribution made by the entity within the period, noting that if no frankable distribution is made during the period, there is no benchmark franking percentage for the period.

Under subsection 203-35(1) of the ITAA 1997, the franking percentage for a frankable distribution is worked out using the formula:

Franking credit allocated to the frankable distribution ÷ Maximum franking credit for the distribution.

Based on Company A's franking history, Company A has paid a dividend every 6 months. In respect of the applicable franking period, Company A paid an unfranked dividend during that period.

This unfranked dividend will be the first and only frankable distribution made by Company A in the applicable franking period. Therefore, pursuant to subsection 203-35(1) of the ITAA 1997, the franking percentage for the applicable franking period will be 0%.

Question 5

Summary

Under item 9(A) of the table in subsection 205-30(1) of the ITAA 1997, a franking debit will not arise in Company A's franking account in respect of the Buy-Back.

Detailed reasoning

The table in subsection 205-30(1) of the ITAA 1997 sets out when a debit (franking debit) arises in the entity's franking account and the amount of the debit.

Relevant to the Buy-Back, under item 9A of the table in subsection 205-30(1) of the ITAA 1997, if an entity purchases a membership interest in itself, the purchase is an off-market buy-back and the entity is a listed public company, a franking debit will arise on the day on which the interest is purchased.

Where item 9A of the table in subsection 205-30(1) of the ITAA 1997 applies, the franking debit that arises in the entity'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 entity 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%.

This franking debit arises on the day on which the interest is purchased.

As discussed under the Detailed Reasoning in Question 4, Company A's benchmark franking percentage for the applicable franking period will be 0% when Company A purchases its shares under the Buy-Back. Accordingly, while item 9A of the table in subsection 205-30(1) of the ITAA 1997 applies to the Buy-Back, a franking debit will not arise in Company A's franking account in respect of the Buy-Back.

Question 6

Summary

The Commissioner will not make a determination that paragraph 177EA(5)(a) applies to the Buy-Back such that a franking debit arises in Company A's franking account.

Detailed reasoning

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

Section 177EA applies if subsection 177EA(3) is satisfied. That is:

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

(b)          either:

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

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

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

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

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

For section 177EA to apply, each of the five specific conditions set out in subsection 177EA(3) must be present.

Under section 177A, a "scheme" is defined widely to include "any agreement Scheme for a disposition of member interests in a corporate tax entity

, arrangement, understanding, promise or undertaking..." and "any scheme, plan, proposal, action, course of action or course of conduct".

Subsection 177EA(14) further sets out a list of schemes that will be a "scheme for a disposition", including (relevantly):

(b) entering into any ... arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the membership interests or interest in membership interests.

Paragraph 177EA(3)(a) is satisfied as the Buy-Back constitutes a scheme for a disposition of membership interests in Company A, which is a corporate tax entity.

Other threshold requirements

The Buy-Back Price is not a dividend and will not be a frankable distribution so this will not be a distribution to which paragraph 177EA(3)(c) applies.

As no distribution to which paragraph 177EA(3)(c) applies, section 177EA does not apply to the Buy-Back. Accordingly, Commissioner will not make a determination that paragraph 177EA(5)(a) applies to the Buy-Back such that a franking debit arises in Company A's franking account.

Question 7

Summary

The Commissioner will not make a determination under subsection 45C(3) in relation to the Buy-Back such that a franking debit arises in Company A's franking account.

Detailed reasoning

On the basis that the Commissioner will not make a determination under paragraph 45B(3)(b) that section 45C applies to the whole, or a part, of the Buy-Back Price, it follows that the Commissioner will not make a further determination under subsection 45C(3) in relation to the Buy-Back such that a franking debit arises in Company A's franking account.