Private ruling: Proposed Share Buy-Back
Date of advice: 3 September 2025
Published: 3 November 2025
Ruling period: 1 July XXXX to 30 June XXXX

Ruling: Q1: Will the Commissioner make a determination in relation to the Proposed Share Buy-Back under subsection 45B(3) of the Income Tax Assessment 1936 (ITAA 1936) that section 45C of the ITAA 1936 applies? | A1: No

Relevant facts and circumstances: Company has 3 shareholders - Company A, Individual A and Individual B (Individual A's mother). The total shares in Company prior to the XXXX share buy- back was as follows: Ordinary A Class (A Class) Ordinary B Class (B Class) Ordinary C Class (C Class) Total X X X X Company's balance sheet as at 30 June X listed total issued capital of $X (based on the total number of shares of X) was as follows: XXX (Note: 'Book value' represents the paid-up capital of the shares.) In the income year ended 30 June X, Company performed a selective share buy-back of B and C Class shares (worth $X in total) in which: The total shares and paid-up capital per share in Company after the X share buy-back: A Class B Class C Class Total Shares issued X X X X Paid up capital before X buy back X X X X X capital component of buy back price X -X -X -X Commissioner adjustment to capital X X X X X Ordinary share capital after X buy back X X X X Individual A: (Individual A controls Company C which is trustee for the Individual B Testamentary Trust - which owns the C Class shares in terms of Individual B's Will & Codicil.) The X share buyback (prior to the ATO audit) In terms of the buy-back, Company reported that they had employed the average capital per share (ACPS) method to determine a capital/dividend split in respect of the $X market value per share paid to Individual A and Individual B for their B Class and C Class shares respectively. The figure of $X per share was derived from the total market value of all shares (A, B and C Class shares) which amounted to $X divided by total shares on issue of X. In attempting to employ the ACPS method, Company calculated an ACPS figure of $X per share. This was based on the reported paid-up capital of $X capital as per above, divided by total shares on issue of X = $X). The remaining compensation paid upon buying back of the shares was treated by Company as a dividend (being $X per share, for example, $X - $X). Based on the ACPS calculated by Company and the shares bought back from each of Individual A and Individual B the following share capital reduction payments were recorded: And the following dividends (being the balance of funds paid) were recorded (totalling $X): The income tax consolidated group of Company made the following disposals in the X year: ATO audit of the XXXX share buy back The Commissioner conducted an audit of the XXXX share buy-back and concluded by way of Determination made pursuant to subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to $X of the distribution of $X paid by Company for the B Class shares it bought back from Individual A. Pursuant to the Determination it was further determined that in accordance with section 45C of the ITAA 1936 that this distribution per share was an unfranked dividend paid out of the profits of Company and so was included in the assessable income of Individual A for XXXX, being the year of income in which Individual A derived the unfranked dividend. In reaching this conclusion, the Commissioner explained his reasons for making the Determination in the Reasons for decision accompanying the Determination referred to in the paragraph above. The audit noted Company's amended constitution provides: Significantly, in considering an appropriate methodology for determining the unfranked dividend from the buy-back, the Commissioner considered a slice approach between the accounting cost and profits of assets disposed of in the year ended 30 June XXXX to be an appropriate split. Using the slice approach the Commissioner calculated the unfranked dividend attributable to Individual A's proceeds from the share buy-back on the following methodology; After the XXXX share buyback Since the time just after the XXXX share buy-back, in respect of Company there have been no: • new issued shares ; • capital injections; • returns of capital; • capital distributions; or • subsequent share buy-backs and • the total number of shares on issue was X, as calculated above. The A, B and C Class Shares continue to carry the same rights to dividend, voting and capital upon winding up. The reason for the proposed share buy-back On XXXX, Individual A and their spouse signed consent orders finalising their matrimonial property settlement, which inter alia, included the requirement for Company to pay a fully franked dividend of $X to be distributed by either the Individual A's Family Trust or the Individual B Testamentary Trust in the sum of $X each to Company E, Company C and Company F. These companies are controlled by Individual A's spouse. The court consented to the orders on XXXX. The dividends are to be paid from Company's profits at the earliest time possible, however, as at 30 June XXXX, Company's consolidated retained profits amounted to only $XXXX which are insufficient to satisfy the fully franked dividend requirements at that time. A selective off-market share buy-back is being seriously considered to facilitate the payment of fully franked dividends by Company to satisfy the requirements of Court consent orders for Individual A's property settlement with their spouse. Proposed Share Buy-Back Company is considering undertaking an off-market buy back of shares from some or all of its shareholders via either a selective or non-selective buy back process in accordance with its Constitution and the Corporations Act Company may buy back shares from one or more class of shares to the exclusion of other classes of shares. Alternatively, Company may undertake a non-selective off market buy back where shares from all classes are bought back pari passu. Company has not yet determined the total proceeds from the buy back, but is seriously contemplating the buy back. Company will undertake a market valuation shortly before the buy back to determine the buy back price offered on the shares. Company intends to allocate $X (as calculated below) as the capital component per share (applying the ACPS method), with the balance of the final buy back price representing the dividend component. Company intends to declare that dividend component to be fully franked. The capital component will be the same regardless of whether a selective or non-selective buy back is undertaken. The ACPS method will be applied across all A, B and C Class shares: The formula for the Average Capital Per Share method: Average capital per share = Company's ordinary issued capital Number of shares on issue Applying this to the A, B and C Class shares: Average capital per share = Company's issued capital for all A, B and C class shares Number of all Company A, B and C Class shares on issue $X X Which gives an average capital per share of $X.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 45B | Income Tax Assessment Act 1936 section 45C

Reasons for decision: Summary: Having regard to the relevant circumstances (as set out in subsection 45B(8)) of the ITAA 1936) of the Proposed Share Buy-Back, it cannot be concluded that a person would have entered into, or carried out, the buy-back for a more than incidental purpose of enabling a participating shareholder to obtain a tax benefit. The proposed split of the purchase price between capital and dividend components using the ACPS calculation set out in the facts is, for the purposes of section 159GZZZP of the ITAA 1936, appropriate in the circumstances. Therefore, section 45B of the ITAA 1936 will not apply to the Proposed Share Buy-Back. | Detailed Reasoning - Section 45B of the ITAA 1936 - schemes to provide certain benefits: Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends. In broad terms, section 45B of the ITAA 1936 applies where: | Detailed Reasoning - Paragraph 45B(2)(a) of the ITAA 1936: A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as provided by section 995-1 of the ITAA 1997 (subsection 45B(10) of the ITAA 1936). Broadly, in this context, the term scheme takes the same meaning as provided in Part IVA of the ITAA 1936: that definition is widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan, or proposal. In particular, a scheme is anything that satisfies any of the terms in the statutory definition. The phrase 'provided with a capital benefit' is defined in subsection 45B(5) of the ITAA 1936. It states that a reference to a person being provided with a capital benefit is a reference to any of the following: a) the provision of ownership interests in a company to the person; b) the distribution to the person of share capital or share premium; or c) something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person. Application in these circumstances The Proposed Share Buy-Back will comprise a scheme within the meaning of subsection 45B(10) of the ITAA 1936 under which the relevant shareholder will be provided with a capital benefit within the meaning of subsection 45B(5), being the amount of the purchase price debited against the amount standing to the credit of Company's share capital account. Therefore, paragraph 45B(2)(a) of the ITAA 1936 will be satisfied. | Detailed Reasoning - Paragraph 45B(2)(b) of the ITAA 1936: Relevantly, subsection 45B(9) of the ITAA 1936 provides that a relevant taxpayer 'obtains a tax benefit' if an amount of tax payable by that taxpayer would, apart from the operation of section 45B, be less than the amount that would have been payable if the capital benefit had been a dividend. Application in these circumstances Under the scheme, the relevant shareholder will obtain a tax benefit within the meaning of subsection 45B(9) of the ITAA 1936 because, apart from section 45B applying, the amount of tax payable by the shareholder on the capital benefit will be less than the amount that would have been if the capital benefits were instead assessable dividends. Therefore, paragraph 45B(2)(b) of the ITAA 1936 will be satisfied. (The precise individual circumstance of each shareholder is not known. However, it is possible that the amount of tax that is payable by a shareholder would be less than the amount of tax that would be payable if they received a franked dividend instead of a capital payment. On this basis, it has been assumed that at least in respect of some shareholders, a "tax benefit" may arise as defined in subsection 45B(9) of the ITAA 1936.) | Detailed Reasoning - Paragraph 45B(2)(c) of the ITAA 1936: For the purposes of paragraph 45B(2)(c) of the ITAA 1936, the Commissioner is required to consider the relevant circumstances of the scheme to determine whether any part of the scheme was entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit. The relevant circumstances to be considered include the non-exhaustive factors set out in subsection 45B(8) of the ITAA 1936 and include any of the matters listed in subsection 177D(2) of the ITAA 1936. In broad terms: Share buy-backs Division 16K of the ITAA 1936 outlines the income tax consequences of share buy-backs. This division applies where a company buys a share in itself from its shareholders. Section 159GZZZK of the ITAA 1936 provides that share buy-backs take the form of an on-market purchase or an off-market purchase. In accordance with paragraph 159GZZZK(d) of the ITAA 1936 the share buy-back will be an off-market purchase where it is not an on-market purchase. Paragraph 159GZZZK(c) of the ITAA 1936 provides that an on-market purchase will arise if: Practice Statement Law Administration PS LA 2007/9 Share buy-backs (PSLA 2007/9) sets out the Commissioner's approach to an arrangement which is a share buy-back within the meaning of section 159GZZZK of the ITAA 1936, and explains that the purpose test in section 45B of the ITAA 1936 examines why the proportions have been chosen as they have,, and if the objective circumstances in subsection 45B(8) on which the test relies point to a significant tax purpose for the choice, then subsection 45B(3) would authorise an adjustment. Application in these circumstances As Company's shares are not listed for quotation on the official list of a stock exchange in Australia or elsewhere, the Proposed Share Buy-Back of any of the shares cannot be made in 'the ordinary course of trading on that stock exchange' as required under subparagraph 159GZZZK(c)(ii) of the ITAA 1936 to be an 'on-market purchase. Therefore, in accordance with paragraph 159GZZZK(d) of the ITAA 1936, the Proposed Buy-Back of the shares will be an off-market buy-back for the purposes of section 159GZZZK of the ITAA 1936. Having regard to the relevant circumstances (as set out in subsection 45B(8) of the ITAA 1936) of the Proposed Share Buy-Back, it cannot be concluded that a person would have entered into, or carried out, the buy-back for a more than incidental purpose of enabling a participating shareholder to obtain a tax benefit. Therefore, paragraph 45B(2)(b) of the ITAA 1936 will be satisfied. Company proposes setting the capital component of the Proposed Share Buy-Back at $X (per share). The Commissioner accepts that this proposal is reasonable in the circumstances. Relevantly, the amendment to Company's constitution to provide that dividends can be paid on any class of shares to the exclusion of the other classes and can be paid as a result of a determination by directors, or a decision of the company in a general meeting subject to the dividend being recommended by directors. Notwithstanding the A, B and C Class shares are separate classes of shares, a relevant and important consideration in these circumstances is Individual A's control over and interest in, all A, B and C class shares (and the benefits therefrom) - noting that: As such, in this case it can be said that Individual A is indifferent whether the shares have the same rights to dividends etc. as each other or not. Consequently, it is appropriate for the ACPS method to be applied across all A, B and C class shares. The formula for the Average Capital Per Share method: Average capital per share = Company's ordinary issued capital Number of shares on issue Applying this to the A, B and C class shares: Average capital per share = Company's issued capital for all A, B and y C class shares Number of all A, B and C class shares on issue X X Which gives an average capital per share of $X. It is noted that the outcome of the audit decision in XXXX does not inform the application of the ACPS method with respect to the Proposed Share Buy-Back. The capital per share calculated by the ATO during the audit was influenced by the connection between the monies repaid to shareholders and the profits derived from a specific investment that were specific to the XXXX income year, and as such it was reasonable for the Commissioner to adopt the slice approach. That factor (that is, the specific transactions relevant to the XXXX income year only) is therefore not relevant X years later. | Detailed Reasoning - Conclusion: Therefore, section 45B of the ITAA 1936 will not apply to the Proposed Share Buy-Back. | Detailed Reasoning - Section 45C of the ITAA 1936 - effect of determinations under section 45B for capital benefits: Section 45C of the ITAA 1936 broadly provides that if the Commissioner makes a determination under subsection 45B(3) of the ITAA 1936, the amount of the capital benefits is taken to be paid out of company profits and to be an unfranked dividend that is paid by the company to the shareholder or relevant taxpayer at the time the capital benefit is provided. Application to the proposed share buy-back As all the conditions of subsection 45B(2) of the ITAA 1936 will not be satisfied, the Commissioner will not be empowered to make a determination that section 45C of the ITAA 1936 applies.

Individual A received $X in exchange for X B Class shares; and | Individual B received $X in exchange for X C Class shares. | is the director/controlling mind of Company A (which holds the A Class shares): | also holds 1 A Class Share; | holds the B Class shares; and | is the executor of Individual B's estate (which held the C Class shares) on Individual B's death. | Individual A - $X (X shares x $X per share capital), and | Individual B - $X (X shares x $1X per share capital). | Individual A - $X (X shares x $X per share) | Individual B - $X (X shares x $X per share). | in XXXX, Company disposed of an asset for which it obtained sales proceeds of $X and made an accounting profit of $X; | during XXXX, Company D, a wholly-owned subsidiary of Company, disposed of shares for sales proceeds of $X making an accounting profit of $X; | On XXXX, Company disposed of properties at a loss resulting in capital proceeds of $X being received and an accounting loss of $X; and | During XXXX Company also sustained accounting capital loss of $XXXX. | Individual A was appointed as governing director until he dies, resigns the office or ceases to be a director. | The shares held by the governing director are entitled to X % of the voting power of all shares represented at any meeting of members. | The governing director may exercise all powers of the company and of the board of directors (except any powers that the Act or the Constitution requires the company to exercise in general meeting) | The governing director has control over all the other directors and they are bound to conform to the directions of the governing director in regard to the operations of the company. | Individual A has exclusive option to subscribe for any unissued shares at $X per share in priority to any other person. This option is personal to Individual A irrespective of whether he is governing director. | In applying the slice approach, Company received proceeds of $X from the disposal of assets in the year ended 30 June XXXX, with $X attributable to the capital (for accounting purposes) contributed to the disposed assets and the remaining $X attributable to accounting profit. | This was indicative of X% of the total proceeds from asset disposals being attributable to capital, and X% of total proceeds from asset disposals in XXXX being attributable to profit. | Company utilised the proceeds from these asset disposals in the year ended 30 June XXXX to fund the selective share buy-back, even though there was not an express link between any one asset disposal and the buy-back of shares from Individual A. | As such, 43.706% of the total proceeds of $X received by Individual A should have been attributable to dividends. This would have resulted in dividends of $X (X% of $X proceeds) being declared. | Originally, Individual A declared only $X of franked dividends as a result of the buy-back. | As a result of the Determination made pursuant to subsection 45B(3) of the ITAA 1936 referred to above, Individual A was held to have received unfranked dividends of $X being the difference between $X which was based on the slice approach minus $X, which was based on Company's initial application of the ACPS approach (i.e. $X per share calculated as $X/X B Class share bought back) from the proceeds of the buy-back. | Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar . | there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936); | 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) of the ITAA 1936); and | 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 a tax benefit (paragraph 45B(2)(a) of the ITAA 1936). | Paragraph 45B(8)(a) of the ITAA 1936 refers to the extent to which the distribution is attributable to the profits of the company. | Paragraph 45B(8)(b) of the ITAA 1936 refers to the pattern of distributions. | Paragraphs 45B(8)(c) to (g) of the ITAA 1936 concern the particular taxation status of shareholders. | Paragraph 45B(8)(h) of the ITAA 1936 requires a comparison of the respective interests held by shareholders after the distribution. | Paragraphs 45B(8)(i) and (j) of the ITAA 1936 pertain to the provision of ownership interests and demergers. | Paragraph 45B(8)(k) of the ITAA 1936 refers to matters listed in section 177D of the ITAA 1936. | the share 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. | Individual A is the director/controlling mind of Company A (which holds the A Class shares): | Individual A also holds 1 A Class share; | Individual A holds the B Class share; and | Individual A is the executor of Individual B's estate (which held the C Class shares) on Individual B's death (Individual A controls Company B which is trustee for Individual B's Testamentary Trust - which owns the C Class shares in terms of Individual B's Will & Codicil).