Private ruling: Share buy-back
Date of advice: 1 April 2026
Published: 15 June 2026
Ruling period: Year ending XX XX XXXX

Ruling: Q1: When considering the application of Division 16K of Part III the Income Tax Assessment Act 1936 to an exiting shareholder of the Company, will subsection 159GZZZQ(2) of that Act operate to deem an increase to the share buy-back price of the A Class redeemable preference shares or B Class redeemable preference shares? | A1: No. | Q2: Where a dividend entitlement is declared and the A Class redeemable preference shares and B Class redeemable preference shares are redeemed, will subparagraph 116-30(2)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) operate to work out the capital proceeds of the redemption? | A2: No.

Relevant facts and circumstances: 1. The Applicant is a founding shareholder of the Company and holds A Class redeemable preference shares (A RDPs) and B Class redeemable preference shares (B RDPs) in the Company. 2. The Company operates an XXXX practice and day procedural hospital and is not listed on any stock exchange. 3. The Company does not employ the specialists who perform procedures at the facility. 4. Specialists practising at the facility bill patients or health funds directly for their professional services and invoice independently of the Company. 5. The Company derives its income from the operation of the facility, including the use of operating theatres and equipment, the provision of nursing and ancillary staff, and administrative and support services associated with procedures. 6. The Company's Constitution (the Constitution) provides for A RDPs, B RDPs and ordinary shares. 7. A RDPs carry voting rights and may be redeemed or bought back at Fair Market Value (as defined in the Constitution) upon specified exit events, including the shareholder ceasing to be actively involved in the conduct of the business. 8. B RDPs are issued to a person or entity nominated by the holder of the corresponding A RDPs, carry non-cumulative preferential dividend rights and possible surplus dividend rights, and do not carry voting rights. 9. Each B RDP must be redeemed or bought back at the same time as the linked A RDP to which it relates. 10. The Constitution does not permit A RDPs or B RDPs to be sold or transferred to third parties and restricts exit by shareholders to the redemption or buy-back mechanisms prescribed under the Constitution. 11. Fair Market Value for the purposes of the Constitution is defined as the net asset value of the Company calculated to the end of the quarter prior to notice of redemption or transfer, less any dividend paid in the current year up to the date of redemption or transfer. 12. Each year, the majority of the Company's profits are paid out on the B RDPs, with surplus earnings retained for working capital purposes. 13. Dividends have not been paid on the A RDPs. 14. The individual shareholders each hold XX% of the A RDPs and B RDPs on issue. 15. Under the Constitution, redemption of A RDPs (and the linked B RDPs) occurs at Fair Market Value (as defined) upon the occurrence of the specified exit events, being death, voluntary notice of disposal, or cessation of active involvement. 16. The shareholders of the Company are not associated with one another, act independently of each other, and each has their own legal and tax advisers. 17. The specialists have no ability to exercise control over one another or influence each other. 18. A deed of variation to the 'activity clause' of the Constitution was passed, which clarifies that where a shareholder's activity in the business of the Company declines, that person's shares may be bought back by the Company. 19. The deed of variation to the activity clause provides that 'activity' includes clinical contribution, administrative contribution and attendance at board meetings. 20. The intention is that the Company will redeem the shares of a retiring shareholder and issue new shares at Fair Market Value (as defined) to a new specialist active in the business of the Company. 21. It is not expected that any distribution to shareholders on exit of the Company should be funded by way of capital raising. 22. The Company has sufficient franking credits to pay fully franked dividends on the B RDPs.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 16K | Income Tax Assessment Act 1936 section 159GZZZK | Income Tax Assessment Act 1936 section 159GZZZQ(1) | Income Tax Assessment Act 1936 section 159GZZZQ(2) | Income Tax Assessment Act 1997 section 104-25(3) | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 116-30 | Income Tax Assessment Act 1997 subparagraph 116-30(2)(b)(ii) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: No. Subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936 (ITAA 1936) does not apply to deem an increase to the share buy-back price of the A Class or B Class redeemable preference shares. | Detailed Reasoning - Detailed reasoning: 23. Broadly, Division 16K of the ITAA 1936 outlines the income tax consequences of share buy-backs. This Division applies where a company buys back its own shares from shareholders and the shares are cancelled as a result. The Company is not listed for quotation in the official list of a stock exchange in Australia or elsewhere. Accordingly, any buy-back of its shares will constitute an off-market purchase for the purposes of Division 16K. 24. Subsection 159GZZZQ(1) of the ITAA 1936 provides that a shareholder is taken to have received an amount equal to the purchase price as consideration in respect of the sale of the share bought back. However, this deemed amount may be subject to adjustment in certain circumstances. 25. Subsection 159GZZZQ(2) of the ITAA 1936 is one of the adjusting provisions. It provides that if the purchase price is less than the market value of the share at the time of the buy-back (calculated as if the buy-back did not occur and was never proposed to occur), the shareholder is taken to have received an amount equal to that market value as consideration in respect of the sale of the share bought back. 26. In this case, the Company is not listed for quotation in the official list of a stock exchange in Australia or elsewhere. The A Class and B Class redeemable preference shares are not freely transferable and may only be redeemed or bought back by the Company in accordance with the terms of its Constitution upon the occurrence of specified exit events. 27. Under the Constitution, upon the occurrence of an exit event, the Company must redeem or buy back the relevant A Class redeemable preference shares and the linked B Class redeemable preference shares at Fair Market Value as defined in the Constitution. 28. Fair Market Value is defined by reference to the net asset value of the Company calculated to the end of the quarter prior to notice of redemption or transfer, less any dividend paid in the current year up to the date of redemption or transfer. 29. The share buy-back price payable to an exiting shareholder is determined in accordance with the Constitution and is not subject to negotiation between shareholders. 30. Having regard to the compulsory redemption mechanism, the restrictions on transfer, and the absence of any alternative market in which the shares could be disposed of, the market value of the A Class and B Class redeemable preference shares is determined solely by reference to the rights and restrictions attaching to those shares under the Constitution. 31. Accordingly, as no valuation other than the constitutionally determined Fair Market Value is relevant, subsection 159GZZZQ(2) of the ITAA 1936 does not apply to the share buy-back of the A Class and B Class redeemable preference shares. | Detailed Reasoning - Question 2: Where a dividend entitlement is declared and the A Class redeemable preference shares and B Class redeemable preference shares are redeemed, will subparagraph 116-30(2)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) operate to work out the capital proceeds of the redemption? | Summary: No. Subparagraph 116-30(2)(b)(ii) of theITAA 1997 does not apply to modify the capital proceeds received on redemption of the A Class and B Class redeemable preference shares. | Detailed Reasoning - Detailed reasoning: 32. The redemption of the A Class and B Class redeemable preference shares constitutes CGT event C2 pursuant to section 104-25 of the ITAA 1997, as the ownership of the shares ends by way of redemption. 33. Subsection 104-25(3) of the ITAA 1997 provides that a capital gain or capital loss arises where the capital proceeds from CGT event C2 are more than the cost base, or, in the case of a capital loss, are less than the reduced cost base of the CGT asset. 34. Under section 116-20 of the ITAA 1997, the capital proceeds from a CGT event are the total of the money received, or entitled to be received, in respect of the event. 35. Section 116-30 of the ITAA 1997 modifies the capital proceeds in certain circumstances. Relevantly, subparagraph 116-30(2)(b)(ii) applies where the CGT event is CGT event C2 and the capital proceeds from the event are more or less than the market value of the CGT asset. 36. The A Class and B Class redeemable preference shares are subject to compulsory redemption at a constitutionally determined Fair Market Value and are not transferable to third parties. There is no alternative market in which the shares could be sold. 37. The amount received by the shareholder on redemption of the shares is determined in accordance with the Constitution and reflects the market value of the shares at the time of redemption, having regard to the rights and restrictions attaching to those shares. 38. The only amount capable of being received on redemption of the A Class and B Class redeemable preference shares is this amount, calculated in accordance with the Constitution. 39. As that amount represents the market value of the shares at the time of redemption, there is no basis to substitute an alternative market value under subparagraph 116-30(2)(b)(ii) of the ITAA 1997. 40. Accordingly, subparagraph 116-30(2)(b)(ii) of the ITAA 1997 does not apply to modify the capital proceeds received on redemption of the A Class and B Class redeemable preference shares.