ATO ID 2003/1094: Income tax: On-market share buy-backs - application of section 45B
Date of decision: 27 November 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
Does section 45B of the Income Tax Assessment Act 1936 (ITAA 1936) apply to a company's on-market share buy-back?

Decision
No. Section 45B of the ITAA 1936 will not apply to the on-market buy-back.

Facts
A company listed on the Australian Stock Exchange (ASX) undertakes an on-market share buy-back. The arrangement does not relate to a demerger. The buy-back is conducted in accordance with the ASX Listing Rules. The amount paid by the company to buy back shares is debited to its share capital account.

Reasons for decision
Summary: Subsection 45B(2) of the ITAA 1936 states that the section applies where: 'Scheme' is defined broadly, including 'any agreement, arrangement, understanding, promise or undertaking' (section 177A of the ITAA 1936). A share buy-back arrangement would come within this definition. 'Capital benefit' includes the distribution to a person of share capital (subsection 45B(5) of the ITAA 1936). Since a share buy-back involves the distribution of share capital, it represents a capital benefit. In this case the share buy-back is not made in relation to a demerger, so that the meaning of 'demerger benefit' does not need to be considered. 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) of the ITAA 1936). 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 buy-back. It is then necessary to consider whether there was a 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) of the ITAA 1936. In this instance the on-market buy-back is conducted through the ASX's Stock Exchange Automated Trading System (SEATS) and complies with the ASX Listing Rules. Because shares must be purchased from any willing vendor, the company cannot control whether vendors obtain a tax benefit from the arrangement. All shareholders have an equal and arm's length opportunity to obtain the capital benefit. The money paid by the company for the shares is not attributable to profits of the company. On weighing these factors it would be concluded that there is no more than an incidental purpose that shareholders receive a tax benefit. Accordingly, the conditions of subsection 45B(2) of the ITAA 1936 are not satisfied. Section 45B of the ITAA 1936 does not apply to an on-market share buy-back arrangement of this kind.

Legislative references: Income Tax Assessment Act 1936 section 45B section 177A
Subject references: Capital benefit Share buy backs