Private ruling: Off-market share buy-back
Published: December 2015

Ruling: Q1: If the Commissioner makes a determination under paragraph 177EA(5)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) that a franking debit arises in the company's franking account as a result of the buy-back, will the franking debit be determined in accordance with the formula set out in Practice Statement Law Administration PS LA 2007/9 (at Example 5 following paragraph 126)? | A1: Yes. | Q2: Will the buy-back and subsequent cancellation of shares under the buy-back be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936? | A2: Yes.

Relevant facts and circumstances: The company is an Australian resident company limited by shares. The company intends to buy-back (off-market) a certain number of its shares. All shares bought back under the buy-back will be cancelled. A percentage of the company's shareholders are non-residents within the meaning given by subsection 6(1) of the ITAA 1936.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 159GZZZN | Income Tax Assessment Act 1936 paragraph 177EA(5)(a)

Reasons for decision: Summary: If the Commissioner makes a determination under paragraph 177EA(5)(a) of the ITAA 1936 that a franking debit arises in the company's franking account as a result of the buy-back, he will use the formula set out in Practice Statement Law Administration PS LA 2007/9 (at Example 5 following paragraph 126) to determine the amount of the franking debit. | Detailed Reasoning - Detailed reasoning: Typically, the Commissioner calculates the franking debit in respect of a determination made under paragraph 177EA(5)(a) of the ITAA 1936 using the following formula: Number of shares bought back x Franking credit attaching to each x Non-residents x 0.5 If the Commissioner makes a determination under paragraph 177EA(5)(a) of the ITAA 1936 that a franking debit arises in the company's franking account as a result of the buy-back, he will use this formula. The Commissioner accepts the percentage given to him for the 'non-residents' part of the formula, and will use this percentage if a determination is made. | Summary: The buy-back and subsequent cancellation of shares under the buy-back will be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Under section 159GZZZN of the ITAA 1936, if a company buys-back a share the buy-back, and any subsequent cancellation of the share, are disregarded for the purposes of: (a) determining for the purposes of the ITAA 1936 or the ITAA 1997: (i) whether an amount is included in the assessable income of the company under a provision of the ITAA 1936 or the ITAA 1997 (other than a provision of Part 3-1 or 3-3 of the ITAA 1997 (about CGT)); or (ii) whether an amount is allowable as a deduction to the company; or (b) determining whether the company makes a capital gain or capital loss. Under the buy-back, the company will buy-back shares within the meaning given by paragraph 159GZZZK(a) of the ITAA 1936 and cancel them. Accordingly, the buy-back and subsequent cancellation of shares under the buy-back will be disregarded for the purposes listed in section 159GZZZN of the ITAA 1936.