Private ruling: Off-market share buy-back
Date of advice: 27 October 2017
Published: March 2018

Ruling: Q1: Will the buy-back and subsequent cancellation of any shares bought-back by the Company be disregarded by the Company for income tax purposes under section 159GZZZN of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Will the dividend be a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes | Q3: Will the Commissioner make a determination under paragraph 177EA(5)(a) of the ITAA 1936? | A3: Yes | Q4: Will the Commissioner make a determination under paragraph 204-30(3)(a) of the ITAA 1997? | A4: No


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 159GZZZN | Income Tax Assessment Act 1936 Section 159GZZZP | Income Tax Assessment Act 1936 Section 159GZZZQ | Income Tax Assessment Act 1936 Section 177EA | Income Tax Assessment Act 1936 Section 202-5 | Income Tax Assessment Act 1936 Section 202-40 | Income Tax Assessment Act 1936 Section 202-30 | All legislative references are to provisions of the Income Tax Assessment Act 1936 (ITAA 1936) unless specified otherwise.

Reasons for decision: Summary: The buy-back and subsequent cancellation of shares bough-back by the Company will be disregarded by the Company for income tax purposes under section 159GZZZN. | Detailed Reasoning - Detailed reasoning: Section 159GZZZN provides that if a company buys-back a share, then the buy-back and any subsequent cancellation of the share, is disregarded by the company for income tax purposes. Following completion of the off-market share buy-back, the Company’s shares were cancelled pursuant to section 257H of the Corporations Act 2001 . As the Company bought-back its shares, the buy-back and any subsequent cancellation of the shares will be disregarded by the Company for income tax purposes under section 159GZZZN. | Summary: The dividend component was a frankable distribution under section 202-40 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 202-40(1) of the ITAA 1997 provides that a distribution is a frankable distribution to the extent it is not unfrankable under section 202-45 of the ITAA 1997. Section 202-45 of the ITAA 1997 sets out a list of unfrankable distributions. The Company is a franking entity and is not subject to section 202-45 of the ITAA 1997, the terms of the buy-back are such that the dividend component was a frankable distribution pursuant to section 202-40 of the ITAA 1997 and the dividend component was capable of being franked in accordance with section 202-5 of the ITAA 1997. | Summary: The Commissioner will make a determination under paragraph 177EA(5)(a). | Detailed Reasoning - Detailed reasoning: Section 177EA is a general anti-avoidance provision that applies to franking credit trading schemes where, having regard to the relevant circumstance of the scheme, one of the purposes (other than an incidental purpose) of the scheme is to obtain a franking credit benefit. Having considered all relevant circumstances of the buy-back, the Commissioner is of the view that section 177EA applies to the buy-back. Where section 177EA applies, the Commissioner has a discretion pursuant to subsection 177EA(5) to make a determination to debit the company’s franking account pursuant to paragraph 177EA(5)(a), or to deny the imputation benefit arising to each participating shareholder pursuant to paragraph 177EA(5)(b). The Commissioner will exercise his discretion to make a determination under paragraph 177EA(5)(a). | Summary: The Commissioner will not make a determination under paragraph 204-30(3)(a) of the of the ITAA 1997. | Detailed Reasoning - Detailed Reasoning: The Commissioner will not make a determination pursuant to paragraph 204-30(3)(a) of the ITAA 1997 on the basis that the Commissioner will, as set out in the Detailed reasoning for Question 3 , exercise his discretion under paragraph 177EA(5)(a).

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions. | Relevant facts and circumstance: The Company is a resident for Australian taxation purposes. | The Company completed an off-market share buy-back and all shares it bought back were cancelled. | For each share bought back by the Company, it debited an amount (capital component) to its untainted share capital account and the balance of the buy-back price (dividend component) to its retained earnings. | The Company fully franked the dividend component.