Private ruling: Share Buy-back and Dividend stripping operation
Date of advice: 28 February 2018
Published: June 2018
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the franked dividend component of the share buy-back price received by the Superannuation Fund from a private company considered to be part of a dividend stripping operation under paragraph 207-145(1)(d) Income Tax Assessment Act (ITAA) 1997? | A1: No | Q2: Is the arrangement a scheme to obtain imputation benefits to which section 177EA of ITAA 1936 applies? | A2: No | Q3: Is the dividend component of the share buy-back price paid from a private company to the superannuation fund non-arm’s length income under section 295-550 ITAA 1997? | A3: No

Relevant facts and circumstances: The taxpayer is the trustee for a Superannuation Fund The members of the Superannuation Fund are 2 individuals The trustee subscribed for an amount of X shares in a company for $X which equates to a holding of X% of the issued X shares in the company. The trustee and the 2 individuals are not related to any director of the company. All other shareholders are unrelated. The allotment price for the shares was determined by reference to an independent valuation. The valuation prescribed the total valuation of the company at $X. Following the date of the valuation, a correction was made to the Australian Securities and Investment Commission share register so that the total number of shares issued as at the date of valuation was X which equates to a valuation of $X per share. The allotment price paid by the trustee is consistent with the price paid under three other allotments made on the same date. Accountants were appointed Auditors of the company. The company tabled the purchase of shares from another shareholder as part of a relationship financial settlement of $X per share. It was proposed that this would be carried out by way of a share-buy-back. At that time the company sought objections, or interest from other shareholders interested in selling. The trustee advised the company it was interested in selling its shareholding. After negotiations the company subsequently accepted the selective buy-back offer on various conditions. The first tranche settled in 20XX for the transfer of X ordinary shares at a price of $X ($X including franking credits) allocated with the following dividend/capital split: (a) Capital payment $X (b) Franked dividend $X (c) Franking credits $X The dividend/capital split for the buy-back price was calculating the Commissioner’s preferred average capital per share method in accordance with Practice Statement Law Administration 2007/9 (PS LA 2007/9). After the buy-back was executed, the company cancelled all of the buy-back shares. All non-participating shareholders are resident shareholders. The company continues to trade and neither the trustee nor its members have any continuing involvement in the Company.

Relevant legislative provisions: Paragraph 207-145(1)(d) of the Income Tax Assessment Act 1997 Section 177EA Income Tax Assessment Act 1936 | Section 295-550 Income Tax Assessment Act 1997

Reasons for decision: Summary: The franked dividend is not considered to be part of a dividend stripping operation. A distribution made to a member of a corporate tax entity is taken to be made as part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, a scheme (subdivision 207-F of the ITAA 1997) that; a) Was by way of, or in the nature of, dividend stripping; or b) Had substantially the effect of a scheme by way of, or in the nature of, dividend stripping. Dividend stripping is not defined in the ITAA. We refer to case law in these circumstances. The High Court confirmed that dividend stripping arrangements can only exist when the purpose of tax avoidance exists, but preferred the Full Court’s analysis that the tax avoidance purpose be the dominant purpose, noting, as the Full Court did, that the decided cases all were characterised by ‘a predominant if not sole purpose’ ( Reference- Consolidated Press Holdings Property Pty Ltd v Commissioner of Taxation ) | Detailed Reasoning - In your case: The facts presented in your case indicate that a tax avoidance purpose is absent from the arrangement. Based on the facts you provided, we agree with your submission that the franked dividend is not considered to be part of a dividend stripping operation. | Summary: Section 177 EA of the ITAA 1936 will not apply. We need to consider whether the scheme was entered into for the purpose of enabling the taxpayer to obtain an imputation benefit (paragraph 177 EA (3)(e) ITAA 1936). The issue is whether there is a purpose more than merely an incidental purpose of conferring an imputation benefit under the scheme. This was examined in Mills v Commissioner of Taxation . The High Court found in favourable of the taxpayer in that section 177EA ITAA 1936 did not apply to the relevant scheme. | Detailed Reasoning - In your case: Your arrangement involves an ordinary share buy-back, which has been negotiated at an arms-length basis. This is not a scheme to which section 177EA of the ITAA 1936 will apply because, as the High Court in Mills v Commissioner of Taxation makes clear, the imputation benefit that flows to the taxpayer is an incidence of the dominant purpose of the share buy-back- that is, to enhance their superannuation capital by realising value of shares held. Furthermore, all non-participating shareholders are resident shareholders. There is no attempt to stream dividends away from non-residents to residents in the present case. There was also no discount in the buy-back price. The share buy-back was carried out at market value. | Summary: The dividend component of the share buy-back price paid from a private company to the superannuation fund is not considered to be non-arms length income (section 295-550 of the ITAA 1997). | Detailed Reasoning - In your case: The dividend component of the buy-back price was calculated on an arm’s length basis in order to comply with the Commissioner’s preferred methodology in PS LA 2007/9. The buy-back was determined by reference to an independent valuation. Based on the facts provided, we are satisfied that the calculation of the dividend component of the buy-back price was calculated on an arm’s length basis and in accordance with PS LA 2007/9