Private ruling: Average capital per share methodology
Date of advice: 27 March 2026
Published: 29 June 2026
Ruling period: 1 July 2025 to 30 June 2026

Ruling: Q1: Is Average Capital Per Share the preferred method for determining the capital and dividend components in this off-market share buy-back under section 159GZZZP of the ITAA 1936? | A1: Yes | Q2: Will the Commissioner make a determination under section 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the buy-back? | A2: No | Q3: Will the Commissioner make a determination under section 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the buy-back? | A3: No | Q4: Will the Commissioner make a determination under subsection 177EA(5) of the ITAA 1936 in relation to the whole, or a part, of the frankable distribution under the buy-back? | A4: No | Q5: Will the Commissioner make a determination under section 204-30 of the Income Tax Assessment Act 1997 (ITAA 1997) that applies in relation to the whole, or a part, of the frankable distribution under the buy-back? | A5: No | Q6: As a consequence of the buy-back, is X required to give a copy of a notice to its shareholders pursuant to subsection 45D(1A) of the ITAA 1936? | A6: No

Relevant facts and circumstances: The Group, as at xx 20xx, comprised two separate structures. XXXC was the head entity of one structure. X was the head entity of the other structure. Decision to restructure business The shareholders decided to restructure the Group to achieve two objectives: (1) The owners wished to simplify the ownership structure so that there was a single holding company (i.e. X) for the group. (2) The owners wished to re-align the group's ownership structure in proportion to each owner's active participation in the affairs of the group. In this instance, the objective was to equalise at X% each the ownership of the existing X shareholders. To achieve these objectives, the shareholders undertook the following transactions: To ensure the shareholdings of the shareholders in X were made equal (at X% each) it executed a selective off-market buy-back in 20BB as below: • X bought back a number of its shares from one shareholder. • As a result, each of X's shareholders now hold (X%) of the ordinary shares in X. • X used the average capital per share method to arrive at the capital and dividend component of the buy-back price. X's share capital account was untainted.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 159GZZZK | Income Tax Assessment Act 1936 section 159GZZZM | Income Tax Assessment Act 1936 section 159GZZZP | 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 section 177D | Income Tax Assessment Act 1936 section 177EA | Income Tax Assessment Act 1997 section 204-30 | Income Tax Assessment Act 1997 Division 207

Reasons for decision: Summary: Average Capital Per Share the preferred method for determining the capital and dividend components in this off-market share buy-back. | Detailed Reasoning - Detailed reasoning: Division 16K of Part III of the ITAA 1936 outlines the income tax consequences of share buy-backs. This Division applies where a company buys a share in itself from its shareholders. Section 159GZZZK of the ITAA 1936 provides that share buy-backs take the form of an on-market purchase or an off-market purchase. In accordance with paragraph 159GZZZK(d) of the ITAA 1936 the share buy-back will be an off-market purchase where it is not an on-market purchase. In accordance with paragraph 159GZZZM(a) of the ITAA 1936, the purchase price in respect of shares the company acquires through the buy-back is the amount of money the participating shareholder receives as a result of or in respect of the buy-back. Section 159GZZZP of the ITAA 1936 provides that for the purposes of this Act, but subject to subsection (1A), where a buy-back of a share or non-share equity interest by a company is an off-market purchase, the difference between: (a) the purchase price; and (b) the part (if any) of the purchase price in respect of the buy-back of the share or non-share equity interest which is debited against amounts standing to the credit of: (i) the company's share capital account if it is a share that is bought back; or (ii) the company's share capital account or non-share capital account if it is a non-share equity interest that is bought back. is taken to be a dividend paid by the company: (c) to the seller as a shareholder in the company; and (d) out of profits derived by the company; and (e) on the day the buy-back occurs. (1A) If the dividend is included to any extent in the seller's assessable income of any year of income, it is not taken into account to that extent under section 188-20 of the ITAA 1997. (2) The remainder of the purchase price is taken not to be a dividend for the purposes of this Act. Law Administration Practice Statement PS LA 2007/9 - Share buy-backs (PSLA 2007/9) provides at paragraph 12 that the Commissioner's preferred methodology for determining the 'split' between the return of capital and dividend paid to participating shareholders in an off-market share buy-back is the Average Capital Per Share (ACPS) method unless companies can demonstrate exceptional circumstances for the use of an alternative method (paragraph 69 of PSLA 2007/9). This method involves dividing a company's ordinary issued capital by the number of shares on issue (paragraph 62 of PSLA 2007/9). 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. Pursuant to the scheme, X will debit its share capital account. The amount will be determined using the ACPS method. As the purchase price of the buy-back exceeds the amount debited to the share capital account there is a dividend to be paid as per the facts on the day the buy-back occurs for the purposes of section 159ZZZP of the ITAA 1936. The ACPS methodology used by X is the preferred method for determining the 'dividend/capital split' of the buy-back price. As a result, for the purposes of section 159GZZZP, an amount will represent the capital component of the buy-back price, and the balance of the buy-back price will be the dividend component for each share bought back. | Detailed Reasoning - Question 2: Will the Commissioner make a determination under section 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the buy-back? | Summary: The Commissioner will not make a determination under subsection 45A(2) that section 45C ITAA 1936 applies to the whole, or any part, of the capital benefit under the buy-back. | Detailed Reasoning - Detailed reasoning: Section 45A of the ITAA 1936 applies where capital benefits are streamed to certain shareholders (the advantaged shareholders) who derive a greater benefit from the capital benefits than other shareholders, and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or would receive dividends. The Commissioner may make a determination to the effect that section 45C of the ITAA 1936 applies to all or part of a capital benefit (section 45A(2) of the ITAA 1936). That capital benefit is then deemed to be an unfranked dividend. As stated in paragraph 62 of PS LA 2007/9, the use of the ACPS method gives rise to a strong presumption that section 45A would not apply to the buy-back. Given this, the Commissioner will not make a determination pursuant to subsection 45A(2) that section 45C of the ITAA 1936 will apply in relation to all or part of the capital benefits. There is nothing in the arrangement to indicate that there is a 'streaming' of capital benefits to some shareholders and dividends to other shareholders as a sole shareholder will receive the capital return in direct proportion to its shareholding. Therefore, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat all or part of the distribution of share capital as an unfranked dividend. | Detailed Reasoning - Question 3: Will the Commissioner make a determination under section 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the buy-back? | Summary: The Commissioner will not make a determination under section 45B(3) ITAA 1936 that section 45C ITAA 1936 applies in relation to the whole, or a part, of the capital benefit under the buy-back. | Detailed Reasoning - Detailed reasoning: Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends. It applies where: • there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936) • 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 (paragraph 45B(2)(b) of the ITAA 1936) and • 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 a tax benefit (paragraph 45B(2)(c) of the ITAA 1936). The conditions in paragraphs 45B(2)(a) and (b) of the ITAA 1936 were met in respect of the selective share capital reduction. However, having regard to the 'relevant circumstances' of the selective share capital reduction, the Commissioner considers that the scheme consisting of the selective share capital reduction was not entered into or carried out for a more than an incidental purpose of enabling the single shareholder who participated in the share capital reduction to obtain a tax benefit given the stated commercial rationale of providing all the shareholders an equal share in X. Some of the key factors are: • the capital component (a distribution of share capital) per share accords with the average capital per share methodology as outlined in the facts and Question 1 response, and • in these circumstances, the capital benefit was provided for the purposes of a buy-back which was not funded through profits or retained earnings but was a reduction of equity in X. It was funded by a debit to the company's untainted share capital account using the ACPS method. 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 45B of the ITAA 1936 would not apply to the buy-back" and the Commissioner will not make a determination that section 45C of the ITAA 1936 applies to treat all or part of the distribution of share capital per share as an unfranked dividend. Accordingly, section 45B of the ITAA 1936 does not apply to the selective share capital reductions. | Detailed Reasoning - Question 4: Will the Commissioner make a determination under section 177EA(5) of the ITAA 1936 in relation to the whole, or a part, of the frankable distribution under the buy-back? | Summary: The Commissioner will not make a determination under section 177EA(5) of the ITAA 1936 in relation to the whole, or a part, of the frankable distribution under the buy-back. | Detailed Reasoning - Detailed reasoning: Section 177EA of the ITAA 1936 applies where the five conditions, set out in paragraphs 177EA(3)(a)-(e) are satisfied. Subsection 177EA(3) of the ITAA 1936 provides that this section applies if: (a) there is a scheme for disposition of membership interests, or an interest in membership interests; 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 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. For section 177EA(5) of the ITAA 1936 to apply, all five conditions set out in paragraphs 177EA(3)(a)-(e) of the ITAA 1936 above must be present. Paragraph 177EA(4) of the ITAA 1936 states that it is not to be concluded for the purposes of paragraph 177EA(3)(e) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph (ie, a purpose of enabling a relevant taxpayer to obtain an imputation benefit), merely because the person acquired membership interests, or an interest in membership interests, in the corporate entity. In this regard, it should be noted that the High Court decision in Mills v Commissioner of Taxation (2012) 250 CLR 171 has clarified some aspects of the basis for ascertaining purpose under section 177EA of the ITAA 1936: • The relevant circumstances referred to in subsection 177EA(17) are only relevant to the extent that they are probative of the ultimate question as to purpose. • The relevant circumstances referred to in subsection 177EA(17) are mandatory considerations but are not exhaustive of the circumstances that might be probative of the ultimate question. • A purpose will be incidental if it does no more than further or follow as a consequence of some other purpose. • A purpose can be incidental even where it is central to the design of a scheme if that design is directed to achieving another purpose. • Purpose is a matter for inference, incidentally is a matter of degree, and counterfactual analysis may be relevant to the ascertainment of both franking purpose and whether that purpose is or is not incidental to some other purpose. The requisite purpose is further clarified when considered alongside the objective of section 177EA of the ITAA 1936 which was explained in paragraph 8.124 of the Explanatory Memorandum (EM) to the Taxation Laws Amendment Bill (No 3) 1998 as follows: One of the underlying principles of the dividend imputation system is 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. Franking credit trading is a process of transferring franking credits on a dividend from investors who cannot fully utilise them (such as non-residents and tax-exempts) to others who can fully utilise them undermines this principle. Similarly, dividend streaming (ie. the streaming of franking credits to select shareholders) undermines the principle that tax paid at the company level is imputed to shareholders proportionately to their shareholdings as explained in paragraph 8.124 of the EM to the Taxation Laws Amendment Bill (no. 3) 1998 that accompanied the introduction of section 177EA. Therefore, in determining whether or not the requisite purpose is present, the relevant circumstances will reveal whether the scheme seeks to undermine the principles of the dividend imputation system by streaming franking credits to select shareholders. The selective buy back by X constitutes a "scheme" involving the disposition of X shares held by XX. The buy-back is to simplify the ownership structure and to ensure each shareholder has an equal share in X. X has provided a fully franked dividend as part of the buy-back (sections 177EA(3)(a-c) of the ITAA 1936 are satisfied). XX being an Australian tax resident and a qualified person in respect of the distribution, will receive franking credits associated with the fully franked dividend payment as outlined in the responses to Question 1 using the ACPS methodology. XX is entitled to a corresponding franking offset under Division 207, satisfying condition 177EA(3)(c) and (d). Section 177EA(3)(e) of the ITAA 1936 requires consideration of whether, having regard to the circumstances set out in subsection 177EA(17) it could be objectively concluded that a party to the scheme has the purpose of enabling the taxpayer to obtain an imputation benefit. Section 177EA(17) of the ITAA 1936 provides that the relevant circumstance of a scheme include the following: (a) the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding membership interests , or havinginterestsinmembershipinterests, 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 membershipinterests, or interests in membership interests, in the corporate tax entity); (b) whether the relevant taxpayerwould, 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 holdmembershipinterests , or have interestsinmembershipinterests, in thecorporate 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 - shareequity interest to which section 215-10 of the ITAA 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 - shareequity interest; and (ii) distributionsin respect of which are frankable; (f) whether any consideration paidor 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 intereston 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 adistribution 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) of the ITAA 1936. The selective buy-back represents a reduction in one shareholder's ownership which alters its future risks and opportunities. The buy-back was not a mere arrangement to temporarily increase its imputation benefit nor to divert the franking credits to it. If the buy-back was not entered into the franking credits would be available to be used by all four Australian shareholders. The capital component is a genuine return of share capital and there are no artificial deductions or capital losses identified in connection with this scheme. There are no deductions or capital loss incurred by the shareholder in relation to this distribution. It has held the shares in X since inception, a long time ago. The fully franked dividend is paid by X from realised retained earnings and not from unrealised profits. Having regard to all the relevant circumstances outlined in section 177EA(17) of the ITAA 1936, the selective buy-back reflects a genuine commercial objective. Any imputation benefit arising from the buy-back to XX is merely incidental and not an intended purpose. It cannot objectively be concluded that the buy-back scheme was entered into for the purpose (other than incidental) of enabling XX to obtain an imputation benefit. Accordingly, section 177EA of the ITAA 1936 will not apply to deny any franking credits on dividends paid. The Commissioner will not make a determination under paragraph 177EA(5) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received under the buy-back. | Detailed Reasoning - Question 5: Will the Commissioner make a determination under section 204-30 of the ITAA 1997 that applies in relation to the whole, or a part, of the frankable distribution under the buy-back? | Summary: The Co mmissioner will not make a determination under section 204-30 of the ITAA 1997 that applies in relation to the whole, or a part, of the frankable distribution. | Detailed Reasoning - Detailed reasoning: Section 204-30(1) of the ITAA 1997 applies where an entity streams one or more distributions in such a way that: (a) an imputation benefit is, or apart from section 204-30 would be, received by a member of the entity as a result of the distribution or distributions, (b) the member (the favoured member) would derive a greater benefit from franking credits than another member of the entity, and (c) the other member (the disadvantaged 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 section is concerned with whether other shareholders would have received a lesser benefit, or no benefit, from the franked dividend which was distributed. 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. For this section to apply, members to whom distributions are streamed must be in a position to derive a greater benefit from the franking credits than other members. Some of the cases in which a member of an entity 'derives a greater benefit from franking credits' are listed in subsection 204-30(8) by reference to the ability of a member to fully utilise franking credits. All the shareholders of X are equally able to benefit from franking credits and no shareholder would have received a lesser benefit, or no benefit, from the franked dividend that was distributed. Therefore, the Commissioner would not make a determination under section 204-30 of the ITAA 1997. | Detailed Reasoning - Question 6: As a consequence of the buy-back of XX's shares in X, is X required to give a copy of a notice to its shareholders pursuant to subsection 45D(1A) of the ITAA 1936? | Summary: X is not required to give a copy of notice to its shareholders. | Detailed Reasoning - Detailed reasoning: Subsection 45D(1A) of the ITAA 1936 provides that where the Commissioner gives notice of a determination to a company in accordance with subsection 45D(1) of the ITAA 1936 that company must, in the case of a determination under section 45A or 45B of the ITAA 1936, give a copy of the notice to: (a) the advantaged shareholder referred to in section 45A; or (b) the relevant taxpayer referred to in section 45B. As outlined above the Commissioner will not make a determination under section 45A, 45B or 45C of the ITAA 1936. There is no notice of determination from the Commissioner for X to give a copy of to its shareholders.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar .