Edited version of private advice

Authorisation Number: 1052412462510

Date of advice: 30 June 2025

Ruling

Subject: Off market share buy-back

Question 1

Will the proposed share buy-backs by Company X constitute an off-market purchase within the meaning of section 159GZZZK of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

Yes.

Question 2

Will the difference between the purchase price and the part of the purchase price which is debited against the share capital account (Capital Component) be taken to be a dividend paid by Company X to its shareholders under section 159GZZZP of the ITAA 1936?

Answer 2

Yes.

Question 3

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

Answer 3

No.

Question 4

Will the Commissioner make a determination under subsection 45C(3) of the ITAA 1936 that a franking debit of Company X arises in respect of the Capital Component?

Answer 4

No.

This ruling applies for the following periods:

Income years ending 30 June 20XX to 30 June 20YY

The scheme commenced

In a particular year

Relevant facts and circumstances

Background

1.            Company X is an Australian private company, incorporated after 20 September 1985.

2.            Company X carries on a business.

Company X's share capital

3.            Company X has 3 classes of shares on issue: ordinary shares, Preference A shares and Preference B shares.

4.            Ordinary shares, Preference A shares and Preference B shares confer equal voting and dividend rights.

5.            In the event of winding up, Preference A shares and Preference B shares rank higher than ordinary shares.

6.            Preference A shares confer the holder with the right to require Company X to buy-back the share at market value.

The proposed share buy-backs

7.            Company X has proposed to undertake buy-backs of its Preference A, Preference B and ordinary shares at various times (the 'proposed share buy-backs').

8.            The purchase price per share for the proposed share buy-backs will be set by reference to the proxy share price determined in accordance with the market value of Company X for the income year in which the buy-backs occur. To avoid doubt, this Ruling does not constitute an endorsement or validation of the market valuation of Company X or of its shares.

9.            The part of the purchase price to be debited against the share capital account of Company X (Capital Component) will be determined as follows:

•                     The Capital Component of the purchase price for the buy-back of a Preference A share will be the paid-up capital for Preference A shares divided by the total number of Preference A shares on issue at the time of the buy-back.

•                     The Capital Component of the purchase price for the buy-back of a Preference B share will be the paid-up capital for Preference B shares divided by the total number of Preference B shares on issue at the time of the buy-back.

•                     The Capital Component of the purchase price for the buy-back of an ordinary share will be the paid-up share capital for ordinary shares divided by the total number of ordinary shares on issue at the time of the buy-back.

10.         The difference between the purchase price and the Capital Component (Dividend Component) will be an unfranked dividend debited against Company X's retained earnings account.

11.         All shares bought back under the proposed share buy backs will be cancelled by Company X.

Other matters

12.         Company X has both resident and foreign-resident shareholders. Foreign-resident shareholders hold a substantial percentage of Company X's issued shares.

13.         Company X has retained losses and a nil franking account balance.

14.         To date, Company X has not paid any dividends to its shareholders and is not expected to pay any dividends (other than the Dividend Component) to its shareholders in the coming years.

15.         Shares in Company X are not taxable Australian property as defined in section 855-15 of the Income Tax Assessment Act 1997 (ITAA 1997).

Assumptions

16.         Company X's share capital account will not be tainted for the purposes of subsection 197-50(1) of the ITAA 1997 at the time of the proposed share buy-backs.

Relevant legislative provisions

Section 45A of the ITAA 1936

Subsection 45A(2) of the ITAA 1936

Paragraph 45A(3)(b) of the ITAA 1936

Section 45B of the ITAA 1936

Paragraph 45B(2)(a) of the ITAA 1936

Paragraph 45B(2)(b) of the ITAA 1936

Paragraph 45B(2)(c) of the ITAA 1936

Subsection 45B(3) of the ITAA 1936

Paragraph 45B(5)(b) of the ITAA 1936

Subsection 45B(8) of the ITAA 1936

Section 45C of the ITAA 1936

Subsection 45C(1) of the ITAA 1936

Subsection 45C(3) of the ITAA 193

Subsection 45D(1A) of the ITAA 1936

Division 16K of Part III of the ITAA 1936

Section 159GZZZK of the ITAA 1936

Subsection 159GZZZK(a) of the ITAA 1936

Subsection 159GZZZK(c) of the ITAA 1936

Subsection 159GZZZK(d) of the ITAA 1936

Section 159GZZZP of the ITAA 1936

Subsection 159GZZZP(1) of the ITAA 1936

Subsection 177D(2) of the ITAA 1936

Division 197 of the ITAA 1997

Subsection 197-50(1) of the ITAA 1997

Section 855-15 of the ITAA 1997

Section 975-300 of the ITAA 1997

Subsection 975-300(3) of the ITAA 1997

Subsection 995-1(1) of the ITAA 1997

Reasons for decision

All legislative references in this Ruling are to provisions of the ITAA 1936, unless otherwise indicated.

Question 1

17.         For the purposes of Division 16K of Part III, where a company buys a share in itself from its shareholders, the purchase is a buy-back (subsection 159GZZZK(a)).

18.         A buy-back is an off-market purchase if it is not an on-market purchase (subsection 159GZZZK(d)).

19.         A buy-back is an on-market purchase if the shares bought back is listed for quotation in the official list of a stock exchange in Australia or elsewhere, and the buy-back is made in the ordinary course of trading on that stock exchange (subsection 159GZZZK(c)).

20.         The proposed share buy-backs will involve Company X buying shares in itself from its shareholders. Therefore, the purchase is a buy-back.

21.         Company X is a privately held proprietary limited company and therefore its shares are not listed for quotation in the official list of a stock exchange in Australia or elsewhere.

22.         Accordingly, the proposed share buy-backs will constitute an off-market purchase within the meaning given by subsection 159GZZZK(d).

Question 2

23.         Section 159GZZZP provides that, where the buy-back of a share is an off-market purchase, the difference between the purchase price and the part (if any) of the purchase price which is debited against the share capital account is taken to be a dividend paid by the company to the seller as a shareholder in the company on the day the buy-back occurs out of profits derived by the company.

24.         The term share capital account is defined in section 975-300 of the ITAA 1997 as an account which the company keeps of its share capital, or any other account created on or after 1 July 1998 where the first amount credited to the account was an amount of share capital. Subsection 975-300(3) of the ITAA 1997 provides that if a company's share capital account is tainted (as defined in Division 197), that account is taken not to be a share capital account. It is assumed that Company X's share capital account will not be tainted within the meaning of Division 197 of the ITAA 1997 at the time of the proposed share buy-backs.

25.         Practice Statement Law Administration PSLA 2007/9: Share buy-backs provides a number of methodologies to determine the capital and dividend split of a purchase price for the purposes of section 159GZZZP.

26.         According to paragraph 12 of PSLA 2007/9, the Average Capital Per Share (ACPS) is the preferred methodology to determine the capital and dividend split in an off-market share buy-back, unless the taxpayer can demonstrate exceptional circumstances to deviate from this approach. The ACPS is obtained by dividing a company's ordinary issued capital by the number of shares on issue to determine the capital component of the purchase price (paragraph 62 of PSLA 2007/9). The balance of any purchase price is the dividend component.

27.         In this instance, Company X will adopt the ACPS methodology based on the total paid up capital applicable to each class of share to determine the capital component to be debited against Company X's untainted share capital account upon undertaking the proposed share buy-backs. We accept that this methodology provides a reasonable estimate of the underlying attributes of Company X having regard to the contributed capital and profits.

28.         Accordingly, the difference between the purchase price and the Capital Component will be taken to be a dividend under subsection 159GZZZP(1).

Question 3

29.         Section 45A applies in circumstances where capital benefits are streamed to certain shareholders who derive a greater benefit from the receipt of share capital (advantaged shareholders) and it is reasonable to assume that the other shareholders (disadvantaged shareholders) have received or will receive dividends.

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

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

32.         A reference to the 'provision of a capital benefit' to a shareholder in a company is defined to include a distribution of share capital to shareholders (paragraph 45A(3)(b)). Therefore, a capital benefit will be provided to participating shareholders of the proposed share buy-backs upon receipt of the Capital Component.

33.         However, the facts and circumstances does not indicate any streaming of capital benefits to the advantaged shareholders and dividends to the disadvantaged shareholders.

34.         Therefore, we will not make a determination under subsection 45A(2) that section 45C applies to the whole, or any part, of the Capital Component and Company X will not have obligations under subsection 45D(1A) to provide notice to the affected shareholders.

Question 4

35.         Pursuant to subsection 45C(3), if the Commissioner makes a determination under section 45B for the whole or part of a capital benefit and then makes a further written determination that the capital benefit was paid for a purpose of avoiding franking debits arising in relation to the distribution from the company, a franking debit of the company arises in respect of the capital benefit on the day on which notice of the determination is served in writing on the company.

36.         Subsection 45B applies where:

•                     there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a))

•                     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 (paragraph 45B(2)(b)), and

•                     having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling the relevant taxpayer to obtain a tax benefit (paragraph 45B(2)(c)).

37.         The proposed share buy-backs would constitute a scheme given the broad definition in subsection 995-1(1) of the ITAA 1997.

38.         The distribution of the Capital Component is a capital benefit as it constitutes provision of share capital to the shareholder in accordance with paragraph 45B(5)(b).

39.         However, having considered each of the circumstances in subsection 45B(8) (including each of the matters referred to in subsection 177D(2)), it cannot be concluded that Company X or participating shareholders in the proposed share buy-backs will enter into or carry out the scheme for a more than incidental purpose of enabling the shareholders to obtain a tax benefit.

40.         As such, section 45B will not apply and we will not make a determination under subsection 45B(3) that section 45C applies to the whole or any part of the Capital Component, or a further determination under subsection 45C(3) that a franking debit of Company X arises in respect of the Capital Component.