Private ruling: Off-market share buy-back
Date of advice: 12 October 2018
Published: December 2018
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 November 20XX

Ruling: Q1: Will section 159GZZZN of the Income Tax Assessment Act 1936 (ITAA 1936) apply to Company A such that the Off-Market Share Buy-Back (the Buy-Back) and any subsequent cancellation of the shares will be disregarded for the purposes of determining whether: (a) an amount is included in the assessable income of Company A under the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936 (b) an amount is allowable as a deduction to Company A, or (c) an amount of a capital gain or capital loss arises to Company A? | A1: Yes. | Q2: Will Company A be taken to have paid Participating Shareholders a dividend out of profits derived by it on the day the Buy-Back occurs equal to the amount of the Dividend Component pursuant to subsection 159GZZZP(1) of the ITAA 1936? | A2: Yes. | Q3: Under subsection 159GZZZP(1) of the ITAA 1936, is the date of the Buy-Back the day when the Buy-Back agreement is entered into? | A3: Yes. | Q4: Will the Dividend Component paid to the shareholders who participate in the Buy-Back constitute a frankable distribution for the purposes of subsection 202-40(1) of the ITAA 1997? | A4: Yes. | Q5: Will paragraphs 202-45(a) through to 202-45(j) of the ITAA 1997 apply to treat part of the Dividend Component as an unfrankable distribution? | A5: No. | Q6: Will the Commissioner make a determination under subsection 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 Component? | A6: No. | Q7: Will the Commissioner make a determination under subsection 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 Component? | A7: No. | Q8: Will the Commissioner make a determination under section 204-15 of the ITAA 1997 that a franking debit arises in Company A’s franking account? | A8: No. | Q9: (a) Will the Commissioner exercise his discretion to make a determination under paragraph 177EA(5)(a) of the ITAA 1936, which Company A will accept, that a franking debit arises in the franking account of Company A in respect of franked dividends paid – being the Dividend Component – as part of the Buy-Back? (b) Will the Commissioner make a Determination under paragraph 177EA(5)(a) of the ITAA 1936, which Company A will accept, that a franking debit arises in the franking account of Company A in respect of franked dividends paid as part of the Buy-Back, calculated in accordance with the formula in Practice Statement PS LA 2007/9: Share buy-backs (PS LA 2007/9)?: | A9: (a) Yes. (b) Yes. | Q10: Will the Commissioner make a determination under paragraph 204-30(3)(a) of the ITAA 1997 that a specified franking debit arises in the franking account of Company A in respect of the whole or part of the Dividend Component? | A10: No. | Q11: Will the Commissioner make a determination under paragraph 177EA(5)(a) that a franking debit arises in Company A’s franking account in respect of the dividend? | A11: No. | Q12: Will the Commissioner make a determination under paragraph 204-30(3)(a) that a franking debit arises in Company A’s franking account in respect of the dividend? | A12: No. | Q13: For the purpose of determining whether Company A has a withholding obligation under section 12-210 of Schedule 1 to the Taxation Administration Act 1953 (TAA) in respect of the dividend, will the Commissioner make a determination under either paragraph 177EA(5)(b) or paragraph 204-30(3)(c) in respect of the dividend? | A13: No.

Relevant facts and circumstances: 1. Company A is an Australian resident with a mix of shareholders being individuals, companies and superannuation funds, some of whom are non-residents. 2. Company A will undertake a Buy-Back of its ordinary shares with all shares bought back under the Buy-Back cancelled. 3. Company A would not buy back any shares at a price higher than the deemed market value determined in accordance with Taxation Determination TD 2004/22: Income tax: for Off-Market Share Buy-Backs of listed shares, whether the buy-back price is set by tender process or not, what is the market value of the share for the purposes of subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936? (TD 2004/22) and PS LA 2007/9, taking into account any ‘ex-dividend’ adjustment. 4. The Buy-Back Price consisted of a Dividend Component and a Capital Component. 5. The Dividend Component of the Buy-Back Price was debited against Company A’s retained earnings. The Dividend Component will be equal to the Buy-Back Price less the Capital Component. The Dividend Component was fully franked. 6. The Capital Component of the Buy-Back Price was debited against Company A’s untainted share capital account. 7. Company A also paid a franked dividend to its shareholders.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 45A | Income Tax Assessment Act 1936 Subsection 45A(2) | Income Tax Assessment Act 1936 Paragraph 45A(3)(b) | Income Tax Assessment Act 1936 Section 45B | Income Tax Assessment Act 1936 Paragraph 45B(2)(a) | Income Tax Assessment Act 1936 Paragraph 45B(2)(b) | Income Tax Assessment Act 1936 Paragraph 45B(2)(c) | Income Tax Assessment Act 1936 Paragraph 45B(3)(b) | Income Tax Assessment Act 1936 Paragraph 45B(5)(b) | Income Tax Assessment Act 1936 Subsection 45B(8) | Income Tax Assessment Act 1936 Subsection 45B(9) | Income Tax Assessment Act 1936 Section 45C | Income Tax Assessment Act 1936 Section 128B | Income Tax Assessment Act 1936 Paragraph 128B(3)(ga) | Income Tax Assessment Act 1936 Paragraph 159GZZZK(a) | Income Tax Assessment Act 1936 Section 159GZZZN | Income Tax Assessment Act 1936 Subsection 159GZZZP(1) | Income Tax Assessment Act 1936 Section 177D(2) | Income Tax Assessment Act 1936 Section 177EA | Income Tax Assessment Act 1936 Subsection 177EA(3) | Income Tax Assessment Act 1936 Paragraph 177EA(3)(a) | Income Tax Assessment Act 1936 Paragraph 177EA(3)(b) | Income Tax Assessment Act 1936 Paragraph 177EA(3)(c) | Income Tax Assessment Act 1936 Paragraph 177EA(3)(d) | Income Tax Assessment Act 1936 Paragraph 177EA(3)(e) | Income Tax Assessment Act 1936 Subsection 177EA(5) | Income Tax Assessment Act 1936 Paragraph 177EA(5)(a) | Income Tax Assessment Act 1936 Paragraph 177EA(5)(b) | Income Tax Assessment Act 1936 Paragraph 177EA(14)(b) | Income Tax Assessment Act 1936 Paragraph 177EA(14)(d) | Income Tax Assessment Act 1936 Subsection 177EA(16) | Income Tax Assessment Act 1936 Subsection 177EA(17) | Income Tax Assessment Act 1936 Paragraph 177EA(17)(b) | Income Tax Assessment Act 1936 Paragraph 177EA(17)(c) | Income Tax Assessment Act 1936 Paragraph 177EA(17)(d) | Income Tax Assessment Act 1936 Paragraph 177EA(17)(g) | Income Tax Assessment Act 1936 Paragraph 177EA(17)(j) | Income Tax Assessment Act 1936 Subsection 177EA(18) | Income Tax Assessment Act 1936 Subsection 177EA(19) | Income Tax Assessment Act 1997 Section 202-5 | Income Tax Assessment Act 1997 Section 202-40 | Income Tax Assessment Act 1997 Subsection 202-40(1) | Income Tax Assessment Act 1997 Section 202-45 | Income Tax Assessment Act 1997 Paragraph 202-45(c) | Income Tax Assessment Act 1997 Section 204-15 | Income Tax Assessment Act 1997 Section 204-30 | Income Tax Assessment Act 1997 Subsection 204-30(1) | Income Tax Assessment Act 1997 Paragraph 204-30(1)(a) | Income Tax Assessment Act 1997 Paragraph 204-30(1)(b) | Income Tax Assessment Act 1997 Paragraph 204-30(1)(c) | Income Tax Assessment Act 1997 Subsection 204-30(3) | Income Tax Assessment Act 1997 Paragraph 204-30(3)(a) | Income Tax Assessment Act 1997 Subsection 204-30(6) | Income Tax Assessment Act 1997 Paragraph 204-30(6)(a) | Income Tax Assessment Act 1997 Paragraph 204-30(6)(e) | Income Tax Assessment Act 1997 Subsection 204-30(7) | Income Tax Assessment Act 1997 Subsection 204-30(8) | Income Tax Assessment Act 1997 Paragraph 204-30(8)(a) | Income Tax Assessment Act 1997 Subsection 204-30(9) | Income Tax Assessment Act 1997 Subsection 204-30(10) | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 Section 960-120 | Income Tax Assessment Act 1997 Subsection 960-120(1) | Income Tax Assessment Act 1997 Subsection 995-1(1) Taxation Administration Act1953 Schedule 1 Section 12-210 | Taxation Administration Act 1953 Schedule 1Section 12-300

Reasons for decision: Summary: Section 159GZZZN will apply to Company A such that the Buy-Back and any subsequent cancellation of the shares will be disregarded for the purposes listed in section 159GZZZN. | Detailed Reasoning - Detailed reasoning: Under section 159GZZZN, where a company buys-back a share, then the buy-back, and any subsequent cancellation of the share, are disregarded for the purposes of: (a) determining for the purposes of this Act: (i) whether an amount is included in the assessable income of the company under a provision of this Act (other than a provision of Part 3-1 or 3-3 of the Income Tax Assessment Act 1997 (about CGT)); or (ii) whether an amount is allowable as a deduction to the company; or (b) determining whether the company makes a capital gain or capital loss. Under the Buy-Back, Company A will buy-back its shares within the meaning given by paragraph 159GZZZK(a). Pursuant to subsection 257H(3) of the Corporations Act 2001 , immediately after the registration of the transfer to a company of shares purchased under a buy-back, the shares are cancelled. Accordingly, the Buy-Back and the subsequent cancellation of Company A shares will be disregarded for the purposes listed in section 159GZZZN. That is, for the purposes of: ● determining whether an amount is included in Company A’s assessable income under a provision of the ITAA 1936 or the ITAA 1997 (other than a provision of Part 3-1 or 3-3 (about CGT)) ● determining whether Company A is entitled to a deduction for an amount under the ITAA 1936 or the ITAA 1997, and ● determining whether Company A makes a capital gain or capital loss under Part 3-1 or 3-3. | Summary: Under subsection 159GZZZP(1), for each share bought back under the Buy-Back, the difference between the Buy-Back Price and the Capital Component of the Buy-Back Price will be taken to be a dividend paid by Company A out of profits derived by Company A for the purposes of the ITAA 1936 and the ITAA 1997. | Detailed Reasoning - Deemed dividend: Subsection 159GZZZP(1) applies to the Buy-Back. In the context of the Buy-Back, subsection 159GZZZP(1) treats the difference between: ● the Buy-Back Price, and ● the part of the Buy-Back Price which is debited against amounts standing to the credit of Company A’s share capital account, as a dividend (the Dividend Component) paid by Company A. The Dividend Component is also taken under subsection 159GZZZP(1) to be paid to Participating Shareholders as shareholders in Company A, out of profits derived by Company A, and on the day the Buy-Back occurs. For each share bought back under the Buy-Back, Company A debited the Capital Component against the amount standing to the credit of its untainted share capital account. As a result, under subsection 159GZZZP(1), for each share Company A purchases under the Buy-Back, the difference between: ● the Buy-Back Price, and ● the Capital Component, is taken to be a dividend paid by Company A out of profits derived by Company A for the purposes of the ITAA 1936 and the ITAA 1997. | Summary: Under subsection 159GZZZP(1), the date of the Buy-Back is the day the Buy-Back agreement was entered into, being the date Company A accepts the Buy-Back offer. | Detailed Reasoning - Detailed reasoning: Subsection 159GZZZP(1) provides that a specified part of the purchase price of an off-market buy-back is deemed to be a dividend 'on the day the buy-back occurs'. The Commissioner considers that the time the buy-back occurs for the purpose of subsection 159GZZZP(1) is anytime on the day that the entities enter into the share buy-back agreement, being the date Company A accepts the Buy-Back offer. | Summary: All of the Dividend Component of the Buy-Back Price is a frankable distribution within the meaning given by subsection 202-40(1). | Detailed Reasoning - Frankable distribution: The Dividend Component constitutes a ‘distribution’ within the meaning given by section 960-120 (item 1 of the table in subsection 960-120(1) as ‘a dividend, or something that is taken to be a dividend, under this Act’). A distribution is a frankable distribution to the extent that it is not unfrankable under section 202-45 (subsection 202-40(1)). As set out in the Detailed reasoning for Question 5 below, no part of the Dividend Component was an unfrankable Dividend. Therefore, the Dividend Component is a frankable distribution for the purposes of subsection 202-40(1). | Summary: Paragraphs 202-45(a) through to 202-45(j) did not apply to treat part of the Dividend Component as an unfrankable distribution. | Detailed Reasoning - Detailed reasoning: Section 202-45 provides a list of distributions that are unfrankable as follows: (a) (Repealed by No 101 of 2003) (b) (Repealed by No 53 of 2015) (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 (certain dividends paid by authorised deposit-taking institutions) or 215-15 (certain non-share dividends); (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 by No 79 of 2007); (iii) section 109 of that Act (excessive payments to shareholders, 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. Paragraph 202-45(c) is relevant to off-market share buy-backs, and provides that part of the Dividend Component is unfrankable to the extent that the Buy-Back Price exceeds the relevant ‘market value’ of the share bought back. Company A undertook not to buy back a share for an amount that was greater that the market value of the share calculated in accordance with TD 2004/22 and the methodology set out in Example 7 of Appendix A to PSLA 2007/9. As a result, paragraph 202-45(c) will not operate to treat any part of the Dividend Component as an unfrankable dividend. None of the other paragraphs of section 202-45 apply to the Dividend Component of the Buy-Back Price. As a result, all of the Dividend Component was a frankable distribution within the meaning given by subsection 202-40(1). | Summary: The Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the whole, or a part, of the Capital Component of the Buy-Back Price. | Detailed Reasoning - Detailed reasoning: Section 45A is an anti-avoidance rule that applies where a company streams ‘capital benefits’ to shareholders who derive a greater benefit from the receipt of share capital (advantaged shareholders), and it is reasonable to assume that other shareholders (disadvantaged shareholders) have received or will receive dividends. Participating Shareholders will be provided with a capital benefit under the Buy-Back in the form of a distribution of share capital (paragraph 45A(3)(b)). Although a capital benefit will be provided to Participating Shareholders under the Buy-Back, the circumstances of the Buy-Back indicate that there is no streaming of capital benefits to some shareholders and dividends to other shareholders. In particular: ● the Buy-Back is in substance an ‘equal access scheme’ where participation is available to all shareholders registered on the Record Date ● the decision whether or not to participate in the Buy-Back is at the discretion of each Shareholder ● each Participating Shareholder will receive the same Dividend Component and Capital Component ● shareholders who do not participate in the Buy-Back will not receive any other dividend or distribution as compensation for not participating in the Buy-Back ● Company A’s dividend history and policy indicates that the Buy-Back is not a substitute for ordinary dividends, and ● both Participating Shareholders and non-Participating Shareholders will, to the extent that they remain shareholders, continue to be eligible to receive ordinary dividends on an equal basis. Accordingly, the Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the whole, or a part, of the Capital Component of the Buy-Back Price. | Summary: The Commissioner will not make a determination under paragraph 45B(3)(b) that section 45C applies to the whole, or a part, of the Capital Component of the Buy-Back Price. | Detailed Reasoning - Detailed reasoning: Section 45B applies where: ● there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a)), and ● 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)), 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 a taxpayer (the relevant taxpayer) to obtain a tax benefit (paragraph 45B(2)(c)). The Buy-Back constitutes a ‘scheme’ within the meaning given by subsection 995-1(1). As set out above in the Detailed reasoning for Question 6 above, Participating Shareholders will be ‘provided with a capital benefit’ under the Buy-Back in the form of a distribution of share capital (paragraph 45B(5)(b)). As a result, the requirements of paragraph 45B(2)(a) was satisfied in respect of the Buy-Back. Broadly, a Participating Shareholder ‘obtains a tax benefit’ under the Buy-Back if the amount of tax payable by a Participating Shareholder in respect of the Capital Component of the Buy-Back Price would be less than the amount of tax that would have been payable if the Capital Component was instead an assessable dividend (subsection 45B(9)). The determination of whether a Participating Shareholder would obtain a relevant tax benefit in respect of the Capital Component of the Buy-Back Price requires consideration of each Participating Shareholder’s particular circumstances on a case by case basis. Company A’s shares are held by a wide variety of shareholders. As a result, it is possible that certain Participating Shareholders may obtain a tax benefit under Buy-Back and the requirements of paragraph 45B(2)(b) may be satisfied. Paragraph 45B(2)(c) provides that it is necessary to have regard to the ‘relevant circumstances’ of the Buy-Back to determine whether Company A or a Participating Shareholder entered into or carried out the Buy-Back for a more than incidental purpose of enabling a Participating Shareholder to obtain a tax benefit. The relevant circumstances to be considered are listed in subsection 45B(8) and include any of the matters listed in subsection 177D(2). Following a consideration of the relevant circumstances of the Buy-Back, the Commissioner accepts that neither Company A nor a Participating Shareholder entered into or carried out the Buy-Back for a more than incidental purpose of enabling a Participating Shareholder to obtain a tax benefit. In particular: ● the Dividend and Capital Components of the Buy-Back Price are acceptable in Company A’s circumstances ● Company A’s dividend history and policy indicate that the Capital Component of the Buy-Back Price is not a substitute for ordinary dividends, and ● the Buy-Back will result in a reduction in the number of ordinary shares held by Participating Shareholders. The tax benefit, if any, that may arise for a Participating Shareholder is incidental to the main or substantial purpose of the Buy-Back, being to return surplus funds. Therefore, section 45B will not apply to the Buy-Back and accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) that section 45C applies to the whole, or a part, of the capital benefit provided under the Buy-Back. | Summary: The Commissioner will not make a determination under section 204-15 that a franking debit arises in Company A’s franking account. | Detailed Reasoning - Detailed reasoning: Section 204-15 is an anti-streaming rule which is designed to prevent avoidance of the benchmark franking percentage rules in circumstances where a member of a corporate tax entity is able to choose, or to fail to choose, to receive a distribution from a corporate tax entity with a certain benchmark percentage, and as a result another member of the entity receives a distribution from a second entity with lesser or no franking credits. The Commissioner considers that section 204-15 does not apply in this matter. | Summary: (a) The Commissioner will make a determination under paragraph 177EA(5)(a) that a franking debit arises in the franking account of Company in respect of franked dividends paid as part of the Buy-Back. (b) The above-mentioned franking debit will be calculated in accordance with the formula set out in PS LA 2007/9. | Detailed Reasoning - Detailed reasoning: Section 177EA is a general anti-avoidance provision that applies to franking credit trading schemes where one of the purposes (other than an incidental purpose) of the scheme is to obtain a franking credit benefit. The provision 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 which includes an off-market share buy-back with a franked dividend component. Subsection 177EA(3) provides that section 177EA 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. For section 177EA to apply, the five specific conditions set out in paragraphs 177EA(3)(a) to (e) must each be present (conjunctive). For the proposed Buy-Back, the conditions of paragraphs 177EA(3)(a) to (d) were satisfied as follows: (a) Company A satisfied paragraph 177EA(3)(a) as there was a scheme for disposition of membership interests as defined in paragraphs 177EA(14)(b) and (d) as under the Buy-Back, Company A entered into a contract (or transactions) that affects the ownership of shares held and disposed by Participating Shareholders which were then subsequently cancelled. (b) Paragraph 177EA(3)(b) was also satisfied as a frankable distribution was paid as part of the Buy-Back Price pursuant to section 202-40, noting the distributions were not unfrankable as set out in the Detailed reasoning for Questions 4 and 5 . (c) Paragraph 177EA(3)(c) was satisfied as, pursuant to section 995-1, a franked distribution arises if the distribution is franked in accordance with section 202-5. The Dividend Component was fully franked. (d) Paragraph 177EA(3)(d) was satisfied as Participating Shareholders received an imputation benefit as per the Note to subsection 177EA(16) and as defined in subsection 204-30(6). For present purposes, Participating Shareholders are members who are entitled to tax offsets under Division 207 (paragraph 204-30(6)(a)). Paragraph 177EA(3)(e) requires a conclusion that Company, its Participating Shareholders or any other relevant party entered into the Buy-Back with a more-than-incidental-purpose of enabling the Participating Shareholders (each a relevant taxpayer) to obtain an imputation benefit. In arriving at a conclusion as to purpose under paragraph 177EA(3)(e), the Commissioner must have regard to the relevant circumstances of the arrangement which are not exhaustively outlined in subsection 177EA(17). The most relevant circumstance for the Buy-Back was its greater attraction to resident shareholders who could fully use the franking credits than to non-resident shareholders. Paragraph 177EA(17)(b) states: (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; The meaning of the phrase ‘greater benefit from franking credits’ is further and not exhaustively set out in subsections 177EA(18) and (19). For direct distributions such as those which will be received by the Participating Shareholders, the Note following subsection 177EA(19) refers to subsections 204-30(7) to (10). Subsection 204-30(8) lists circumstances that apply for Company A’s Participating Shareholders. Paragraph 204-30(8)(a) looks to the greater attraction of the imputation benefits attached to the Dividend Component of the Buy-Back Price to (certain) resident Participating Shareholders than for non-resident shareholders. As treaty non-residents hold a percentage of Company A shares, the Commissioner concludes that the terms and conditions of the Buy-Back were unattractive to the non-resident shareholders. Paragraphs 177EA(17)(c), (d), (g) and (j) are also relevant to the Buy-Back. These paragraphs state: … (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); … (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; … (j) any of the matters referred to in subsection 177D(2). … For the purposes of paragraph 177EA(17)(c), Company A has a history of distributing fully franked dividends to its shareholders. Regardless of the Buy-Back, Company A intends to continue to make franked distributions to shareholders. Accordingly, the portion of franking credits which would be used for the Buy-Back would otherwise be retained by Company A. For the purposes of paragraph 177EA(17)(d), subject to Company A’s dividend policy, any increased, fully franked dividends that Company A would otherwise pay to its shareholders in the absence of the Buy-Back may flow directly or indirectly to another entity subject to paragraph 177EA(17)(b). For the purposes of paragraph 177EA(17)(g), the Sale Consideration (being the Capital Component per share as adjusted by the operation of subsection 159GZZZQ(2)) is less than the trading price of Company A shares. Therefore, the Buy-Back Price most likely resulted in Participating Shareholders making capital losses or being entitled to allowable deductions. Finally, as referred in paragraph 177EA(17)(j), the matters outlined in subsection 177D(2) also requires consideration. However, as observed in Mills v Federal Commissioner of Taxation 2011 ATC 20-247 at 131, many of the matters referred to in subsection 177D(2) have no application beyond the extent to which those circumstances have already been taken into account for the other circumstances in subsection 177EA(17). In relation to the Buy-Back, the Commissioner considers that the matters raised by paragraph 177EA(17)(j) have already been taken into account in the discussion above. Having regard to all the relevant circumstances of the Buy-Back discussed above but with particular weight attributed to paragraph 177EA(17)(b), the Commissioner is of the view that section 177EA applies to the Buy-Back. Where section 177EA applies the Commissioner has a discretion pursuant to subsection 177EA(5) to make a determination to debit the company’s franking account pursuant to paragraph 177EA(5)(a), or to deny the imputation benefit arising to each Participating Shareholder pursuant to paragraph 177EA(5)(b). The Commissioner’s practice is to apply paragraph 177EA(5)(a) where a buy-back price achieved does not achieve a discount greater than the maximum acceptable level of discount set out in PS LA 2007/9. Company A did not purchase its shares under the Buy-Back at a discount greater than 14% to the VWAP of its shares for the five days leading up to and including the Closing Date. As a result, the Commissioner will exercise his discretion in such a way as to debit Company A’s franking account pursuant to paragraph 177EA(5)(a) . | Summary: The Commissioner will not make a determination under paragraph 204-30(3)(a) that a specified franking debit arises in the franking account of Company A in respect of the whole or part of the Dividend Component. | Detailed Reasoning - Detailed reasoning: Subsection 204-30(1) states that the section empowers the Commissioner to make certain determinations if an entity: … streams one or more *distributions (or one or more distributions and the giving of other benefits), …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 requirements of subsection 204-30(1) were satisfied in respect of the Buy-Back as: ● Participating Shareholders received an imputation benefit (within the meaning given by subsection 204-30(6)) as a result of receiving the fully franked Dividend Component. ● Some if not most Participating Shareholders are residents that derive a greater benefit from franking credits for the purposes of paragraph 204-30(1)(b) and subsections 204-30(7) and (8) than other Company A shareholders such as non-resident shareholders (paragraph 204-30(8)(a)), and ● it is reasonable to conclude that the features of the Buy-Back will influence some if not most non-resident Company A shareholders to choose not to participate in the Buy-Back, and as a result the non-resident shareholders did not receive any imputation benefits in respect of the Buy-Back. As set out in the Relevant Facts and Circumstances, a percentage of Company A’s shares are held by treaty non-residents. Non-resident shareholders do not benefit from franking to the same extent as resident Shareholders (paragraph 204-30(8)(a)). Therefore, the conditions in subsection 204-30(1) were met. The Commissioner considers that the Buy-Back was unattractive to non-resident shareholders. Although, section 204-30 also applies to Company A in relation to the Buy-Back, the Commissioner will not make a determination pursuant to paragraph 204-30(3)(a) on the basis that the Commissioner, as set out in the Detailed reasoning for Question 9, exercised his discretion under section 177EA to make a determination to debit the franking account balance of Company A under paragraph 177EA(5)(a). | Summary: The Commissioner will not make a determination under paragraph 177EA(5)(a) that a franking debit arises in Company A’s franking account in respect of the dividend. | Detailed Reasoning - Detailed reasoning: We refer to subsection 177EA(3) which is set out in the Detailed reasoning for Question 9. For section 177EA to apply, the five specific conditions set out in paragraphs 177EA(3)(a) to (e) must each be present (conjunctive). The dividend was paid to all Company A shareholders that held shares on the Dividend Record Date. For the dividend, the paragraph 177EA(3)(a) requirement was not satisfied as it was not paid as part of a scheme for disposition of membership interests as set out in subsection 177EA(14). As one of the conjunctive requirement of subsection 177EA(3) does not apply for the dividend, section 177EA cannot apply and therefore the Commissioner is unable to make a determination under paragraph 177EA(5)(a) that a franking debit arises in Company A’s franking account for the dividend. | Summary: The Commissioner will not make a determination under paragraph 204-30(3)(a) that a franking debit arises in Company A’s franking account in respect of the dividend. | Detailed Reasoning - Detailed reasoning: We refer to subsection 204-30(1) which is set out in the Detailed reasoning for Question 10. The dividend was paid to all Company A shareholders that held shares on the Dividend Record Date. 'Streaming' is not defined for the purposes of section 204-30. However, the Commissioner understands that it refers to a company 'selectively directing the flow of franked distributions to those members who can most benefit from the imputation credits' (paragraph 3.28 of the Explanatory Memorandum to the N ew Business Tax System (Imputation) Bill 2002). For section 204-30 to apply, members to whom distributions are streamed must derive a greater benefit from franking credits than another member of the entity. The words 'derive a greater benefit from franking credits' are defined in subsection 204-30(8) by reference to the ability of the members to fully utilise imputation benefits. All shareholders that hold Company A shares at the Dividend Record Date received an imputation benefit when the dividend was paid. The imputation benefit for resident shareholders is in the form of a tax offset (paragraph 204-30(6)(a)), and for non-resident shareholders is in the form of not being liable to pay dividend withholding tax (paragraph 204-30(6)(e)). The resident shareholders may derive a greater benefit from franking credits than the non-resident shareholders. However, the dividend was paid equally to all Company A ordinary shareholders and was fully franked regardless of their tax profiles. The Commissioner accepts in the present matter that Company A has not selectively directed the flow of franked, dividends to those members who could most benefit from the franking credits. As the conditions in subsection 204-30(1) were not met, the Commissioner will not make a determination under paragraph 204-30(3)(a) that a franking debit arises in Company A’s franking account. | Summary: For the purpose of determining whether Company A has a withholding obligation under section 12-210 of Schedule 1 to the TAA in respect of the dividend, the Commissioner will not make a determination under either paragraph 177EA(5)(b) or paragraph 204-30(3)(c) in respect of the dividend. | Detailed Reasoning - Dividend withholding obligations under the TAA: Section 12-210 of Schedule 1 to the TAA provides that a company that is an Australian resident must withhold an amount from a dividend it pays if: (a) according to the register of the company’s members, the entity, or any of the entities, holding the *shares on which the dividend is paid has an address outside Australia; or (b) that entity, or any of those entities, has authorised or directed the company to pay the dividend to an entity or entities at a place outside Australia. For limits on the amount to be withheld, see section 12-300. Company A has a percentage of shareholders that reside in jurisdictions that Australia has a double tax agreement with. Section 12-300 of Schedule 1 to the TAA provides limits on the amount to be withheld as follows: This Subdivision does not require an entity: (a) to withhold an amount from a *dividend, from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936 ) or from a *royalty if no *withholding tax is payable in respect of the dividend, interest or royalty; or (b) to withhold from a dividend, from interest (within the meaning of that Division) or from a royalty more than the withholding tax payable in respect of the dividend, interest or royalty (reduced by each amount already withheld from it under this Subdivision). Note: Section 128B of the Income Tax Assessment Act 1936 deals with withholding tax liability. Under paragraph 128B(3)(ga), liability to withholding tax does not apply to: … income that consists of: (i) the franked part of a dividend; or (ii) in relation to a dividend that is paid by a former exempting entity (within the meaning of the Income Tax Assessment Act 1997 ) on a share acquired under an employee share scheme (within the meaning of that Act) - the part of the dividend that is franked with an exempting credit; or (iii) in relation to a dividend that is paid by a former exempting entity (within the meaning of the Income Tax Assessment Act 1997 ) to an eligible continuing substantial member (within the meaning of that Act) - the part of the dividend that is franked with an exempting credit; other than a dividend in respect of which a determination is made under paragraph 204-30(3)(c) of the Income Tax Assessment Act 1997 or a dividend or a part of a dividend in respect of which a determination is made under paragraph 177EA(5)(b) of this Act; or As discussed in the Detailed reasoning for Question 11 and for Question 12 above, neither section 204- nor section 177EA applies to the dividend. Accordingly, the Commissioner is unable to make a determination under paragraph 204-30(3)(c) or a determination under paragraph 177EA(5)(b) that no imputation benefit arose in respect of the dividend to a non-resident shareholder. Therefore, due to the operation of paragraph 128B(3)(ga), section 12-300 of Schedule 1 to the TAA did not apply to require Company A to withhold an amount on the dividend. This is because withholding tax is not payable on the dividend that Company A paid to a non-resident shareholder as the dividend was fully franked.

Reasons for decision: In these reasons for decision, all legislative references are to provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.