Private ruling: Share buy-back
Date of advice: 4 March 2026
Published: 9 June 2026
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will the selective share buy-back be an off-market purchase within the meaning of paragraph 159GZZZK(d) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Will $xx per share of the $xx per share purchase price be taken to be a dividend paid by the company in accordance with section 159GZZZP of the ITAA 1936? | A2: Yes. | Q3: Is the dividend component of the selective share buy-back price a frankable distribution pursuant to section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes. | Q4: Will the Commissioner make a determination that section 177EA of the ITAA 1936 should apply such that no franking credit arises to Trust 2 on the dividend component received under the share buy-back? | A4: No. | Q5: Will the Commissioner make a determination that section 204-30 of the ITAA 1997 should apply such that no franking credit arises to Trust 2? | A5: No. | Q6: Will the Commissioner make a determination that section 45A, 45B and 45C should apply such that any capital benefit provided is an unfranked dividend? | A6: No. | Q7: Will Section 100A of the ITAA 1936 apply in respect of the distributions to be made by Trust 2, and/or subsequent distributions by beneficiary trusts, to respective presently entitled beneficiaries as outlined in the arrangement? If yes, will section 99A apply to the net income of the applicable trust/s that is subject to the section 100A statutory deeming that applicable present entitlements never arose? | A7: No. This private ruling applies for the following period: Year ended 30 June 20xx to 30 June 20xx

Relevant facts and circumstances: This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-125 | Income Tax Assessment Act 1997 Division 200 | Income Tax Assessment Act 1997 section 204-30 | Income Tax Assessment Act 1997 section 202-40 | Income Tax Assessment Act 1997 section 202-45 | Income Tax Assessment Act 1997 section 215-10 | Income Tax Assessment Act 1997 section 215-15 | Income Tax Assessment Act 1997 section 220-105 | Income Tax Assessment Act 1997 Division 725 | Income Tax Assessment Act 1997 subsection 960-120(1) | Income Tax Assessment Act 1936 section 45A | Income Tax Assessment Act 1936 section 45B | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1936 Division 16K | Income Tax Assessment Act 1936 section 100A | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 section 177EA

Reasons for decision: Detailed Reasoning - Question 1:: Will the selective share buy-back be an off-market purchase within the meaning of paragraph 159GZZZK(d) of the ITAA 1936? | Detailed Reasoning - Explanation of the law:: 36. Where a company buys a share in itself from a shareholder and then cancels that share, this is known as a share buy-back. Share buy-backs are predominantly governed by Division 16K (Division 16K) of the ITAA 1936. 37. Division 16K sets out how share buy-backs are treated for tax purposes. Relevant to the current circumstances, section 159GZZZK provides that where a company buys a share in itself from a shareholder in the company (a share buy-back), the share is not a share that is listed on a stock exchange and the buy-back is not made in the ordinary course of trading on that stock exchange, the buy-back is an off-market purchase. | Detailed Reasoning - Application to your circumstances:: 38. Company 1 is not listed for quotation on an official stock exchange in Australia or elsewhere. The current shareholding of the company is as follows: (a) x% Company 2 (b) x% Trust 1 (c) x% Trust 2 (d) x% held by Individual 1, and (e) x% held by Individual 2. 39. To allow Individual 2 to exit from the business, Company 1 is proposing to implement a selective buy-back of x ordinary shares held by Trust 1 and x ordinary shares held by Trust 2 for total consideration of approximately $x million. 40. There is no intention to sell part of the business, or its assets under the arrangement. 41. Given the above, the selective buy-back and cancellation of Trust 1 and 2's shares in Company 1 in Steps 1 and 2 of the proposed arrangement will be an off-market buy-back pursuant to paragraph 159GZZZK(d). | Detailed Reasoning - Question 2:: Will $x per share of the $x per share purchase price be taken to be a dividend paid by the company in accordance with section 159GZZZP of the ITAA 1936? PART OF OFF-MARKET PURCHASE PRICE IS A DIVIDEND: | Detailed Reasoning - Explanation of the legislation:: 42. Subject to subsection 159GZZZP(1A) of the ITAA 1936, subsection 159GZZZP(1) relevantly provides that where a buy-back of a share by a company is an off-market purchase, a dividend will be taken to have been made by the company to the seller as a shareholder, out of profits of the company and on the day the buy-back occurs. The amount of the dividend is the difference between the purchase price and any part of the purchase price in respect of the buy-back of the share which is debited against amounts standing to the credit of the company's share capital account. 43. Subsection 159GZZZP(1A) of the ITAA 1936 provides that where a dividend is included to any extent in the seller's assessable income of any year, the dividend is not taken into account to that extent under section 118-20 of the ITAA 1997. 44. Subsection 159GZZZP(2) of the ITAA 1936 provides that the remainder of the purchase price is not taken to be a dividend. | Detailed Reasoning - Average capital per share method (ACPS):: 45. Paragraph 12 of PS LA 2007/9 provides that the ATO considers that: ... the Average Capital Per Share methodology is the preferred methodology for determining the 'Dividend/Capital Split' in an off-market share buy-back. In the absence of exceptional circumstances, Average Capital Per Share will be applied to determine the capital component...' 46. Paragraphs 59 and 60 of PS LA 2007/9 further states that: An essential aspect of any off-market share buy-back is the 'split' between the return of capital and dividend paid to participating shareholders. Section 159GZZZP of the ITAA 1936 prescribes that: • 'capital' is debited against the company's share capital account, and • the balance of the purchase price is a dividend. The 'split' is nominated by the company. However, the ATO will have regard to the various anti-avoidance and integrity rules in the provision of written advice to the company. For example, a 'split' that has too low a capital component will both stream dividends and artificially increase capital losses to vendor shareholders. Conversely, a capital component that is too high will provide or stream capital benefits at the expense of dividends. Neither of these outcomes is desirable. 47. The ACPS method is explained in paragraph 62 of PS LA 2007/9 as obtained by: ... dividing a company's ordinary issued capital by the number of shares on issue. The amount so derived is a reasonable estimate of any capital component of the split. The balance of any buy-back price would be a dividend. This method does overcome the dilution issue discussed at paragraph 63 of this practice statement. Another clear advantage is that ACPS gives rise to a strong presumption that sections 45A and 45B of the ITAA 1936 would not apply to the buy-back. Tax officers should examine recent financial year data as well as projected movements in the average. Evidence of recent capital injections just before a share buy-back may attract the anti-avoidance provisions. ACPS should, prima facie , be applied to determine the capital component in an off-market share buy-back. The other methods discussed below may have particular relevance or application in specific instances only. | Detailed Reasoning - Application to your circumstances:: 48. Company 1 proposes to use the ACPS methodology to determine the capital/dividend split of the purchase price of Company 1's shares under the proposed arrangement. This will require dividing the company's issued share capital by the number of shares on issue to determine the capital component of the buy-back price. The balance of the buy-back price will be the amount of the dividend per share. 49. With issued share capital of $x and x issued shares, the capital component of the buy-back price for the purposes of subsection 159GZZZP(1) of the ITAA 1936 using the ACPS method is $x per share. 50. With a share buy-back purchase price of $x per share, the dividend component of the purchase price pursuant to subsection 159GZZZP(1) of the ITAA 1936 will be the difference between the purchase price and the capital component, being an amount of $x per share. | Detailed Reasoning - Question 3:: Is the dividend component of the selective share buy-back price a frankable distribution pursuant to section 202-40 of the ITAA 1997? | Detailed Reasoning - Explanation of the legislation:: 51. Section 202-40 of the ITAA 1997 provides that a distribution is a frankable distribution to the extent that it is not unfrankable pursuant to section 202-45. (a) In relation to a company, the meaning of the term 'distribution' is provided by item 1 of the table in subsection 960-120(1) of the ITAA 1997 as 'a dividend, or something that is taken to be a dividend, under this Act'. 52. Section 202-45 of the ITAA 1997 states that the following are unfrankable: ... (c) where the purchase price on the buy-back of a share by a company from one of its members is taken to be a dividend under section 159GZZZP of that Act - so much of that purchase price as exceeds what would be the market value (as normally understood) of the share at the time of the buy-back if the buy-back did not take place and were never proposed to take place; (d) a distribution in respect of a non-equity share; (e) a distribution that is sourced, directly or indirectly, from a company's share capital account; (f) an amount that is taken to be an unfrankable distribution under section 215-10 or 215-15; (g) an amount that is taken to be a dividend for any purpose under any of the following provisions: (i) unless subsection 109RB(6) or 109RC(2) applies in relation to the amount - Division 7A of Part III of that Act (distributions to entities connected with a private company); (ii) (Repealed...) (iii) section 109 of that Act (excessive payments to shareholder, directors and associates) (iv) section 47A of that Act (distribution benefits - CFCs) (h) an amount that is taken to be an unfranked dividend for any purpose; (i) under section 45 of that Act (streaming bonus shares and unfranked dividends); (ii) because of a determination of the Commissioner under section 45C of that Act (streaming dividends and capital benefits); (i) a demerger dividend; (j) a distribution that section 152-125 or 220-105 says is unfrankable. | Detailed Reasoning - Section 215-10 of the ITAA 1997 - Certain non-share dividends by ADIs unfrankable:: 53. Section 215-10 of the ITAA 1997 provides conditions for when non-share dividends [1] paid by an authorised deposit-taking institution (ADI) will not be frankable. | Detailed Reasoning - Section 215-15 of the ITAA 1997 - Non-share dividends are unfrankable if profits are unavailable:: 54. Broadly, section 215-15 of the ITAA 1997 provides that if a corporate tax entity pays a non-share dividend and immediately before the payment, the available frankable profits of the entity is nil or less than nil, the non-share dividend will be unfrankable. | Detailed Reasoning - Division 7A - Distributions to entities connected with a private company - deemed dividends:: 55. Broadly, Division 7A of the ITAA 1936 is an integrity measure aimed at ensuring that profits of a private company are not effectively received by its shareholders in non-dividend form. The general provisions of Division 7A treat amounts paid or lent, or debts forgiven, by a private company to a shareholder in a private company or an associate of such a shareholder as unfranked dividends. 56. Subsection 109RB(6) of the ITAA 1936 relates to where the Commissioner has decided to exercise his discretion to either disregard the operation of Division 7A or to allow the deemed dividend to be franked. 57. Section 109RC of the ITAA 1936 relates to dividends which are taken to have been paid as a result of a family law obligation. | Detailed Reasoning - Section 109 - Excessive payments to shareholders, directors and associates deemed to be dividends: 58. Generally, where a private company pays or credits an amount (called the excessive amount) to an associated person that is, or purports to be, remuneration or an allowance, gratuity or compensation in relation to the retirement, or employment, of the associated person, so much of the excessive amount that exceeds an amount that the Commissioner considers reasonable: (a) will not be an allowable deduction, and (b) will be deemed to be a dividend. | Detailed Reasoning - Section 45 - Streaming bonus shares and unfranked dividends:: 59. Broadly, section 45 relates to the provision of shares and the payment of minimally franked dividends to its shareholders in such a way that the shares are not received by all shareholders or will receive minimally franked dividends. | Detailed Reasoning - Section 152-125 of the ITAA 1997 - payments to company's or trust's CGT concession stakeholders are exempt:: 60. Section 152-125 of the ITAA 1997 provides that if a capital gain made by a company or trust is disregarded under the 15-year exemption in section 152-110 of the ITAA 1997, certain payments by the company or trust to an individual are not taken into account in determining that individual's taxable income. | Detailed Reasoning - Section 220-105 of the ITAA 1997 - Unfrankable distributions by NZ franking companies:: 61. Broadly, section 220-105 of the ITAA 1997 provides the conditions when franking credits will not be available to a NZ franking company. | Detailed Reasoning - Application to your circumstances:: 62. Based on the assumption that the market value of Company 1 is $x million at the time the arrangement is implemented, the market value per share will be $x. As the purchase price to be received by Trusts 1 and 2 will be at the market value of $x, there will be no amount that will be in excess of what would have been the market value and paragraph 202-45(c) of the ITAA 1997 will not apply. 63. The proposed arrangement is in relation to a buy-back of Company 1's ordinary shares held by Trusts 1 and 2 and therefore, does not involve a distribution in respect of a non-equity share for paragraph 202-45(d) of the ITAA 1997 to apply. 64. The capital component of $x per share will be sourced directly from Company 1's share capital account. Consequently, paragraph 202-45(e) of the ITAA 1997 will apply to this portion of the share purchase price and it will not be frankable. 65. Additionally, the proposed selective buy-back of Company 1's shares will not involve: (a) the payment of non-share dividends (sections 215-10 and 215-15 will not apply) (b) subsections 109RB(6) and 109RC(2) (regarding the exercise of the Commissioner's discretion under section 109RB or a deemed dividend having arise through a family law obligation) (c) excessive payments by Company 1 to an associated person (section 109 will not apply) (d) a distribution to a controlled foreign company (CFC) (section 47A will not apply) (e) the Commissioner making a determination under subsection 45A(2) or 45B(3) (section 45C will not apply - for the reasons referred to in explanation of our answer to Question 6 of this ruling) (f) the restructuring of a corporate group under a demerger (g) the small business concessions are not available and the 15-year exemption under section 152-110 is not available, and (h) a NZ franking company (section 220-105 will not apply). 66. Consequently, the amount of the purchase price in excess of the capital component of $x per share, being the dividend component of $x, will be frankable pursuant to section 202-40 of the ITAA 1997. | Detailed Reasoning - Question 4:: Will the Commissioner make a determination that section 177EA of the ITAA 1936 should apply such that no franking credit arises to Trust 2 on the dividend component received under the share buy-back? | Detailed Reasoning - Explanation of the legislation: 67. The rules governing the imputation system in Division 200 of the ITAA 1997 aim to avoid double taxation at the shareholder level. Division 200 broadly provides that shareholders who receive assessable income from a corporate tax entity can claim a tax offset for tax already paid by the corporate entity. The tax credit paid by the corporate tax entity is known as a franking credit. 68. Section 177EA of the ITAA 1936 is a general anti-avoidance provision relating to a wide range of schemes designed to obtain a tax advantage in relation to imputation benefits. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 3) 1998 (Explanatory Memorandum), which introduced section 177EA, states: 8.5 Two of the underlying principles of the imputation system are, firstly, that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves and, secondly, that tax paid at the company level is in broad terms imputed to shareholders proportionately to their shareholdings. 69. Section 177EA of the ITAA 1936 applies to schemes for the disposition of shares or an interest in shares, where a franked distribution is paid or payable in respect of the share or an interest in shares, and could include an off-market share buy-back with a franked dividend component. Specifically, subsection 177EA(3) provides that: This section applies if: (a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and (b) either: (i) a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or (ii) a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and (c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and (d) except for this section, the person (the relevant taxpayer ) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and (e) 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 an imputation benefit. 70. Consequently, having regard to the relevant circumstances of the particular scheme, section 177EA of the ITAA 1936 focusses on whether it can be concluded that there is a more than incidental purpose of conferring an imputation benefit under the scheme for the company, its shareholder/s or any relevant party. 71. The meaning of the term 'relevant circumstances' is provided in subsection 177EA(17) of the ITAA 1936 to include: (a) the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding membership interests, or having interests in membership interests, in the corporate tax entity that are respectively borne by or accrue to the parties to the scheme, and whether there has been any change in those risks and opportunities for the relevant taxpayer or any other party to the scheme (for example, a change resulting from the making of any contract, the granting of any option or the entering into of any arrangement with respect to any membership interests, or interests in membership interests, in the corporate tax entity); (b) whether the relevant taxpayer would, in the year of income in which the distribution is made, or if the distribution flows indirectly to the relevant taxpayer, in the year in which the distribution flows indirectly to the relevant taxpayer, derive a greater benefit from franking credits than other entities who hold membership interests, or have interests in membership interests, in the corporate tax entity; (c) whether, apart from the scheme, the corporate tax entity would have retained the franking credits or exempting credits or would have used the franking credits or exempting credits to pay a franked distribution to another entity referred to in paragraph(b); (d) whether, apart from the scheme, a franked distribution would have flowed indirectly to another entity referred to in paragraph(b); (e) if the scheme involves the issue of a non - share equity interest to which section 215-10 of the Income Tax Assessment Act 1997 applies--whether the corporate tax entity has issued, or is likely to issue, equity interests in the corporate tax entity: (i) that are similar, from a commercial point of view, to the non - share equity interest; and (ii) distributions in respect of which are frankable; (f) whether any consideration paid or given by or on behalf of, or received by or on behalf of, the relevant taxpayer in connection with the scheme (for example, the amount of any interest on a loan) was calculated by reference to the imputation benefits to be received by the relevant taxpayer; (g) whether a deduction is allowable or a capital loss is incurred in connection with a distribution that is made or that flows indirectly under the scheme; (ga) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is sourced, directly or indirectly, from unrealised or untaxed profits; (h) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is equivalent to the receipt by the relevant taxpayer of interest or of an amount in the nature of, or similar to, interest; (i) the period for which the relevant taxpayer held membership interests, or had an interest in membership interests, in the corporate tax entity; (j) any of the matters referred to in subsection 177D(2). 72. Paragraph 115 of PS LA 2007/9 states: In coming to the conclusion that section 177EA of the ITAA 1936 does apply to an off-market share buy-back, the Commissioner has regard to relevant circumstances of an arrangement, as outlined in subsection 177EA(17). Tax officers should be aware of even seemingly innocuous features that have caused the provision to be applied: • the delivery of franking credits in excess of what would have otherwise been distributed in the ordinary course of dividend declaration • the greater attraction of the buy-back to resident shareholders who could fully utilise the franking credits than to non-resident shareholders who could not (...) • the greater attraction of the buy-back to some resident shareholders with a low marginal tax rate than other resident shareholders (for example, whereas superannuation funds are taxed at 15% and corporations at 30% individuals can be taxed at a marginal tax rate up to 45%), and • that participating shareholders were more likely than not to make an economic gain, but a loss for taxation purposes, from their participation. 73. However, paragraph 103 [2] of PSLA 2007/9 provides that: A more than incidental purpose includes the 'main or substantial purpose' but does not need to be the most' influential or prevailing purpose' and will not include a purpose which occurs 'fortuitously or in subordinate conjunction with one of the main or substantial purposes...or merely follows that purpose as a natural incident.' 74. Where section 177EA of the ITAA 1936 applies, subsection 177EA(5) provides that the Commissioner may make a determination in writing that: (a) where the corporate tax entity is a party to the scheme - the franking debit or exempting debit of the entity arises in respect of each distribution made to the relevant taxpayer, or that flows indirectly to the relevant taxpayer, or (b) no imputation benefit is to arise in respect of a distribution or a specified part of a distribution that is made, or that flows indirect, to the relevant taxpayer. 75. A determination made by the Commissioner in accordance with subsection 177EA(5) of the ITAA 1936 will not form part of an assessment. | Detailed Reasoning - Application to your circumstances:: 76. Given the broad manner in which paragraphs 177EA(3)(a) to (d) of the ITAA 1936 are drafted, these paragraphs will be satisfied under the proposed arrangement. Therefore, whether the Commissioner will make a determination pursuant to subsection 177EA(5) will fall upon the consideration of the 'relevant circumstances' of the proposed share buy-back arrangement and if it can be concluded that there is more than an incidental purpose of providing a franking credit benefit. (a) Paragraph 177EA(17)(a): (i) Individuals 1 and 2 first gained an interest in Company 1 in 19xx. Over time, their proportional shareholding in the company has changed. (ii) In 19xx, Trusts 1 and 2 were settled to hold shares for their (and their families') benefit. (iii) In 19xx, Individuals 1 and 2 (and their respective families) initiated a buy-out of the shares not held by them such that the shareholding of Company 1 was reduced from xx shareholders to effectively xx shareholders. (iv) Given the above, the proposed share buy-back does not contain elements that would mitigate or alter the risks of loss, or give rise to additional opportunities for profit or gain, that have not been present over the many decades of the shareholding. (b) Paragraph 177EA(17)(b) to (d): (i) There are no non-resident shareholders (or other members that cannot gain the benefit of franking credits) of Company 1. (ii) The proposed share buy-back will not result in any shareholder receiving a greater, or disproportionate, benefit from franking credits over other shareholders. (c) Paragraph 177EA(17)(e): (i) Section 215-10 of the ITAA 1997 broadly applies to an authorised deposit-taking institution (ADI). There are no ADIs involved in the arrangement and paragraph 177EA(17)(e) is not applicable. (d) Paragraph 177EA(17)(f): (i) No consideration will be paid to the shareholders (or related parties) with reference to the franking credits received by the shareholders. (e) Paragraph 177EA(g): (i) With cost bases ranging between nil to $x per share, and the capital component of the buy-back price of $x per share, there will not be any deductions or capital losses available. (f) Paragraph 177EA(ga): (i) The consideration will not be sourced from unrealised or untaxed profits. (g) Paragraph 177EA(h): (i) None of the consideration will be equivalent to the receipt of an interest (or an amount in the nature of, or similar to, interest) by the shareholder. (h) Paragraph 177EA(i): (i) Trusts 1 and 2 first acquired shares in Company 1 in 19xx. Their last acquisition of shares in the company occurred in 20xx. (ii) No shareholders will have purchased shares in Company 1 immediately before the proposed share buy-back arrangement. (i) Paragraph 177EA(j) - matters in subsection 177D(2): (i) The form and substance of the scheme involving the buy-back of Trusts 1 and 2's shares does not appear to be artificial or contrived. It is a step being implemented to allow Trust 2 (and Individual 2) to exit the business in a manner that is acceptable to the Commissioner. (ii) Having regard to the factors in subsection 177D(2) in relation to the scheme, the selective share buy-back is not one that is entered into or carried out to allow either of the trusts to obtain a franking credit benefit. 77. Based on the above summary analysis, the Commissioner will not make a determination pursuant to subsection 177EA(5) of the ITAA 1936 to deny franking credits on the dividend component received under a proposed share buy-back arrangement. | Detailed Reasoning - Question 5:: Will the Commissioner make a determination that section 204-30 of the ITAA 1997 should apply such that no franking credit arises to Trust 2? | Detailed Reasoning - Explanation of the legislation:: 78. Section 204-30 of the ITAA 1997 applies where a company streams the payment of franked distributions to its shareholders in such a way that the imputation benefits attaching to the distribution are received by those shareholders who derive a greater benefit from them and other shareholders receive lesser imputation benefits, or no imputation benefits. 79. Specifically, subsection 204-30(1) of the ITAA 1997 provides that: This section empowers the Commissioner to make determinations if an entity streams one or more distributions (or one or more distributions and the giving of other benefits), whether in a single franking period or in a number of franking periods, in such a way that: (a) an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions; and (b) the member would derive a greater benefit from franking credits than another member of the entity; and (c) the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits. The member that derives the greater benefit from franking credits is the favoured member . The member that receives the lesser imputation benefits is the disadvantaged member . 80. The meaning of the term 'streams' is not defined in the income tax legislation. Guidance on the meaning of the term can be found in the Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002, which introduced the streaming provisions in Subdivision 204-D. It states that streaming will occur when 'selectively directing the flow of franked distributions to those members who can most benefit from imputation credits'. 81. Paragraphs 3.29 and 3.30 of the Explanatory Memorandum further state: 3.29 It will normally be apparent on the face of an arrangement that a strategy for streaming is being implemented. The distinguishing of members on the basis of their ability to use franking benefits is a key element of streaming. 3.30 Where one class [of members] is predominantly able to use imputation credits, and the other is predominantly not, it may be apparent that an arrangement is streaming, notwithstanding the presence in each class of a small minority of the other type of member. 82. Examples of what would be the giving of other benefits is given for in subsection 204-30(2) of the ITAA 1997, which provides: (a) issuing bonus shares; (b) returning paid-up capital; (c) forgiving a debt; the entity or another entity making a payment of any kind, or giving any property, to a member or to another person on a member's behalf. 83. Subsection 204-30(3) of the ITAA 1997 then provides that the Commissioner may make, in writing, one or more determinations: (a) that a specified franking debit arises in the franking account of the entity, for a specified distribution or other benefit to a disadvantage member; (b) that a specified exemption debit arises in the exempting account of the entity, for a specified distribution or other benefit to a disadvantaged member; (c) that no imputation benefit is to arise in respect of a distribution that is made to a favoured member and specified in that determination. 84. As explained in paragraph 139 of PS LA 2007/9, subsection 204-30(4) and (5) provide how the debit or distribution may be specified, as follows: • the Commissioner may specify the franking percentage or exempting percentage to be used in working out the amount of the debit, or • specify the date or period when the distribution was made, and the member or class of members to whom it was made. 85. Subsection 204-30(6) of the ITAA 1997 explains that a member of an entity will receive an imputation benefit if: (a) the member is entitled to a tax offset under Division 207 as a result of the distribution; or (b) an amount would be included in the member's assessable income as a result of the distribution because of the operation of section 207-35; or (c) a franking credit would arise in the franking account of the member as a result of the distribution; or (d) an exempting credit would arise in the exemption account of the member as a result of the distribution; or (e) the member would not be liable to pay withholding tax on the distribution, because of the operation of paragraph 128B(3)(ga) of the Income Tax Assessment Act 1936 ; or (f) the member is entitled to a tax offset under section 210-170 as a result of the distribution. 86. Subsections 204-30(7) and (8) of the ITAA 1997 provide a non-exhaustive list of cases which would result in a favoured member deriving a greater benefit from franking credits, if: (a) the other member is a foreign resident; (b) the other member would not be entitled to any tax offset under Division 207 because of the distribution; (c) the amount of the income tax that, apart from this Division, would be payable by the other member because of the distribution is less than the tax offset to which the other member would be entitled; (d) the other member is a corporate tax entity at the time of the distribution is made, but no franking credit arises for the entity as a result of the distribution; (e) the other member is a corporate tax entity at the time of the distribution is made, but cannot use franking credits received on the distribution to frank distributions to its own members because: (i) it is not a franking entity; or (ii) it is unable to make frankable distributions; (f) the other member is an exempting entity. 87. Where the Commissioner has or will exercise his discretion in relation to the same arrangement, paragraph 142 of PS LA 2007/9 states that the Commissioner will generally not make a determination pursuant to subsection 204-30(3) of the ITAA 1997 where he intends to exercise his discretion pursuant to section 177EA of the ITAA 1936. | Detailed Reasoning - Application to your circumstances:: 88. Under Step 1, the dividend component of the buy-back price for the shares in Company 1 will be $x per ordinary share. In order for section 204-30 of the ITAA 1997 to apply, there needs to be an advantaged shareholder who receives a greater benefit from franking credits than another member. 89. In your circumstances, there will not be an advantaged shareholder who will receive a greater benefit from the franking credits than another member. The requisite streaming is not apparent, in that the arrangement is not structured on the basis of the ability of members to use franking benefits. Moreover, having regard to the non-exhaustive list of where a favoured member would derive a greater benefit from franking credits in subsection 204-30(8) of the ITAA 1997, none of the examples will be present in the buy-back of Trust 1 and 2's shares in Company 1. Consequently, the Commissioner will not make a determination pursuant to paragraph 204-30(3). | Detailed Reasoning - Question 6:: Will the Commissioner make a determination that section 45A, 45B and 45C of the ITAA 1936 should apply such that any capital benefit provided to Trust 2 is an unfranked dividend? | Detailed Reasoning - EXPLANATION OF THE LEGISLATION:: 90. In 1998, amendments were made to the Corporations Act 2001 (Corporations Act) which removed some of the then existing restrictions on share capital reductions by companies. A consequence of these amendments was that it became easier for companies to make capital distributions to shareholders. 91. As a result of the changes to the Corporations Act , sections 45A, 45B and 45C of the ITAA 1936 were introduced as anti-avoidance provisions to prevent companies from distributing profits to shareholders as preferentially taxed capital distributions rather than dividends. | Detailed Reasoning - Streaming of dividends and capital benefits:: 92. Paragraph 95 of PS LA 2007/9 explains that '[s]ection 45A of the ITAA 1936 applies where a company streams the provision of capital benefits and the payment of dividends in such a way that capital benefits are received by 'advantaged shareholders' who thereby derive a greater benefit from the capital benefits than other shareholders (who receive dividends)'. | Detailed Reasoning - ... streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that:: (a) the capital benefits are, or apart from this section would be, received by shareholders (the advantaged shareholders ) who would, in the year of income in which the capital benefits are provided, derive a greater benefit from the capital benefits than other shareholders; and (b) it is reasonable to assume that the other shareholders (the disadvantaged shareholders ) have received, or will receive, dividends. 94. The Commissioner may make a determination in writing that section 45C of the ITAA 1936 applies to whole or part of the capital benefit pursuant to subsection 45A(2). | Detailed Reasoning - 95. Subsection 45A(3) of the ITAA 1936 provides that the term 'provision of a capital benefit' refers to the following:: (a) the provision of shares in the company to the shareholder (b) the distribution of share capital or share premium to the shareholder, or (c) something that is done in relation to a share that increases the value of a share held by the shareholder. 96. Subsection 45A(4) of the ITAA 1936 describes when a 'greater benefit' arises: The circumstances in which a shareholder would, in a year of income, derive a greater benefit from capital benefits than another shareholder include, but are not limited to, any of the following circumstances existing in relation to the first shareholder and not in relation to the other shareholder: | Detailed Reasoning - (d) the shareholder has a net capital loss for the year of income in which this capital benefit is provided;: (e) the shareholder is a private company who would not have been entitled to a rebate under former section 46F if the shareholder had received the dividend that was paid to the disadvantaged shareholder; | Detailed Reasoning - (f) the shareholder has income tax losses.: 97. Section 45C of the ITAA 1936 broadly provides that if the Commissioner makes a determination under subsection 45A(2), 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. | Detailed Reasoning - Schemes to provide certain benefits:: 98. Subsection 45B(1) of the ITAA 1936 provides that the purpose of section 45B is to ensure that relevant amounts are treated as dividends if certain payments, allocations and distributions are made in substitution for dividends. [3] | Detailed Reasoning - 99. In relation to capital benefits, subsection 45B(2) of the ITAA 1936 provides that 45B will apply if:: (a) there is a scheme under which a person is provided with a capital benefit by a company (b) a taxpayer (the relevant taxpayer) obtains a tax benefit (this taxpayer may or may not be the person who is provided with the capital benefit), and (c) 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 taxpayer (the relevant taxpayer) to obtain a tax benefit. | Detailed Reasoning - 100. A 'scheme' is defined in subsection 177A(1) of the ITAA 1936 as:: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable by legal process; and (b) any scheme, plan, proposal, action, course of action or course of conduct. | Detailed Reasoning - 101. Subsection 45B(5) of the ITAA 1936 provides that a person will be 'provided with a capital benefit' if:: (a) they are provided with an ownership interest in a company (b) they receive distributions of share capital or share premium, or (c) something is done that increases the value of their ownership interest (which may or may not be the same ownership interest). 102. Subsection 45B(7) of the ITAA 1936 further states that a non-share distribution to an equity holder will be taken to be a distribution of share capital to the equity holder to the extent to which it is a non-share capital return. | Detailed Reasoning - 103. In relation to capital benefits, the meaning of the term 'tax benefit' is provided by subsection 45B(9) of the ITAA 1936, which states:: A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the ... capital benefit had been an assessable dividend. 104. Paragraph 45B(2)(c) of the ITAA 1936 requires the Commissioner to consider the 'relevant circumstances' of the scheme as set out in subsection 45B(8). A consideration of these circumstances determines whether any part of the scheme will be entered into for a purpose, other than an incidental purpose, of enabling the relevant taxpayer to obtain a tax benefit. Each of the circumstances must be considered in order to determine whether or not, individually or collectively, they reveal the existence of the requisite purpose. 105. The test of purpose is an objective one. The question is whether it would be concluded that a person who enters into or carries out the scheme does so for the purpose of obtaining a tax benefit for the relevant taxpayer in respect of the capital benefit. The purpose does not have to be the most influential or prevailing purpose, but it must be more than an incidental purpose. 106. The relevant circumstances contained in subsection 45B(8) of the ITAA 1936 cover the circumstances of the company and the tax profile of the shareholders, and include: (a) the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company; (b) the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company: (c) whether the relevant taxpayer has capital losses that, apart from the scheme, would be unutilised (within the meaning of the Income Tax Assessment Act 1997 ) at the end of the relevant year of income; (d) whether some or all of the ownership interests in the company or in an associate (within the meaning in section 318) of the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985; (e) whether the relevant taxpayer is a non-resident; (f) whether the cost base (for the purposes of the Income Tax Assessment Act 1997 ) of the relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit; (g) (Repealed by No 101 of 2006) (h) if the scheme involves the distribution of share capital or share premium - whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium; (i) if the scheme involves the provision of ownership interests and the later disposal of those interests; or an increase in the value of ownership interests and the later disposal of those interests: (i) the period for which the ownership interests are held by the holder of the interests; and (ii) when the arrangement for the disposal of the ownership interests was entered into; (j) for a demerger only: (i) [not relevant for the current circumstances]... (k) any of the matters referred to in subsection 177D(2). 107. PS LA 2007/9 states that the use of the ACPS method to determine the capital and dividend components of a share buy-back 'gives rise to a strong presumption that section 45A and 45B would not apply to the buy-back'. 108. Further, ATO Interpretative Decision ATO ID 2004/318 Income Tax Reduction in a shareholder's equity interest by the way of share buy-back: section 45A does not apply (ATO ID 2004/318) summarises the Commissioner's decision that section 45A would not apply to a proposed share buy-back arrangement similar to the current circumstances. The Commissioner determined in ATO ID 2004/318 that, despite one shareholder being provided with a capital benefit, section 45A would not apply as there is nothing in the arrangement to indicate that capital benefits are being streamed to one shareholder and dividends to another shareholder. | Detailed Reasoning - Effect of determinations under section 45A and 45B for capital benefits:: 109. Section 45C of the ITAA 1936 broadly provides that if the Commissioner makes a determination under subsections 45A(2) or 45B(3), 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. | Detailed Reasoning - Section 45A:: 110. Under Step 1 of the proposed arrangement, Trusts 1 and 2 will be the exiting shareholders. Consistent with paragraph 45A(3)(b) of the ITAA 1936, these 2 shareholders will receive a distribution of share capital and therefore Company 1 will provide them with a capital benefit of $x per share. 111. Individual 1, Individual 2, Trust 1 and Trust 2 hold shares in Company 1 that were acquired prior to 20 September 1985. Consequently, any capital gain derived by Trusts 1 and 2 from the sale of their Company 1 shares would be, apart from the operation of section 45A, disregarded. 112. Company 2 acquired its Company 1 shares in 20xx and these shares are post-CGT assets. In accordance with subsection 45A(4)(c) of the ITAA 1936, the pre-CGT status of Trusts 1 and 2 shares will enable both trusts to gain a greater capital benefit from the proposed share buy-back as compared to Company 2. 113. Your circumstances are similar to those in ATO ID 2004/318 where it was determined that section 45A did not apply. Although capital benefits will be provided to Trusts 1 and 2 under the proposed arrangement, it does not involve the payment of dividends to the remaining shareholders per subsection 45A(1) of the ITAA 1936. 114. Additionally, Company 1 will use the ACPS methodology to determine the capital/dividend split of the purchase price which will produce a capital component of $x per share for the purposes of subsection 159GZZZP(1). As stated in paragraph 62 of PS LA 2007/9, the use of the ACPS method gives a strong presumption that section 45A would not apply to the buy-back. 115. Having regard to all of the elements of the proposed arrangement, the Commissioner will not make a determination pursuant to subsection 45A(2) that section 45C will apply in relation to all or part of the capital benefits. | Detailed Reasoning - Section 45B:: 116. The proposed arrangement for the selective buy-back of the shares in Company 1 is an agreement, arrangement or understanding and therefore satisfies the definition of a scheme pursuant to subsection 177A(1) of the ITAA 1936. 117. The capital component of the buy-back will result in Trusts 1 and 2 receiving a distribution of share capital such that each trust will be provided with a capital benefit within the meaning in subsection 45B(5). 118. As required by paragraph 45B(2)(c) of the ITAA 1936, considering the relevant circumstances of the proposed arrangement as set out in subsection 45B(8): (a) The capital component of the proposed share buy-back will be attributable to issued capital of Company 1, and not realised profits (paragraph 45B(8)(a)). The ACPS will be applied to determine an acceptable capital/ profit split. Further, the capital distribution is not attributable to the profit on any disposal of assets or businesses as referred to paragraph 42 of PSLA 2007/9 and paragraph 73 of PSLA 2008/10 (regarding the application of section 45B to returns of capital). (b) There is no evidence of a substitution of distributions of profits with capital under the proposed share buyback arrangement, and there have been no acquisitions prior to the buyback in order for any entity to benefit from it (paragraph 45B(8)(b)). | Detailed Reasoning - (c) Neither Trusts 1 or 2 have capital losses (paragraph 45B(8)(c)).: (d) The shares in Company 1 by Trusts 1 and 2 were acquired by them before 20 September 1985 (paragraph 45B(8)(d)). While this may initially point towards the requisite purpose, the minor extent of the capital component of the share buyback purchase price compared to the dividend component, and use of the ACPS method, ultimately point away from the requisite purpose. | Detailed Reasoning - (e) All shareholders to participate in the proposed arrangement are Australian residents (paragraph 45B(8)(e)).: (f) The cost bases of Trusts 1 and 2's Company 1 shares are $x each, being $x less than the capital benefit of $x from the buy-back (paragraph 45B(8)(f)). | Detailed Reasoning - (g) The interests held by the participating shareholders after the scheme will not be the same if a dividend is instead paid (paragraph 45B(8)(h)).: (h) Trusts 1 and 2 initially acquired 300 Company 1 shares in 19xx. In 19xx, Company 1 implemented a share split and bonus share allotments. No additional shares were acquired by the trusts subsequent to 1987, which is over 35 years before the share buy-back will be undertaken (paragraph 45B(8)). After the buyback, neither trust will own shares in Company 1, and Company 1 will cancel the shares bought back. The capital component accordingly is not in substitution for a dividend, as may otherwise be concluded in other circumstances if shareholdings remained the same. | Detailed Reasoning - (i) As explained in paragraph 76.i., matters in subsection 177D(2):: (i) The form and substance of the scheme involving the buy-back of Trust 1 and 2's shares does not appear to be artificial or contrived. It is a step being implemented to allow Trust 2 (and Individual 2) to exit the family business. (ii) Having regard to the factors in subsection 177D(2) in relation to the scheme, the selective share buy-back is not one that is entered into or carried out to allow either of the trusts to obtain a franking credit benefit. 119. It is considered that any tax benefit from carrying out the scheme will be incidental. Consequently, paragraph 45B(2)(c) will not be satisfied. Moreover, and in accordance with PS LA 2009/7, the use of the ACPS methodology to determine the capital/dividend split will give 'rise to a strong presumption that section 45A and 45B would not apply to the buy-back' and the Commissioner will not make a determination that section 45C to the resultant tax benefit. | Detailed Reasoning - Question 7:: Will section 100A of the ITAA 1936 apply in respect of the distributions to be made by Trust 2, and/or subsequent distributions by beneficiary trusts, to respective presently entitled beneficiaries as outlined in the arrangement? If yes, will section 99A apply to the net income of the applicable trust/s that is subject to the section 100A statutory deeming that applicable present entitlements never arose? | Detailed Reasoning - Present entitlement arising from a reimbursement agreement: 120. Section 100A is an anti-avoidance measure which broadly provides that if a beneficiary is presently entitled to income of a trust and this entitlement is as a result of a reimbursement agreement, the beneficiary shall be deemed to not have been presently entitled to that income. As a consequence, the trustee will be assessed on this income of the trust pursuant to section 99A. | Detailed Reasoning - 121. Subsection 100A(1) provides that:: Where: (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and (b) the present entitlement of the beneficiary to that share or to a part of the that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the relevant trust income ) arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement; the beneficiary shall , for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income [emphasis added]. 122. The application of section 100A was discussed in the Full Federal Court decision of Prestige Motors [4] in which Beaumont, Hill and Sackville JJ commented in obiter that 'the essential element common to the schemes is that, while the income concerned is effectively freed from [some or all] tax in the hands of the nominal beneficiary, the terms of the underlying arrangement ensure that the beneficiary does not enjoy anything like the full use or benefit of the income'. | Detailed Reasoning - 123. Subsection 100A(3A) provides that where:: (a) a beneficiary is made presently entitled to a share of income of a trust estate in their capacity of a trustee (referred to as a trustee beneficiary) of another trust (referred to as an interposed trust estate) (b) the trustee beneficiary would, but for the application of subsection 100A(3A), have been deemed to not be, and never have been, presently entitled to that share of trust income pursuant to subsection 100A(1), and (c) a beneficiary is presently entitled, or deemed presently entitled, to income of the interposed trust estate subsection 100A(1) will not apply to the trustee beneficiary in relation to the relevant trust income. This means that where present entitlements arise as a result of a reimbursement agreement and these present entitlements flow through a chain of trusts, subsections (1) and (3A) will operate to deem the ultimate beneficiary as never having been presently entitled to the trust income, such that the last trustee in the chain of trusts will be assessed and liable to pay tax in accordance with section 99A. | Detailed Reasoning - Present entitlement: 124. In order for section 100A to apply, there must be present entitlement to income of a trust estate. The concept of 'present entitlement' refers to a beneficiary's interest in the income of the trust estate. The term is not defined in the ITAA 1936 or the ITAA 1997, however guidance can be found in case law. [5] 125. In Harmer v. Federal Commissioner of Taxation (1991) [6] the court summarised the principles considered in determining whether a beneficiary is presently entitled. In summary, a beneficiary will be presently entitled to a share of the income of a trust estate if at least by the end of the year of income if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession, and (b) the beneficiary has a present legal right to demand and receive payment of the income, including beneficiaries, that but for their legal disability, have an absolute entitlement to that income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. | Detailed Reasoning - Present entitlement arose from or in connection with a reimbursement agreement: 126. Paragraph 100A(1)(b) requires that the beneficiary's present entitlement must have arisen 'out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement'. Therefore, there are two elements that must be present to satisfy paragraph 100A(1)(b), being: (a) a reimbursement agreement, and (b) a connection between the reimbursement agreement and the present entitlement of the beneficiary. 127. The reimbursement agreement must exist at the time that the beneficiary is made presently entitled to income of the trust. [7] | Detailed Reasoning - Reimbursement agreement: 128. Reimbursement agreement is a label, not a descriptor, and 'reimbursement' does not control the meaning of 'reimbursement agreement'. [8] The term takes its meaning from subsections 100A(7) to (10) and (13) of the ITAA 1936. By those provisions, an agreement can be an arrangement or an understanding, which would extend to a case where parties have a common view regarding the maintenance of a particular state of affairs, whether or not that state of affairs or course of conduct is universally created or involves some element of mutual obligation. 129. A reimbursement agreement must involve the payment of money, transfer of property or provision of services or other benefits to a person other than the presently entitled beneficiary. The person who is the provider of the money, property, services of other benefits is not limited by subsection 100A(7). 130. The necessity for a benefit to be provided to a person other than a beneficiary from, or in connection with, the reimbursement agreement is explained in paragraph 17 of TR 2022/4: For an agreement to be a reimbursement agreement, it must provide for the payment of money (including via loans or the release, abandonment, failure to demand payment of or the postponing of the payment of a debt), transfer of property to or provision of services or other benefits for one or more persons other than the beneficiary alone. 131. Paragraph 18 of TR 2022/4 adds that a benefit will be provided to someone other than the beneficiary where there is an agreement that the beneficiary will not demand payment of their present entitlement. | Detailed Reasoning - 132. Further, paragraph 19 of TR 2022/4 notes that:: ... there is no requirement that the relevant money, property, services or other benefits provided to a person other than the beneficiary alone be sourced from, equal to or otherwise referrable to the share of trust income the beneficiary is presently entitled to receive, was paid or that was applied on their behalf. | Detailed Reasoning - Entered into in the course of an ordinary family or commercial dealing: 133. Where an arrangement is entered into in the course of an ordinary family or commercial dealing, the definition of agreement in subsection 100A(13) of the ITAA 1936 will not be met. 134. TR 2022/4, at paragraph 98, provides the following summary of case law considerations of the 'ordinary family or commercial dealing' exception: In Prestige Motors, in concluding that the 3 transactions did not arise out of ordinary family or commercial dealing, the Court referred to the absence of commercial motivation or commercial necessity or justification for the transactions, and observed of one arrangement that the 'only explanation for the entry into the agreement... [was] the elimination or reduction of tax liabilities'. In Guardian FCA [9] , the Court (Logan J) identified an agreement involving the incorporation of a company, the nomination of that company as an eligible beneficiary of a trust that conducted investment activities and the subsequent appointment of income from those investment activities to the company. In concluding that the exception applied, the Court made findings on the evidence and posited that the identified agreement achieved the benefits of 'risk minimisation... the shielding of distributed income and accumulated wealth from any creditors of individuals who were also members of the class of eligible beneficiaries' and the 'familial advantage ... of not having to make a large distribution in an income year to an individual'. In BBlood FCA [10] , in concluding the arrangement was not an agreement entered into in the course of ordinary family or commercial dealing, the Court observed that the arrangement was unusual, was more complex than was necessary to achieve any specific purpose that could be described as 'ordinary family or commercial dealing', and was neither explicable as being for family succession or for commercial purposes. Further, the Court considered the arrangements in the context of the historical behaviour of the parties, concluding that it was inconsistent with that behaviour and that no sensible commercial or family rationale had been established for adopting the buy-back procedure. | Detailed Reasoning - Reduction or elimination of tax: 135. With reference to subsection 100A(7) of the ITAA 1936, subsection 100A(8) limits the scope of a reimbursement agreement to one with a purpose of reducing tax, providing that: A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into. 136. An agreement is entered into for a tax reduction purpose if any of the parties to the agreement entered into the agreement for that purpose. 137. For there to be a tax reduction purpose, the Court in B&F Investments Pty Ltd as trustee for the Illuka Park Trust v Commissioner of Taxation (2023) [11] observed that: '[i]t is not part of the statutory task to establish what the parties would have done if the agreement had not been entered into.' ... [12] An inquiry as to the purpose of a party (as required by s 100A(8)) is, on the other hand, an historical inquiry of why [a] party entered into the agreement in fact entered into. The inquiry is not a prediction. Nor is it an examination of a comparative position or comparative outcomes for a particular taxpayer requiring you to remove from the proposed future what was done and positing what might have been done: Ludekens [13] at 192. [14] | Detailed Reasoning - 138. Subsection 100A(9) of the ITAA 1936 further clarifies who should have the purpose for subsection (8) as follows:: For the purposes of subsection (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for the purposes that include that purpose, as the case may be. 139. Therefore, subsection 100A(9) of the ITAA 1936 explains that in determining a purpose for which the agreement was entered into, it is a purpose of any party to the agreement that is relevant. | Detailed Reasoning - Present entitlement: 140. To determine whether section 100A of the ITAA 1936 would have consequences for Trust 2 and/or beneficiaries under the proposed arrangement, the first element that must be satisfied is that a beneficiary is presently entitled to income of a trust estate. 141. Under Step 3, Trust 2 will distribute its $x proceeds from the Company 1 share buy-back to the trustee of the Investment Trust 2. 142. Under Step 4, the trustee for the Investment Trust 2 will distribute: (a) the fully franked dividend component of the proceeds from the share buy-back to Company 3, and (b) any capital component of the proceeds from the share buy-back to an immediate family member of Individual 2. 143. Consistent with the principles established in Harmer , Investment Trust 2 , flowing through to Company 3 and the abovementioned individual beneficiaries, will have interests in the income of a trust estate that are both vested in interest and in possession. Further, these beneficiaries will have a legal right to demand and receive payment of their entitlements. As a consequence, these beneficiaries will be presently entitled to a share of income of a trust such that the first element of subsection 100A(1) is satisfied. | Detailed Reasoning - Present entitlement arose from or in connection with a reimbursement agreement: 144. In order for section 100A to apply, there must be a reimbursement agreement. If a reimbursement agreement does exist, where the trust income flows through a chain of trusts, subsection 100A(3A) operates such that the trustee of the last trust in the chain would be liable to tax pursuant to section 99A. 145. Under the proposed arrangement, Trust 2 will distribute the proceeds from the sale of its Company 1 shares to Investment Trust 2. The income component of these proceeds will then be distributed to Company 3, which operates as an investment vehicle and the funds distributed to it will be used for investment purposes. 146. With no subsequent steps or additional elements to the steps described under the proposed arrangement in paragraphs 27 to 35, together with assumptions made for the purposes of this ruling, there is no indication that Company 3 or the individual beneficiaries will not have full use and beneficial enjoyment of the present entitlements made in their favour. That is, the proposed arrangement does not contain steps or agreements that would result in the conclusion that the company and individual beneficiaries' present entitlements will arise due to a reimbursement agreement pursuant subsections 100A(7) to (10) and (13). 147. Consequently, without present entitlements to the income component of the Company 1 share buyback proceeds being subject to a reimbursement agreement, the requirements for section 100A to apply will not be met. [1] The meaning of the term 'non-share dividend' is provided in section 974-120 of the ITAA 1997 and broadly means a distribution made by a company to holder of non-share equity interests in relation to those interests. [2] This paragraph sits under the Section 45B heading, but the test of 'more than incidental purpose' is the same test s applies in s177EA, and therefore this paragraph is equally applicable here. [3] Subsection 45B(1) of the ITAA 1936, as well as other provisions in section 45A, 45B and 45C, provide anti-avoidance rules for demergers situations. However, as the proposed scheme between Perron Investments and the Trust does not relate to a demerger, these provisions will not be considered further in this ruling. [4] 98 ATC 4241. [5] See, for example: FC of T v Whiting (1943) 68 CLR 199: 7 ATD 179, Union Fidelity Trustee Co of Australia & Anor v FC of T (1969) 119 CLR 177; 69 ATC 4084; (1969) 1 ATR 200, Taylor v FC of T (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582, FC of T v Totledge Pty Ltd 82 ATC 4168; (1982) 12 ATR 830, and Harmer v FC of T (1991) 173 CLR 264; 91 ATC 5000; (1991) 22 ATR 726. [6] 173 CLR 264; (1991) 91 ATC 5000; (1991) 22 ATR 726. [7] Taxation Ruling TR 2022/4 at paragraph 16; East Finchley at [38]; Guardian FCAFC at [108]. [8] Commissioner of Taxation v Prestige Motors Pty Ltd as Trustee of the Prestige Toyota Trust [1998] FCA 221; 98 ATC 4241 ("Prestige Motors") at 4261 per Hill and Sackville JJ. [9] Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619 [10] BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 [11] [2023] FCAFC 89at [46]. [12] at [46] [13] Federal Commissioner of Taxation v Ludekens [2013] FCAFC 100 [14] B&F Investments Pty Ltd as trustee for the Illuka Park Trust v Commissioner of Taxation [2023] FCAFC 89 at [47], affirming the decision at first instance in BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 at [130] per Thawley J.

BACKGROUND: 1. Individual 1 and Individual 2 are siblings. | 2. Individual 1 and Individual 2, and their associated entities (discussed below) are the shareholders of Company 1. | 3. Individual 1 is the predominant and driving force of the business. Individual 2 is a director of Company 1, but their operational role in the business has been limited to one akin to a passive shareholder. | 4. In 19xx, Trust 1 and Trust 2 were settled for the benefit of Individual 1 and Individual 2, respectively, and their immediate families. | 5. Trusts 1 and 2 were settled to hold shares in Company 1, which are the only significant assets held by the respective trustees. | Investment Trust 1: 6. In 19xx, Investment Trust 1 was settled. | 7. In 19xx, Investment 2 was settled. | 8. In 20xx, Company 2 was incorporated as a preferred investment vehicle for Individual 1, and for estate, succession and asset protection purposes. | 9. In 20xx, Individual 1 and Individual 2 aligned their (indirect and direct) shareholding in Company 1 such that: | a. Company 2 subscribed for xxxx shares in Company 1 for $xxxx. | 10. As a result of the transaction in 20xx, Individual 1 and their immediate family obtained a xx% aggregate shareholding in Company 1, with Individual 2 and their immediate family holding the remain xx%. | 11. Company 3 is an investment company. Individual 1 holds 100% of the shares in the company. | Unit Trust 1: 12. In 20xx, Unit Trust 1 was settled, with 100% of the units being held by Company 1. Unit Trust 1 is a subsidiary member of Company 1's tax consolidated group. | 13. Unit Trust 1 was established to actively manage the working capital that was in excess of the normal operational requirements of Company 1. This structure has allowed regular unit subscriptions to be made by Company 1 and the annual profits of Unit Trust 1 to be assessed to Company 1 with the unit trust having to distribute cash back to the company. This allowed Company 1 to re-invest annual profits. | 14. Individuals 1 and 2 planned for Unit Trust 1 to be managed in a conservative and responsible manner to allow it to preserve and grow funds for future generations. They envisaged that, if required, the funds of Unit Trust 1 would be available to Company 1 to support its business operations or for generational succession matters as they arose. | 15. It has always been intended that Unit Trust 1 would be the source of funds to allow Company 1 to fund any future generational change in ownership. | Share ownership of Company 1: 16. There are currently xxx shares on issue for Company 1, which are held as follows: | 17. All the shares held by Trust 1, Trust 2, Individual 1 and Individual 2 are taken to have been acquired pre-CGT as the shares were acquired before 20 September 1985. | Financial information of Company 1 at 30 June 20xx: 18. Table 2 provides key financial information at 30 June 20xx. | Table 1: selected financial information of Company 1 as at 30 June 20xx. | Retained earnings (Company 1 standalone) | 19. Individual 1 discussed the future of the family business openly with Individual 2 and both agreed for the exit of Individual 2 from the business. | 20. Individuals 1 and 2 each obtained independent advice, which they independently funded, and sought to be transparent with each other. They remained in regular communication to bring the negotiation to a conclusion. To assist in determining a fair market value of Company 1, Individuals 1 and 2 separately obtained independent valuations of the company, based on a controlling basis by Valuer 1 and Valuer 2. | 21. The independent valuations were as follows: | Table 2: Valuations of Company 1. | 22. The negotiation process to agree a market value for Company 1, and therefore consideration that may be paid for the shares held by the proposed exiting shareholders, involved numerous meetings, differences of opinion and took x months. The negotiations involved each Individual's advisor. | 23. In 20xx, after a lengthy and robust negotiation process between Individuals 1 and 2 (and their advisors), the parties reached an in-principal agreement for a purchase price of $x million for Individual's x% (direct and indirect/controlled) shareholding in Company 1. This agreed purchase price implies that 100% of the shares in Company 1 have a market value of $x million, which is approximately the midpoint of the 2 valuations. | Sale price negotiations: 24. Individual 1 and their advisors felt that the approach taken by Valuer 2 was fair and reasonable given the known issues confronting the industry and the risks this presents to the future profitability of the Group. As such, the valuation from Valuer 2 formed the basis of Individual 1's initial offer of $x million. Individual 2 considered this offer to be inadequate. | 25. Over many months, the siblings and their respective advisors undertook negotiations regarding the sale price of the business. At all times, the negotiations were undertaken in good faith and were robust. After compromise on both sides, a price of $x million was agreed for Individual 2's interest (subject to several technical matters, such as stamp duty cost). | Steps of the proposed arrangement: 26. The proposed arrangement is explained below: | 27. Company 1 will undertake a selective buy-back of the x ordinary shares held by Trust 1 and Trust 2 for total consideration of approximately $x million. | a. The total percentage of shares bought back will be x%. With a market value of $x million for the company, this gives a market value of approximately $x million for the bought-back shares. | 28. Given the proposed arrangement requires the exit of Trust 2 from the Company 1 shareholding structure, it is considered necessary that Trust 1 is also removed from the shareholding of the company. This will enable Individual 1 to simplify their estate by replacing Trust 1 with Individual 1's preferred vehicle for succession planning, being Company 2. | 29. It is intended that both Trusts 1 and 2 will be vested after the completion of the proposed arrangement. | Step 2: 30. Company 1 will cancel the x ordinary shares acquired from Trusts 1 and 2. After the cancellation of the bought-back shares, Company 1 will have x shares on issue, held as follows: | a. x held by Individual 1 | b. x held by Individual 2, and | 31. Trust 1 will distribute the $x proceeds received from the share buyback to the trustee of Investment Trust 1. | 32. Trust 2 will distribute the $x proceeds received from the share buyback to the trustee of Investment Trust 2. | 33. The trustee for the Investment Trust 1 will distribute: | a. the fully franked dividend component of its proceeds from the share buy-back to Company 2, and | b. any capital component of the proceeds from the share buy-back to an individual, which could include Individual 1, or their child. | 34. The trustee for the Investment Trust 2 will distribute: | a. the fully franked dividend component of its proceeds from the share buy-back distribution to Company 3 | i. Company 3 will use the funds representing the dividend component for investment purposes. | ii. In no circumstances will Trust 2, Investment Trust 2, Company 3 or Individual 2 make available any of the buy-back proceeds to Individual 1 or their family group, or Company 1. Any subsequent transactions will be managed in accordance with Company 3's taxation compliance obligations, including Division 7A, if applicable. | b. any capital component of the proceeds from the share buy-back to an immediate family member of Individual 2, which could include Individual 2. | Step 5: 35. Company 2 will acquire x ordinary shares in Company 1 from Individual 2 for $x under a Share Purchase Agreement. This purchase price reflects the market value agreed between the parties of $x per share. | The answers to the questions raised in this Notice of Private Ruling are based on the following assumptions: | 1. the Step 1 valuation of $x million for 100% of the shares in Company 1 reflects an accurate market value of the company at the time of the transaction. | 2. the agreed purchase price per share under the proposed selective share buy-back has been reached from real bargaining between the parties on an arm's length basis | 3. there will be no injections of capital just before the proposed selective share buy-back | 4. there will be no additional steps to those listed under the proposed arrangement as described in paragraphs 27 to 35 | 5. the Step 2 buyback proceeds are included in trust income of Trust 2, and Step 3 distributions are included in the trust income of the Investment Trust 2, according to their respective trust deeds and trustee resolutions (if applicable), and | 6. the funds representing the proposed distributions in Steps 3 and 4 will be paid by the relevant trustees to the relevant presently entitled beneficiaries within 2 years of them becoming presently entitled (that is, within 2 years of a date/s falling within the year ending 30 June 20xx or 30 June 20xx as applicable, depending upon the time of execution of the transaction and the relevant resolution and distribution decisions of the trustees), such that each beneficiary will have the full use and enjoyment of the funds to which they will become presently entitled within a reasonable timeframe. Further, upon receipt of payment, the beneficiaries will not use the funds received to provide gifts, or for investment or transactions with related parties where the amount paid to the related party/ies exceeds market value or is on non-commercial terms. | Reasons for decision: This is to explain how we reached our decision. This is not part of the private ruling.