Private ruling: Share buy-back
Date of advice: 26 June 2017
Published: November 2017
Ruling period: Year ended XXXX.
Date scheme commenced: During the year ended XXXX.

Ruling: Q1: Will the shares in Company A owned by Company B constitute an indirect Australian real property interest (IARPI) for the purposes of section 855-25 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the Commissioner make a determination pursuant to section 45B of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C of the ITAA 1936 applies to the proposed share buy-back? | A2: No. | Q3: Will the Commissioner make a determination pursuant to section 45A of the ITAA 1936 that section 45C of the ITAA 1936 applies to the proposed share buy-back? | A3: No. | Q4: Will the Commissioner make a determination pursuant to paragraph 177EA(5)(b) of the ITAA 1936 and paragraph 204-30(3)(c) of the ITAA 1997 in relation to the proposed share buy-back? | A4: No.

Relevant facts and circumstances: Background 1. Company A is an Australian resident company, whose shares are not listed on the Australian Securities Exchange or any other exchange. 2. Company A is the provisional head entity of a multiple entry consolidated (MEC) group. 3. Company A has on issue fully-paid ordinary shares which are solely held by Company B, a non-resident company. 4. Company B acquired its shares in Company A after 20 September 1985. 5. All shares held by Company B in Company A carry voting rights and rights to distributions of capital and profits. 6. All shares in Company A are equity interests for Australian tax purposes pursuant to Division 974 of the ITAA 1997. 7. Company B holds the shares in Company A on capital account, as a capital gains tax (CGT) asset. 8. An intragroup restructure occurred in XXXX whereby Company A disposed of its shares in subsidiary companies to other members of the MEC group and received as consideration cash and related-party receivables. 9. Other than the abovementioned restructure, Company A confirms that it has not, and will not, undertake prior to the proposed share buy-back any other business restructures, intra-corporate loans or other such actions. 10. Company A has a history of regularly declaring fully franked dividends. 11. The MEC group does not have any foreign resident subsidiaries and does not have a conduit foreign income balance. Proposed off-market share buy-back 12. Company A is proposing to undertake a share buy-back totalling $X to return surplus cash funds to Company B (Buy-Back). 13. The Buy-Back is expected to occur at market value. 14. The Commissioner reviewed the market valuation methodology proposed by Company A and is satisfied that the buy-back price represents the market value of a Company A share at the time of the Buy-Back. 15. Company A will use the average capital per share (ACPS) methodology to determine the capital and dividend component of the Buy-Back. 16. For each share bought back by Company B, Company A will debit an amount (Capital Component) to its share capital account and the balance of the Buy-Back price (Dividend Component) to its retained earnings. 17. The Dividend Component is intended to be fully franked. 18. Company A’s taxable Australian real property (TARP) analysis, based on the most recent balance sheet of the company, indicates that the market value of the company’s TARP assets do not exceed the market value of its non-TARP assets at the time of the Buy-Back.

Relevant legislative provisions: 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 Paragraph 177EA(5)(b) | Income Tax Assessment Act 1997 Paragraph 204-30(3)(c) | Income Tax Assessment Act 1997 Section 855-25

Reasons for decision: Summary: Section 855-10 of the ITAA 1997 provides that a taxpayer can: (1) Disregard a capital gain or capital loss from a CGT event if: (a) you are a foreign resident, or the trustee of a foreign trust for CGT purposes, just before the CGT event happens; and (b) the CGT event happens in relation to a CGT asset that is not taxable Australian property. Accordingly, if the shares in Company A are not taxable Australian property (TAP) at the time of the CGT event (being at the time of the Buy-Back), Company B can disregard any capital gain or loss made on the buy-back of shares. Section 855-15 of the ITAA 1997 outlines the categories of CGT assets which are TAP. Relevantly, Item 2(a) of the table in section 855-15 of the ITAA 1997 provides that a non-resident taxpayer will be subject to Australian CGT on a buy-back of shares if the shares constitute an IARPI. Section 855-25 of the ITAA 1997 defines an IARPI as a membership interest of a holding entity (in this case, Company B) in the test entity (in this case, Company A) where: ● the interest passes the non-portfolio interest test (NPIT) at that time or throughout a 12 month period that began no earlier than 24 months before that time and ended no later than that time, and ● the interest passes the principal asset test (PAT) in section 855-30 of the ITAA 1997 at that time. | Detailed Reasoning - NPIT: Section 960-195 of the ITAA 1997 provides that an interest held by the holding entity in the test entity passes the NPIT if the sum of the direct participation interests held by the holding entity and its associates in the test entity at that time is 10% or more. In this case, Company B is the sole shareholder of Company A and holds 100% of the direct interests in Company A. On this basis, Company B’s interest in Company A satisfies the NPIT in respect of its membership interest at the time of the Buy-Back. | Detailed Reasoning - PAT: Subsection 855-30(2) of the ITAA 1997 provides that a membership interest held by the holding entity in the test entity passes the PAT if the sum of the market values of the test entity’s TARP assets exceeds the sum of the market values of its non-TARP assets. Section 855-20 of the ITAA 1997 states that a CGT asset is TARP if it is real property situated in Australia or a mining, quarrying or prospecting right in Australia. In determining whether Company A has greater than 50% TARP 'at that time’ (being at the time of the Buy-Back), pursuant to paragraph 855-25(1)(b) and section 855-30 of the ITAA 1997, calculations based on the most recent balance sheet for Company A have been used to estimate the proportion of Company A’s assets that are TARP at the time of the Buy-Back. As the market value of Company A’s TARP assets do not exceed the market value of its non-TARP assets, Company A does not pass the PAT. | Detailed Reasoning - Integrity measures: Subsection 855-30(5) of the ITAA 1997 and section 855-32 of the ITAA 1997 are integrity measures in place to prevent the distortion of the application of the PAT. In this case, these integrity measures are not triggered as Company A has not undertaken or will not undertake a business restructure or other such actions which would result in an injection of non-TARP assets with the intention of failing the PAT just before the Buy-back. | Detailed Reasoning - Conclusion: Based on the above, the shares in Company A held by Company B do not constitute IARPI under section 855-25 of the ITAA 1997. | Detailed Reasoning - Question 2: Section 45B of the ITAA 1936 is an anti-avoidance provision which applies where certain capital payments are paid to shareholders in substitution for dividends to treat such capital payments as unfranked dividends. Subsection 45B(2) of the ITAA 1936 states that section 45B of the ITAA 1936 applies if: (a) there is a scheme under which a person is provided with a… capital benefit by a company; and (b) under the scheme, a taxpayer (the relevant taxpayer ), who may or may not be the person provided with the …capital benefit, obtains a tax benefit; 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 a taxpayer (the relevant taxpayer ) to obtain a tax benefit. The conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are met in respect of the Buy-Back as: ● the Buy-Back is a scheme ● a capital benefit, being the Capital Component of $1.00, is provided under the scheme to Company B, being the relevant taxpayer; and ● the relevant taxpayer obtains a tax benefit, being less tax payable on the Capital Component if the amount had instead been a dividend. However, the Commissioner considers that neither Company A nor Company B entered into or carried out the Buy-Back for a more than incidental purpose of enabling a person to obtain a tax benefit, having regard to the 'relevant circumstances' (as set out in subsection 45B(8) of the ITAA 1936) of the Buy-Back, as it is apparent that: ● the Capital Component accords with the ACPS method, which is acceptable in Company A’s circumstances ● the pattern of distributions of Company A does not indicate that the Capital Component reflects amounts in substitution for a dividend ● the Buy-Back is not expected to alter Company A's dividend policy ● the Buy-Back will result in a reduction of the number of ordinary shares held by Company B, and therefore the number of shares on issue; and ● the manner, form, substance and timing of the Buy-Back is consistent with it being an off-market share buy-back. Therefore, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat all or part of the Capital Component (the capital benefit) as an unfranked dividend. | Detailed Reasoning - Question 3: Section 45A of the ITAA 1936 is an anti-avoidance provision that applies to circumstances where capital benefits are streamed to certain shareholders who derive a greater benefit from the receipt of share capital (the advantaged shareholders) and when it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have, or will receive dividends. If section 45A of the ITAA 1936 applies, the Commissioner can make a determination under section 45C of the ITAA 1936 that all or part of the capital benefit is an unfranked dividend. In this case, Company B is the sole shareholder of Company A. Therefore, there are no advantaged or disadvantaged shareholders for the purposes of section 45A of the ITAA 1936. Further, Company B will receive capital benefits (Capital Component) and dividends (Dividend Component) in proportion to its shareholding in Company A. Therefore, section 45A of the ITAA 1936 does not apply to the Buy-Back and the Commissioner will not make a determination pursuant to section 45A of the ITAA 1936 that section 45C of the ITAA 1936 applies. | Detailed Reasoning - Section 177EA of the ITAA 1936: Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to a wide range of schemes designed to obtain imputation benefits. It 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 shares or an interest in shares. This extends to an off-market share buy-back with a franked dividend component. If section 177EA of the ITAA 1936 applies, the Commissioner has the discretion to make a determination in writing to cancel the imputation benefits attached to the Dividend Component of the Buy-Back for the shareholder, Company B (paragraph 177EA(5)(b) of the ITAA 1936). Subsection 177EA(3) of the ITAA 1936 provides that section 177EA of the ITAA 1936 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 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, a 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. The conditions of paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied in respect of the Buy-Back. In arriving at a conclusion on paragraph 177EA(3)(e) of the ITAA 1936, the Commissioner must have regard to the relevant circumstances of the scheme which include, but are not limited to, the circumstances set out in subsection 177EA(17) of the ITAA 1936. In this case, the Commissioner considers that neither Company B nor Company A entered into or carried out the Buy-Back for a more than incidental purpose of enabling a person to obtain an imputation benefit, as: ● Company B is the sole shareholder of Company A and therefore there are no other entities which are disadvantaged by the distribution; ● accordingly, there is no 'streaming’ of franking benefits; and ● the Dividend Component accords with the ACPS method, which is acceptable in Company A’s circumstances. Accordingly, section 177EA of the ITAA 1936 will not apply and the Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 in relation to the Buy-Back. | Detailed Reasoning - Section 204-30 of the ITAA 1997: Section 204-30 of the ITAA 1997 allows the Commissioner to make certain determinations if a corporate tax entity streams one or more distributions, or one or more distributions and the giving of other benefits, to its members in such a way that: (a) an 'imputation benefit’ is, or apart from section 204-30 of the ITAA 1997 would be, received by a member of the entity as a result of the distribution or distributions (paragraph 204-30(1)(a) of the ITAA 1997) (b) the member would derive a 'greater benefit from franking credits’ than another member of the entity (paragraph 204-30(1)(b) of the ITAA 1997); 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 (paragraph 204-30(1)(c) of the ITAA 1997). If section 204-30 of the ITAA 1997 applies, the Commissioner has the discretion to make a determination in writing that no imputation benefit is to arise in respect of a distribution that is made to a favoured member and specified in the determination. For section 204-30 of the ITAA 1997 to apply, a member of an entity must derive a greater benefit from franking credits. In this case, Company B is the sole shareholder of Company A and will receive capital benefits and dividends in direct proportion to its shareholding. Therefore, no member would derive a 'greater benefit from franking credits’ than another member of the entity. Accordingly, section 204-30 of the ITAA 1997 will not apply and Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 in relation to the Buy-Back.