Private ruling: Cancellation/share buy-back

Ruling: Q1: Will CGT Event K6 in section 104-230 of the ITAA 1997 apply to the shares held by the Trustee of Trust A in the company? | A1: No. | Q2: Will section 45B of the ITAA 1936 apply to the share buy-back? | A2: No. | Q3: Will subsection 159GZZQ(2) of the ITAA 1936 apply upon the buy-back of the company's shares currently held by the Trustee of the Trust A? | A3: Yes. | Q4: Will the value shifting provisions in Division 725 of the ITAA 1997 apply to the share buy-back? | A4: No | Q5: Will CGT Event K8 in section 104-250 of the ITAA 1997 apply to the cancellation of the shares? | A5: No. | Q6: Will Part IVA of the ITAA 1936 apply to the cancellation or share buy-back? | A6: No.


Relevant legislative provisions: Income Tax Assessment Act 1936, Section 45B | Income Tax Assessment Act 1936 , Subsection 159GZZZP(2) | Income Tax Assessment Act 1936, Subsection 177A(1) | Income Tax Assessment Act 1936, Subsection 177C(1) | Income Tax Assessment Act 1936, Section 177D | Income Tax Assessment Act 1936, Paragraph 177D(b) | Income Tax Assessment Act 1997, Subsection 725-230(1) | Income Tax Assessment Act 1997, Subsection 104-230(2) | Income Tax Assessment Act 1997, Paragraph 104-230(2)(a) | Income Tax Assessment Act 1997, Paragraph 104-230(2)(b) | Income Tax Assessment Act 1997, Section 104-250 | Income Tax Assessment Act 1997, Subsection 104-250(1) | Income Tax Assessment Act 1997, Section 725-50 | Income Tax Assessment Act 1997, Section 725-55 | Income Tax Assessment Act 1997, Section 725-65 | Income Tax Assessment Act 1997, Section 725-70 | Income Tax Assessment Act 1997, Section 725-80 | Income Tax Assessment Act 1997, Section 725-145 | Income Tax Assessment Act 1997, Section 725-230 | Income Tax Assessment Act 1997, Subsection 725-230(1) | Income Tax Assessment Act 1997, Subsection 725-230(2)

Reasons for decision: Summary: CGT event K6 in section 104-230 of the ITAA 1997 is designed to stop the potential avoidance of CGT where, instead of an entity disposing of an asset it acquired on or after 20 September 1985, the owners of pre-20 September 1985 interests in the entity dispose of those interests. Both direct and indirect interests are caught. | Detailed Reasoning - 104-230(1) CGT event K6 happens if:: (a) you own shares in a company or an interest in a trust you acquired before 20 September 1985; and (b) CGT event A1, C2, E1,E2, E3, E5, E6, E7, E8, J1 or K3 happens in relation to the shares or interest; and (c) there is no roll-over for the other CGT event; and (d) the applicable requirement in subsection (2) is satisfied. 104-230(2) Just before the other event happened: (a) the market value of property of the company or trust (that is not its trading stock) that was acquired on or after 20 September 1985; or (b) the market value of interests the company or trust owned through interposed companies or trusts in property (except trading stock) that was acquired on or after 20 September 1985; must be at least 75% of the net value of the company or trust. For the purposes of subsection 104-230(2) of the ITAA 1997, the term 'property' has its ordinary legal meaning. Taxation Ruling TR 2004/18 outlines the application of CGT event K6 in section 104-230 of the ITAA 1997 and discusses the meaning of the term 'property' in some detail. Paragraph 17 of TR 2004/18 states that property for the purposes of paragraph 104-230(2)(a) of the ITAA 1997 can include post-CGT shares in, or loans to lower tier companies. The property taken into account under paragraph 104-230(2)(b) of the ITAA 1997 is post-CGT property that is owned by lower tier companies in which the company referred to in paragraph 104-230(2)(a) of the ITAA 1997 has a direct or indirect interest. If the company referred to in paragraph 104-230(2)(a) has a less than 100% interest in a lower tier company, only that percentage interest in the underlying post-CGT property is counted. It does not matter, for that purpose, whether the shares in the lower tier company giving rise to the interest were acquired pre-CGT or post-CGT. For the purposes of working out the net value of a company in subsection 104-230(2) of the ITAA 1997, the term 'assets' in the context of the expression 'net value' in subsection 104-230(2) means the property and other economic resources owned by the company that can be turned to account. The term 'liabilities' in the context of the expression 'net value' has its ordinary meaning. In accordance with the definition in section 995-1 of the ITAA 1997, the net value of a company or trust is the amount by which the sum of the market values of the assets of the company or trust exceeds the sum of its liabilities. The time that the 75% net value test is required to be satisfied is just before the other CGT event happened. In the current case, the net assets at market value at the end of the financial year were a known amount and the market value of property that was acquired post-CGT another amount. Based on the figures at the end of the financial year, the market value of post-CGT property is not greater than or equal to 75% of the net value of the company. The test in paragraph 104-230(2)(a) of the ITAA 1997 is therefore not satisfied. In accordance with paragraph 104-230(2)(b) of the ITAA 1997, it is also necessary to determine if the post-CGT property which the company owns through lower tier companies satisfies the 75% test. Based on the figures provided, the market value of the interest in which the company owns in post-CGT property through the lower tier companies is less than 75%. As this does not equal or exceed 75% of the net value of the company, the test in paragraph 104-230(2)(b) of the ITAA 1997 is not satisfied. As the tests in subsection 104-230(2) of the ITAA 1997 have not been satisfied, CGT event K6 will not apply to the shares in the Company. | Detailed Reasoning - Section 45B of the ITAA 1936: The purpose of section 45B of the ITAA 1936 is to ensure that relevant amounts are treated as dividends for taxation purposes if: (e) components of a demerger allocation as between capital and profit do not reflect the circumstances of the demerger (paragraph 45B(1)(a) of the ITAA 1936); or (ii) certain payments, allocations and distributions are made in substitution for dividends (paragraph 45B(1)(b) of the ITAA 1936). In the current case, as the scheme involves a shares buy-back, paragraph 45B(1)(b) of the ITAA 1936 is relevant. Law Administration Practice Statement PS LA 2007/9 provides guidance on the application of various taxation laws in connection with off-market share buy-backs. Paragraphs 99 to 110 discuss the application of section 45B of the ITAA 1936 to share buy-backs. Paragraph 99 of PS LA 2007/9 states that section 45B of the ITAA 1936 applies where a 'capital benefit' is provided under a scheme for a 'more than incidental purpose' of conferring a tax benefit. It then goes on to say: … Subsection 45B(5) provides that the provision of a 'capital benefit' includes a distribution of share capital. Subsection 45B(9) provides that a capital benefit constitutes a tax benefit in the hands of the shareholder because it is less onerous tax-wise than a dividend. In other words, the mischief addressed by the section is that of a company distributing capital in substitution for a dividend substantially because of its preferential tax treatment in the hands of shareholders. Paragraph 100 of the PSLA then goes on to explain how section 45B of the ITAA 1936 applies when it states in part that: Speaking practically, to apply section 45B of the ITAA 1936 to a share buy-back requires objective evidence of a substantial tax purpose of substituting share capital for a part of the purchase price which would otherwise be a dividend. … Paragraph 101 of PSLA 2007/9 then explains how Division 16K of the ITAA 1936 works when it states that: The operation of Division 16K in relation to off-market buy-backs is predicated on characterising the constitution of the purchase price in the hands of the vendor shareholder according to the manner of its debiting in the accounts of the company. To the extent that the purchase price is not debited against share capital it is taken, for the purposes of the Act, to be a dividend paid to the vendor shareholder out of profits (section 159GZZZP of the ITAA 1936). Inferentially, the balance of the purchase price, which is debited against share capital, would be taken to be a distribution of share capital. This statutory bifurcation of the price into share capital and profit displaces the character of an 'indivisible lump sum' of distribution that it would otherwise have in the hands of the shareholder under common law: Thornett v. FCT (1938) 59 CLR 787. Paragraph 104 of PS LA 2007/9 discusses the purpose test in section 45B of the ITAA 1936 and examines the proportions of an off-market buy-back price which is debited against share capital and profit. It also examines why the proportions have been chosen as they have and if the objective circumstances in subsection 45B(8) of the ITAA 1936 on which the test relies point to a significant tax purpose for the choice, then subsection 45B(3) of the ITAA 1936 would authorise an adjustment. 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.' For example, if, objectively speaking, persons entering into or carrying out a scheme of distributing capital have a substantial purpose of obtaining a tax benefit in the form of a capital benefit, the fact that they have other purposes that are more than incidental will not prevent the section from applying. Paragraphs 59 to 62 of PS LA 2007/9 discuss the acceptable methods to obtain 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. Paragraph 62 of PS LA 2007/9 states that an acceptable method of determining the methodology for the dividend/capital split is the average capital per share (ACPS) method which is 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 and the balance of any buy-back price would be a dividend. Where the ACPS method is used, there is a strong presumption that sections 45A and 45B of the ITAA 1936 would not apply to the share buy-back. The Commissioner is of the presumption that the ACPS method should, prima facie, be applied for share buy-backs, unless companies can demonstrate exceptional circumstances for the use of an alternative methodology. In the current case, as the value of the shares is to be debited against the paid up capital, the company has employed the ACPS method. As the ACPS method has been employed, then in accordance with paragraph 62 of PS LA 2007/9, this gives rise to a strong presumption that section 45B of the ITAA 1936 will not apply. Subsection 45B(8) of the ITAA 1936 lists the circumstances that are relevant to determining whether any person has more than an incidental purpose of enabling a person to obtain a tax benefit. Significantly, under the proposed share buyback: · the buy-back price consists of a return of capital - as the return of capital corresponds to the capital originally contributed the capital benefit is not attributable to the profits of the company · The company has not paid any dividends in the last few years · Trust A does not have any capital losses · The shares to be bought back were acquired by the Trustee of Trust A before 20 September 1985 · The Trustee of Trust A's equity interest in the company will be substantially reduced in accordance with the commercial objective of the shareholders and · The scheme effects a change in the financial position of the shareholders reflecting the intended reduction of the Trustee of Trust A's equity interest in the company. This is also confirmed in ATO ID 2004/319 where it is stated that a reduction in the shareholder's equity interest by way of a share buy-back does not apply where the amount debited to the share capital account is the original subscription price. As the return of capital corresponds to the capital contribution, the capital benefit is not attributable to the profits of the company. After considering all the relevant circumstances in subsection 45B(8) of the ITAA 1936, it cannot reasonably be concluded that there exists the requisite level of purpose of providing a tax benefit to the company by way of a capital reduction. It is concluded that section 45B of the ITAA 1936 will not apply to the share buy-back. | Detailed Reasoning - Questions 3, 4 and 5: Division 725 of the ITAA 1997 deals with direct value shifts while CGT event K8 in section 104-250 of the ITAA 1997 deals with a taxing event where value is shifted from equity or loan interests in a company or trust under Division 725. Section 725-50 of the ITAA 1997 states that a direct value shift will only have consequences if: · The target entity is a company or trust at some time during the scheme period; and · Section 725-55 of the ITAA 1997 (Controlling entity test) is satisfied; and · Section 725-65 of the ITAA 1997 (Cause of the value shift) is satisfied; and · There is an affected owner of a down interest, or an affected owner of an up interest, or both, and · Neither of sections 725-90 and 725-95 of the ITAA 1997 (about direct value shifts that are reversed) applies Section 725-55 of the ITAA 1997 states that the control test will be satisfied if an entity (the controller) controls the target entity at some time during the period beginning when the scheme is entered into and ending when the scheme has been carried out. Section 727-355 of the ITAA 1997 sets out the various control tests that apply for value shifting purposes. There are three tests to be considered which are: · The 50% stake test · The 40% stake test · The actual control test An entity only needs to satisfy one of these tests to be considered to control the company. In accordance with subsection 727-355(1) of the ITAA 1997, the 50% stake test is satisfied if an entity controls the company for value shifting purposes where that entity (either alone or together with is associates): · Can exercise or can control the exercise of, at least 50% of the voting power in the company (either directly, or indirectly through one or more interposed entities); or · Have the right to receive (either directly, or indirectly through one or more interposed entities) at least 50% of any dividends that the company may pay, or · Have the right to receive (either directly, or indirectly through one or more interposed entities) at least 50% of any distribution of capital of the company. In the current case, company B is the corporate Trustee for both Trust A and Trust B and there are the same beneficiaries in both trusts. Trust A is therefore an associate of Trust B in accordance with the definition in subsection 995-1(1) of the ITAA 1997 and subsection 318(3) of the ITAA 1936. It is noted that all of the shares in the company are held by the Trustee for Trust A and Trust B. As more than 50% of the voting power is controlled by Trust A and its associate, Trust B, then the control test in paragraph 727-355(1)(a) of the ITAA 1997 is satisfied. Section 725-65 of the ITAA 1997 states that the cause of the value shift test will be satisfied if one or more of the following entities: · The target entity · The controller · An entity that is an associate of the controller at or after the time when the scheme was entered into, and · An active participant in the scheme Did a thing or those things under the scheme: · To which the decrease in the market value of the down interests is reasonably attributable; and · To which the increase in the market value of the up interests, or the issue of up interests at a discount, is reasonable attributable, or that is or include the issue of up interests at a discount. In the current case, the target entity, the company is cancelling the shares or buying back the shares from the controller (the Trustee of Trust A). The controller is disposing of its shares to the target entity at less than market value. The value shift will therefore be reasonably attributable to things done by the target entity and the controller. Section 725-65 of the ITAA 1997 is satisfied. Subsection 725-70 of the ITAA 1997 states that Division 725 will not apply to down interests if the aggregate of the market value reductions does not exceed $150,000. As the market value of the shares to be cancelled is in excess of this amount, the exception in section 725-70 does not apply. Section 725-80 of the ITAA 1997 states that an entity is an affected owner of a down interest if the entity owns the down interest at the decrease time and at least one of the following is satisfied: · The entity is the 'controller' · The entity was an associate of the controller at some time during or after the scheme period · The entity is an active participant in the scheme It has previously been determined that the Trustee of Trust A is the controller. It is therefore necessary to determine if the Trustee of Trust A, as the controller, will own a 'down interest' at the time the shares are to be bought back and is therefore an affected owner pursuant to section 725-80 of the ITAA 1997. In accordance with the definition in subsection 995-1(1) of the ITAA 1936, 'down interest' has the meaning given in section 725-155 of the ITAA 1936. Section 725-155 of the ITAA 1997, states that an equity or loan interest in the target entity is a down interest if a decrease in its market value is reasonably attributable to one or more things referred to in paragraph 725-145(1)(b) of the ITAA 1997. Section 725-145 of the ITAA 1997 states: 725-145(1) There is a direct value shift under a scheme involving equity or loan interests in an entity (the target entity) if: (a) there is a decrease in the market value of one or more equity or loan interests in the target entity; and (b) the decease is reasonably attributable to one or more things done under the scheme, and occurs at or after the time when that thing, or the first of those things, is done; and (c) either or both subsections (2) and (3) are satisfied. Examples of something done under a scheme are issuing new shares at a discount, buying back shares or changing the voting rights attached to shares. 725-145(2) One or more equity or loan interests in the target entity must be issued at a discount. The issue must be, or must be reasonably attributable to, the thing, or one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph. Example: A company runs a family business. There are 2 shares originally issued for $2 each. They are owned by husband and wife. The market value of the shares is much greater (represented by the value of the assets of the company less its liabilities). The company issues one more share for $2 to their son. Caution is need in such a situation. The example would result in a large CGT liability for the husband and wife under this Division, because they have shifted 1/3 of the value of their own shares to their son. No such liability would arise if the share had issued for its market value. 725-145(3) Or, there must be an increase in the market value of one or more equity or loan interests in the target entity. The increase must be reasonably attributable to the thing, or to one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph. In the current case, the shares are either to be cancelled or bought back from the company. Under both alternatives, the value of the shares will shift from the original shareholders to the company. As there is a decrease in the market value which is attributable to the proposed share buy-back or cancellation of the shares then, in accordance with subsection 725-145(2) of the ITAA 1997, there is a 'down interest'. The Trustee of Trust A is an affected owner of a down interest so that section 725-80 of the ITAA 1997 is satisfied. Subsection 725-90(1) of the ITAA 1997 provides an exclusion from consequences arising from a direct value shift where the effect of a direct value shift is intended to only be temporary, being for a period of up to four years. As the cancellation of the shares or the share buy-back is not intended to be temporary, the exclusion under subsection 725-90(1) of the ITAA 1997 does not apply. As all the conditions in section 725-50 of the ITAA 1997 are satisfied, the direct value shifting provisions of Division 725 may apply. It is noted that one of the proposals is that the company will buy-back the shares for their nominal value. Subsection 725-230(1) of the ITAA 1997 states that special rules apply where there is a share value shift as a result of an off-market share buy-back as prescribed by the terms of Division 16K of the ITAA 1936. | Detailed Reasoning - Share buy-back proposal: Subsection 725-230(1) of the ITAA 1997 states that The consequences are different if: (a) a decrease in the market value of a down interest of which you are an affected owner is reasonably attributable to the target entity proposing to buy-back that interest for less than its market value; and (b) The target entity buys back that down interest, and (c) subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936 treats you as having received the down interest's market value worked out as if the buy-back had not occurred and was never proposed to occur. Subsection 725-230(2) of the ITAA 1997 states that where all of the above conditions are satisfied, the share value shifting provisions do not apply to reduce the adjustable value of the down interests and there is no taxing event which generates a gain. This is because 159GZZZP(2) of the ITAA 1936 has already dealt with the down interests in Division 16K of the ITAA 1936. Accordingly, there are no consequences arising to those down interests under the direct value shifting rules. In the current case, paragraph 725-230(1)(a) of the ITAA 1997 is satisfied. The decrease in the market value of the down interest of the affected owner (the Trustee of Trust A) will occur as a result of the proposed share buy-back at less than market value. Paragraph 725-230(1)(b) of the ITAA 1997 applies as the company, the target entity will buy-back the down interest on the proposed share buy-back. Subsection 159GZZQ(2) of the ITAA 1936 states that, subject to subsection 159GZZQ(3) of the ITAA 1936, where the purchase price of a share in an off-market share buy-back is less than its market value, the consideration that a seller is taken to have received is the amount that would have been the market value of the share at the time of the buy-back if the buy-back did not occur and was never proposed to occur. Under the share buy-back proposal, the company is proposing to buy-back the shares at less than market value. Subsection 159GZZQ(2) of the ITAA 1936 is applicable and the consideration that the Trustee of Trust A is taken to have received as a result of the buy-back is the market value of the shares. As all the conditions in subsection 725-230(1) of the ITAA 1997 are satisfied, subsection 725-230(2) of the ITAA 1997 is applicable. The share value shifting provisions therefore do not reduce the adjustable value of the down interests and there is no taxing event which generates a gain. | Detailed Reasoning - CGT Event K8: Section 104-250 of the ITAA 1997 states: 104-250(1) CGT event K8 happens if there is a taxing event generating a gain for a down interest under section 725-245. Note: That section sets out some of the CGT consequences of a direct value shift for affected owners of down interests. See also the rest of Division 725. 104-250(2) The time of the event is the decrease time for the down interest. 104-250(3) You make a capital gain equal to the gain generated for the taxing event. 104-250(4) If, because of the same direct value shift, there are 2 or more taxing events generating a gain that are covered by subsection (1), CGT event K8 happens for each of those taxing events, and you make a separate capital gain for each. Exceptions 104-250(5) A capital gain is disregarded if the down interest is a pre-CGT asset. In accordance with the above, CGT event K8 happens if there is a taxing event generating a gain for a down interest under section 725-245 of the ITAA 1997. In this case, subsection 725-230(2) of the ITAA 1997 applies where the adjustable value of the down interest is not reduced, and there is no taxing event generating a gain. Therefore, as there is no taxing event, CGT event K8 does not apply (subsection 104-250(1) of the ITAA 1997). In addition, subsection 104-250(5) of the ITAA 1997 states that a capital gain is disregarded if the down interest is a pre-CGT asset. In the current case, the shares which are to be cancelled by the company are pre-CGT shares and the down interest is therefore a pre-CGT asset. In accordance with subsection 104-250(5) of the ITAA 1997, the capital gain is therefore disregarded for being a pre-CGT asset as well as for there being no taxing event. | Detailed Reasoning - Part IVA: Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances if you obtain a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. Part IVA is a provision of last resort. In order for Part IVA of the ITAA 1936 to apply, the following requirements must be satisfied: · There must be a scheme as defined by section 177A of the ITAA 1936. · There must be a tax benefit as defined by section 177C of the ITAA 1936, obtained in connection with the scheme. · The scheme must be one to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be concluded that the taxpayer (or any other person involved in the scheme) had the sole or dominant purpose of entering into the scheme to obtain the tax benefit. | Detailed Reasoning - Scheme: For Part IVA to apply, the identified scheme must fall within the following wide definition of 'scheme'. Subsection 177A(1) of the ITAA 1936 defines 'scheme' as any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct. In the current case, the proposed arrangement falls within this definition. It is therefore a scheme in accordance with the definition in subsection 177A(1) of the ITAA 1936. | Detailed Reasoning - Tax benefit: Part IVA cannot apply unless a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. Subsection 177C (1) of the ITAA 1936 defines four kinds of tax benefits and states: 177C(1) [Obtaining a tax benefit] Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or (ba) a capital loss being incurred by the taxpayer during a year of income where the whole or a part of that capital loss would not have been, or might reasonably be expected not to have been, incurred by the taxpayer during the year or income if the scheme had not been entered into or carried out; or (bb) a foreign income tax offset being allowable to the taxpayer where the whole or a part of that foreign income tax offset would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into or carried; The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis, or an 'alternative postulate'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. Under the scheme, the shares held by the Trustee of Trust A will be cancelled or alternatively bought back by the company. The Trustee will receive the original amount paid up on the shares under the share buy-back or alternatively nil on the cancellation of the shares. It is considered that the alternative hypothesis would involve the cancellation of the shares in the company currently owned by the Trustee of Trust A for no consideration under Division 1 (section 256B) of Chapter 2J of the Corporations Act 2001 . However if the company is intending to pay nothing for the cancellation of its shares currently owned by the Trustee of Trust A, subsection 159GZZZP(2) of the ITAA 1936 will ensure that the deemed consideration for income tax purposes is increased to market value. If it can be said that any capital gain or any other assessable amount which would have been included in an entity's taxable income under the alternative hypothesis would also have been included under the current proposal, then it can be said that there is no amount that would be included in the assessable income of an entity under the scheme that would have been included if the scheme had not been entered into. There is therefore no tax benefit pursuant to paragraph 177C(1)(a) of the ITAA 1936. As stated previously, under the scheme, the Trustee of Trust A will receive either nil on the cancellation of the shares or amount equal to the original subscription price from the company under the share buy-back. There is therefore no deduction allowed to the Trustee as a result of the scheme which would not have been allowable if the scheme had not been entered into. Paragraph 177C(1)(b) of the ITAA 1936 is therefore not applicable. In addition, as there is also no capital loss arising from the scheme or no foreign income tax offset allowable, paragraphs 177(1)(ba) and (bb) of the ITAA 1936 are not applicable. It is concluded that the scheme does not provide a tax benefit within the meaning of section 177C of the ITAA 1936. As there is no tax benefit, the general anti-avoidance provisions of section 177D of the ITAA 1936 do not need to be considered and do not apply. Part IVA of the ITAA 1936 does therefore not apply to the scheme.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: The company carries on a business and is owned by the family via Trust A and Trust B. | Trust A holds ordinary shares in the company which were acquired by the Trustee prior to 20 September 1985. | Trust A is an Australian resident trust and all the shareholders of the company are Australian residents. | Trust B holds ordinary shares in the company which were acquired prior to 20 September 1985. | Trust A and Trust B are the only shareholders in the company. | Trust A and Trust B were established prior to 20 September 1985. | The Trustee of Trust A and Trust B is company B. Both trusts also have the same beneficiaries. | The company proposes to cancel the shares held by the Trustee of Trust A. The amount paid by the Company to the Trustee of Trust A on the cancellation of the shares will be nil under Division 1 (section 256B) of Chapter 2J of the Corporations Act 2001 . A nil amount will be debited against the company's paid up capital account. The applicant has now agreed that this proposal will not apply. | Alternatively, a share buy-back of the shares under Division 2 (section 257A) of Chapter 2J of the Corporations Act 2001 may be undertaken. Under this option the shares will be bought back by the company at a nominal amount per share being the original amount paid up on the shares. The buy-back amount will be debited against the company's paid up capital account. No distribution other than this nominal amount per share will be received by the Trustee of Trust A. | Trust A does not have any capital losses and no dividends have been paid by the company in the last few years. It has not been the company's policy to pay dividends but rather to re-invest its profits in the expansion of its business activities. | The market value of the total assets in the company was an estimated amount at the end of a financial year. | The market value of the net assets at the end of the previous financial year was a known amount while the market value of property that was acquired post-CGT at the end of the same financial year was also known. | The market value of the shares held by the Trustee of Trust A which are to be cancelled is a known amount.