Private ruling: Off-market share buy-back
Date of advice: 1 May 2023
Published: 26 June 2023
Ruling period: Year ended 31 December XXXX and | Year ended 31 December XXXX
Date scheme commenced: In the income year ending 31 December XXXX

Ruling: Q1: Did the variation of rights attaching to XX% of Company A shares give rise to a CGT event for Company C? | A1: No | Q2: Did CGT Event A1 happen for Company C when Company B and the Purchasers entered into each of the sale agreements for the shares in Company A? | A2: Yes | Q3: Can the capital gains made by Company C from the CGT events in respect of the shares in Company A be reduced to nil under subsection 768-505(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes | Q4: Can the amount by which the capital gains made by Company C from the CGT events in respect of the shares in Company A that are reduced to nil under subsection 768-505(1) of the ITAA 1997 be declared conduit foreign income (CFI) by Company C in accordance with Division 802 of the ITAA 1997? | A4: Yes | Q5: Will the proposed share Buy-Back by Company C constitute an off-market purchase within the meaning of section 159GZZZK of the Income Tax Assessment Act 1936 (ITAA 1936)? | A5: Yes | Q6: To the extent that the Buy-Back price is not debited against amounts standing to the credit of Company C's share capital account, will the Buy-Back price be taken to be a dividend paid by Company C under section 159GZZZP of the ITAA 1936? | A6: Yes | Q7: Will paragraph 202-45(c) of the ITAA 1997 apply in respect of the dividend component of the Buy-Back? | A7: No | Q8: Will the Commissioner make a determination under section 45A or section 45B of the ITAA 1936 that subsection 45C(3) of the ITAA 1936 will apply in respect of the capital component of the Buy-Back? | A8: No | Q9: Can the amount of the Buy-Back price attributable to a dividend under section 159GZZZP of the ITAA 1936 be declared to be CFI by Company C in accordance with Division 802 of the ITAA 1997? | A9: Yes | Q10: Will the Commissioner apply the CFI streaming provisions in section 802-60 of the ITAA 1997 to the Buy-Back? | A10: No | Q11: Will the dividend component of the Buy-Back price that is declared to be CFI in Company C's distribution statement be exempt from withholding tax under section 128B of the ITAA 1936 and in accordance with Subdivision 12-F of Schedule 1 of the Tax Administration Act 1953 (TAA 1953)? | A11: Yes | Q12: Will the Commissioner make a determination under paragraph 204-30(3)(a) of the ITAA 1997 that a franking debit arises in respect of the Buy-Back? | A12: No | Q13: Will the Commissioner make a determination under paragraph 177EA(5)(a) of the ITAA 1936 that a franking debit arises in respect of the Buy-Back? | A13: No

Relevant facts and circumstances: Company C is an Australian incorporated private company that is Australian tax resident and the head of a tax consolidated group (TCG). Its subsidiary member is Company B. The shares in Company C are held XX% each by Company D and Company E which are both non-resident companies. Company B owns XX% of the shares in Company A. Company A is a foreign resident company operating in the same industry as the ultimate shareholders. Company B agreed to sell XX% of Company A to various foreign entities. The proceeds from this transaction were used by Company B to buy back XX% of its shares held by Company C. In turn it is intended that Company C will use these proceeds to selectively buy back XX% of its shares held by Company D. This permits Company D and its ultimate owner to divest itself of its share in the foreign project which for commercial reasons no longer aligns with their growth strategy. The actual steps are: • Prior to the execution of the purchase and sale agreements, Company A created X shares in itself by converting XX% of its existing shares into X shares with modified rights relating to dilution, transferability and contribution. • On XX, the X shares were transferred by Company B to a foreign entity for $X. • On XX, XX% of X shares were transferred by Company B to a foreign entity for $X. • On XX, Company B distributed the proceeds to Company C by way of a share buy-back. • During the income year ending 31 December XXXX, Company C will conduct a selective share buy-back (the Buy-Back) of Company D's shareholding in Company C using the sale proceeds. Company D will cease to hold any interest in Company C after the completion of the Buy-Back. The Buy-Back components will be calculated using the Average Cost Per Share (ACPS) method. The capital component will be debited to share capital. Company C will declare the dividend component conduit foreign income (CFI) and will have sufficient CFI balance to that extent. Company C will make no other distributions during the franking period in which the Buy-Back occurs. At the time the foreign entities acquired their shares in Company A, substantially all of the value of Company A's assets (and in any event, at least 90%) was comprised of active assets. Company C will apply the 'market value method' to calculate its active foreign business asset percentage under section 768-520 of the ITAA 1997. Company C will not make any distributions other than consideration for the Buy-Back in the income year ending XX. Company C will declare the frankable component of the Buy-Back proceeds to be CFI in its distribution statement in the same proportion for each share subject to the Buy-Back.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 45A | 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 section 45C | Income Tax Assessment Act 1936 subsection 45C(3) | Income Tax Assessment Act 1936 section 47A | Income Tax Assessment Act 1936 section 109 | Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1936 section 159GZZZK | Income Tax Assessment Act 1936 section 159GZZZP | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177EA | Income Tax Assessment Act 1936 subsection 177EA(3) | Income Tax Assessment Act 1936 paragraph 177EA(5)(a) | Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1936 Part X | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 paragraph 108-5 | Income Tax Assessment Act 1997 paragraph 108-5(2)(a) | Income Tax Assessment Act 1997 section 152-125 | Income Tax Assessment Act 1997 section 202-40 | Income Tax Assessment Act 1997 section 202-45 | Income Tax Assessment Act 1997 paragraph 202-45(c) | Income Tax Assessment Act 1997 subparagraph 202-45(h)(ii) | Income Tax Assessment Act 1997 section 203-45 | Income Tax Assessment Act 1997 subsection 204-30(1) | Income Tax Assessment Act 1997 paragraph 204-30(3)(a) | Income Tax Assessment Act 1997 subsection 204-30(6) | Income Tax Assessment Act 1997 section 207-35 | Income Tax Assessment Act 1997 section 220-105 | Income Tax Assessment Act 1997 Subdivision 768-G | Income Tax Assessment Act 1997 subsection 768-505(1) | Income Tax Assessment Act 1997 subsection 768-505(2) | Income Tax Assessment Act 1997 section 768-510 | Income Tax Assessment Act 1997 subsection 768-515(1) | Income Tax Assessment Act 1997 subsection 768-520(1) | Income Tax Assessment Act 1997 subsection 768-540(1) | Income Tax Assessment Act 1997 subsection 768-540(2) | Income Tax Assessment Act 1997 subsection 768-545(1) | Income Tax Assessment Act 1997 Division 802 | Income Tax Assessment Act 1997 section 802-15 | Income Tax Assessment Act 1997 subsection 802-35(3) | Income Tax Assessment Act 1997 section 802-45 | Income Tax Assessment Act 1997 section 802-60 | Income Tax Assessment Act 1997 subsection 802-60(2) | Income Tax Assessment Act 1997 section 995-1 Schedule 1 to the Taxation Administration Act 1953 section 12-300 | Schedule 1 to the Taxation Administration Act 1953 section 288-80 | Schedule 1 to the Taxation Administration Act 1953 Subdivision 12-F

Reasons for decision: Detailed Reasoning - Detailed reasoning: The Commissioner has provided his opinion on whether a variation of rights attaching to shares will result in a disposal of shares in Taxation Ruling TR 94/30 Income tax: capital gains tax implications of varying rights attaching to shares. This ruling concerns Part IIIA of the ITAA 1936. Part IIIA which dealt with capital gains and losses has since been repealed and rewritten into the ITAA 1997. In particular, disposals of an asset formerly covered under subsection 160M(1) of the ITAA 1936 are now captured by CGT event A1 under the ITAA 1997. Similarly, paragraph 108-5(2)(a) of the ITAA 1997, which replaces former section 160R of the ITAA 1936, ensures that part disposals of a CGT asset are also captured under CGT event A1. In respect of former subsection 160M(1)of the ITAA 1936, paragraph 8 of TR 94/30 states: 8. A variation in rights attaching to a share... does not result in a full disposal of an asset for the purposes of Part IIIA unless there is a cancellation or redemption of the share. In determining whether a disposal has occurred under Part IIIA, it is not relevant to consider whether the variation is slight (such as a small change to the nominal value of shares) or more significant (such as disposing of the preference to receive dividends). Company A created X shares in itself by converting XX% of its existing ordinary shares into X shares. The X shares carry the same rights and obligations as ordinary shares including, specifically, voting and dividend rights. The shares that were varied to become X shares are also non-dilutable, non-transferable and non-contributing. No cancellation or redemption of ordinary or X shares occurred as part of the share conversion. As such, the variation of rights to create the X shares did not give rise to a CGT event. | Detailed Reasoning - Question 2: CGT Event A1 happened for Company C when Company B and the Purchasers entered into each of the sale agreements for the shares in Company A. | Detailed Reasoning - Detailed reasoning: Section 104-10 of the ITAA 1997 provides that CGT event A1 happens when a taxpayer disposes of a CGT asset. There is a disposal of a CGT asset if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law. The time of the event is when the taxpayer enters into the contract for the disposal. On XX, Company B entered into sale agreements for the transfer of the shares in Company A to the Purchasers. Accordingly, each of the transfer of shares in Company A from Company B to the Purchasers caused CGT event A1 to happen at this time. | Detailed Reasoning - Question 3: The capital gains made by Company C from the CGT events in respect of the shares in Company A be reduced to nil under subsection 768-505(1) of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Under Subdivision 768-G of the ITAA 1997, a capital gain or capital loss made by an Australian resident company (referred to as the 'holding company') on the disposal of a share in a foreign company (referred to as the 'foreign disposal company') is reduced under subsection 768-505(1) where: (a) the holding company held a *direct voting percentage of 10% or more in the foreign disposal company throughout a 12 month period that: (i) began no earlier than 24 months before the time of the CGT event; and (ii) ended no later than that time; and (b) the share is not: (i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936); or (ii) a widely distributed finance share (within the meaning of that Part); and (c) the CGT event is CGT event A1, B1, C2, E1, E2, G3, J1, K4, K6, K10 or K11. The capital gain or loss is reduced by the 'active foreign business asset percentage' of the foreign disposal company in relation to the holding company at the time of the disposal of the share under subsection 768-505(2) of the ITAA 1997. Broadly, the active foreign business asset percentage is a percentage that reflects the degree to which the assets of the foreign disposal company are used in an active business. This percentage is worked out in accordance with section 768-510 of the ITAA 1997 using one of three methods. These are the 'market value method', the 'book value method' and the 'default method'. Where the holding company has made a choice under subsection 768-515(1) of the ITAA 1997 to use the 'market value method', the active foreign business asset percentage of a foreign company in relation to the holding company, at the time of the disposal of the share, is worked out under subsection 768-520(1). Under the method statement, the market value of the active foreign business assets of the foreign company are divided by the market value of all the assets included in the total assets of the foreign company at that time. If the result of applying this test is 90% or more, then it is deemed to be 100%. An asset is included in the total assets of the foreign company under subsection 768-545(1) of the ITAA 1997 if it is a CGT asset, the foreign company owns the asset and, where the foreign company is not an AFI subsidiary, the asset is not a foreign company derivative asset. The term CGT asset is defined under section 108-5 of the ITAA 1997 as any kind of property, or a legal or equitable right that is not property. This includes intangible assets such as mining rights, licences and permits. An active foreign business asset is defined in subsection 768-540(1) of the ITAA 1997 to mean an asset, at a particular time, of a foreign company if: (a) the asset is an *asset included in the total assets of the company; and (b) the asset satisfies any of these conditions: (i) the asset is used, or held ready for use, by the company in the course of carrying on a *business; (ii) the asset is goodwill; (iii) the asset is a *share; and (c) the asset is not any of the following: (i) *taxable Australian property; (ii) a *membership interest in a company that is an Australian resident; (iii) a membership interest in a *resident trust for CGT purposes; (iv) an option or right to acquire a membership interest mentioned in subparagraph (ii) or (iii); and (d) the asset is not covered by subsection (2); and ... For the purposes of paragraph 768-540(1)(d) of the ITAA 1997, an asset covered by subsection 768-540(2) includes financial instruments, cash or cash equivalents, or assets which relate to the earning of passive income such as interest, rent or royalties. In relation to Company A, each of the requirements at paragraphs 768-505(1)(a) to (c) of the ITAA 1997 will be satisfied. The disposal of Company A shares by Company B satisfies the conditions for a reduction to the capital gain amount under subsection 768-505(1) of the ITAA 1997 to nil. | Detailed Reasoning - Question 4: The amount of the capital gains made by Company C from the CGT events in respect of the shares in Company A that are reduced to nil under subsection 768-505(1) of the ITAA 1997 can be declared CFI by Company C in accordance with Division 802 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: An entity's CFI includes the amount by which a capital gain of an entity is reduced because of the operation of section 768-505 of the ITAA 1997, under paragraph 802-35(1)(a). The adjustments are made at the end of the income year in which the CGT event occurred under subsection 802-35(3). Accordingly, at the end of the income year ending XX, the CFI balance of Company C was increased by an amount equal to the reduction in the capital gain arising from the disposal of the Company A shares under section 768-505 of the ITAA 1997. | Detailed Reasoning - Question 5: The proposed share Buy-Back by Company C will constitute an off-market purchase within the meaning of section 159GZZZK of the Income Tax Assessment Act 1936 (ITAA 1936). | Detailed Reasoning - Detailed reasoning: Section 159GZZZK of the ITAA 1936 provides: For the purposes of this Division, where a company buys a share in itself from a shareholder in the company: (a) the purchase is a buy-back; and (b) the shareholder is the seller; and (c) if: (i) the share is listed for quotation in the official list of a stock exchange in Australia or elsewhere; and (ii) the buy-back is made in the ordinary course of trading on that stock exchange; the buy-back is an on-market purchase; and (d) if the buy-back is not covered by paragraph (c)--the buy-back is an off-market purchase. As Company C will buy shares in itself from one of its shareholders the purchase is a buy-back. Company C's shares are not listed for quotation in the official list of a stock exchange in Australia or elsewhere and the Buy-Back is not made in the ordinary course of trading on that stock exchange. Therefore, the Buy-Back is an off-market purchase under paragraph 159GZZZK(d) of the ITAA 1936. | Detailed Reasoning - Question 6: To the extent that the Buy-Back price is not debited against amounts standing to the credit of Company C's share capital account, the Buy-Back price will be taken to be a dividend paid by Company C under section 159GZZZP of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 159GZZZP(1) of the ITAA 1936 provides: 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. In the context of the buy-back of Company C shares, subsection 159GZZZP(1) of the ITAA 1936 will operate to treat 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 C's share capital account as a dividend paid by Company C. The dividend is also taken under subsection 159GZZZP(1) of the ITAA 1936 to be paid out of profits derived by Company C, and on the day the Buy-Back occurs. | Detailed Reasoning - Question 7: Paragraph 202-45(c) of the ITAA 1997 will not apply in respect of the dividend component of the Buy-Back. | Detailed Reasoning - Detailed reasoning: Section 202-45 of the ITAA 1997 provides a list of circumstances when distributions are unfrankable. In particular, subsection 202-45(c) provides: (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; This requirement is dependent on the Buy-Back price and the market value of the Company C shares. Company C will buy back XX% of its shares on issue. The Buy-Back will be funded directly from the Company A Sale Proceeds which represent the sale of a XX% economic interest in the foreign project to the Purchasers. Company C and its subsidiary Company B hold no material assets or liabilities other than those pertaining to Company A and the foreign project and accordingly the market value of shares in Company C is almost entirely attributable to Company C's investment in Company A. As the Buy-Back purchase price will be equal to the market value that the shares in Company C would have had at the time of the Buy-Back, assuming the Buy-Back did not take place and was never proposed to take place. Paragraph 202-45(c) of the ITAA 1997 will not apply in respect of the dividend component. | Detailed Reasoning - Question 8: The Commissioner will not make a determination under section 45A or section 45B of the ITAA 1936 that subsection 45C(3) of the ITAA 1936 will apply in respect of the capital component of the Buy-Back. | Detailed Reasoning - Detailed reasoning: Section 45A and section 45B of the ITAA 1936 are two anti-avoidance provisions which, if they apply, allow the Commissioner to make a determination that section 45C of the ITAA 1936 applies. The effect of such a determination is that all or part of the distribution of capital received by the shareholder under the Buy-Back is treated as an unfranked dividend. Section 45A of the ITAA 1936 applies in circumstances where capital benefits are streamed to certain shareholders (the advantaged shareholders) who derive a greater benefit from the receipt of share capital, and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends. The distribution of share capital to Company D by Company C under the Buy-Back is a 'provision of a capital benefit' as defined in paragraph 45A(3)(b) of the ITAA 1936. However, 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 circumstances of Company D, Company E and Company C do not support a conclusion that in the year of income, Company D will derive a greater benefit from the receipt of capital benefits than Company E. • The Buy-Back is part of the transaction to allow Company F (through Company D) to exit its investment in the joint venture with Company E. Company D will receive half of the share capital of Company C, in direct proportion to its XX% interest in Company C prior to the Buy-Back. • The Buy-Back does not entail the streaming of capital benefits to Company D and the payment of dividends to Company E. Company E will not receive any distributions as a consequence of the Buy-Back, nor will Company E receive any dividends from Company C in the income year ending XX, being the income year of the Buy-Back. Accordingly, section 45A of the ITAA 1936 has no application to the Buy-Back. Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends. Under subsection 45B(2) of the ITAA 1936, section 45B of the ITAA 1936 applies when: (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. For section 45B of the ITAA 1936 to apply, each of the requirements set out in paragraphs (a) to (c) of subsection 45B(2) of the ITAA 1936 must be present. The Buy-Back constitutes a 'scheme' within the meaning given by subsection 995-1(1) of the ITAA 1997. Company D will be 'provided with a capital benefit' under the Buy-Back in the form of a distribution of share capital which means paragraph 45B(2)(a) of the ITAA 1936 is satisfied. Under paragraph 45B(2)(b) and subsection 45B(9) of the ITAA 1936, a taxpayer will obtain a tax benefit under the Buy-Back if the amount of tax payable by the taxpayer in respect of the Buy-Back would be less than the amount of tax that would have been payable if the capital component of the Buy-Back price were instead an assessable dividend. Company D's circumstances are such that the tax payable in respect of the capital component of the Buy-Back would be less than the amount of tax that would be payable if the capital component were instead an assessable dividend. As such, the requirements of paragraph 45B(2)(b) of the ITAA 1936 is satisfied. Paragraph 45B(2)(c) of the ITAA 1936 provides that it is necessary to have regard to the 'relevant circumstances' of the Buy-Back to determine whether Company C or Company D entered into or carried out the Buy-Back for a more than incidental purpose of enabling Company D to obtain a tax benefit. The relevant circumstances to be considered include the non-exhaustive factors set out in subsection 45B(8) of the ITAA 1936 and include any of the matters listed in subsection 177D(2) of the ITAA 1936. Following a consideration of the relevant circumstances of the Buy-Back, the Commissioner accepts that neither Company C or Company D entered into or carried out the Buy-Back for a purpose of enabling Company D to obtain a tax benefit. The Buy-Back is the commercial means by which Company F (through Company D) will exit its investment in the joint venture, following the acquisition of XX% of Company A and the foreign project by the Purchasers. Accordingly, section 45B of the ITAA 1936 has no application to the Buy-Back. The Commissioner will not make a determination under either section 45A or section 45B of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat all or part of the capital component of the Buy-Back price as an unfranked dividend. | Detailed Reasoning - Question 9: The amount of the Buy-Back price attributable to a dividend under section 159GZZZP of the ITAA 1936 can be declared to be CFI by Company C in accordance with Division 802 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: A dividend may be declared to be CFI under section 802-15 of the ITAA 1997 to the extent it reflects the unfranked part of a frankable distribution made by an Australian corporate tax entity. This declaration must be made on or before the day on which the distribution is made. Section 202-40 of the ITAA 1997 provides that a distribution is a frankable distribution to the extent that it is not unfrankable under section 202-45 of the ITAA 1997. Two paragraphs in section 202-45 require consideration: • 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 (paragraph 202-45(c)). • an amount that is taken to be an unfranked dividend for any purpose because of a determination of the Commissioner under section 45C of the ITAA 1936 (subparagraph 202-45(h)(ii)). As per the detailed reasoning for question 7, the Commissioner does not consider the Buy-Back price will exceed the market value of the Company C shares at the time of the Buy-Back. Similarly, per the detailed reasoning for question 8, the Commissioner will not make a determination under section 45C of the ITAA 1936 in relation to the Buy-Back. Therefore, the full dividend component is frankable. Company C will not frank the dividend component of the Buy-Back price to the extent it relates to the Company A Sale Proceeds. Accordingly, the anticipated dividend component related to the Company A Sale Proceeds will be an unfranked frankable distribution that Company C can declare to be CFI in the distribution statement under section 802-15 of the ITAA 1997. On the basis that the declared CFI amount is less than the balance of Company C's CFI account, no administrative penalty for over declaring CFI would apply under section 288-80 of Schedule 1 to the TAA 1953. | Detailed Reasoning - Question 10: The Commissioner will not apply the CFI streaming provisions in section 802-60 of the ITAA 1997 to the Buy-Back. | Detailed Reasoning - Detailed reasoning: Section 802-60 of the ITAA 1997 is intended to discourage the streaming of CFI to foreign shareholders in preference to resident shareholders. Specifically, subsection 802-60(2) provides: (2) If the entity does not, for that *franking period, declare the same proportion of *conduit foreign income for all *membership interests and *non-share equity interests then, instead of the amount that it declared to be conduit foreign income on those *distributions, it is taken to have declared under section 802-45 the greater amount that it would have declared had it declared that same proportion on all those distributions. Company C has a franking period that is the same as its income year under section 203-45 of the ITAA 1997, being the year ended 31 December. It is currently anticipated that Company C will not make any distributions in the income year ended 31 December 2023 other than under the Buy-Back. Company C will make an unfranked distribution on each share subject to the Buy-Back that will be declared CFI to the same extent. Accordingly, Company C will declare the same proportion of CFI for all membership interests during the franking period and section 802-60 of the ITAA 1997 has no application. | Detailed Reasoning - Question 11: The dividend component of the Buy-Back price that is declared to be CFI in Company C's distribution statement will be exempt from withholding tax under section 128B of the ITAA 1936 and in accordance with Subdivision 12-F of Schedule 1 of the Tax Administration Act 1953 (TAA 1953). | Detailed Reasoning - Detailed reasoning: Under paragraph 802-15(1)(b) so much of the unfranked part of a frankable distribution that a foreign resident receives from an Australian corporate tax entity that is declared, in its distribution statement, to be CFI is not subject to withholding tax under section 128B of the ITAA 1936. As per the detailed reasoning in questions 7-9, the amount of the dividend component of the Buy-Back price will be a frankable distribution under section 202-40 of the ITAA 1997. However, Company C will not frank the part of the dividend component of the Buy-Back relating to the Company A Sale Proceeds and will instead declare that part to be CFI in its distribution statement in respect of the Buy-Back. On that basis, section 802-15 will apply to exclude the amount of the dividend component of the Buy-Back price from the operation of the withholding tax rules in section 128B of the ITAA 1936. Under section 12-300 of Schedule 1 of the TAA 1953, no amount is required to be withheld from a dividend under Subdivision 12-F of Schedule 1 of the TAA 1953 where no amount of withholding tax is payable in respect of the dividend under section 128B of the ITAA 1936. | Detailed Reasoning - Question 12: The Commissioner will not make a determination under paragraph 204-30(3)(a) of the ITAA 1997 that a franking debit arises in respect of the Buy-Back. | Detailed Reasoning - Detailed reasoning: Subsection 204-30(1) of the ITAA 1997 provides that the Commissioner has discretion to make determinations where an entity streams one or more distributions such that: • an imputation benefit would be received by a member of the entity as a result of the distribution(s) • that member would derive a greater benefit from franking credits than another member of the entity, and • the other member will receive lesser (or nil) imputation benefits. For streaming to occur, a member better able to benefit from imputation credits must receive one or more imputation benefits. Imputation benefit is defined in subsection 204-30(6) of the ITAA 1997 as: • an entitlement to a tax offset or, if the member is a corporate tax entity, a franking credit • an amount that would be included in the members assessable income as a result of the distribution because of the operation of section 207-35 of the ITAA 1997, or • an exemption from withholding tax (relevant if the member is a non-resident). Company C will not be franking the dividend component of the Buy-Back and Company D will not receive an imputation benefit in accordance with subsection 204-30(6) of the ITAA 1997. As Company E is also a non-resident member it is no more or less able to benefit from imputation credits than Company D. As such the Commissioner will not make a determination pursuant to paragraph 204-30(3)(a) of the ITAA 1997. | Detailed Reasoning - Question 13: The Commissioner will not make a determination under paragraph 177EA(5)(a) of the ITAA 1936 that a franking debit arises in respect of the Buy-Back. | Detailed Reasoning - Detailed reasoning: Section 177EA of the ITAA 1936 is a general anti-avoidance provision that operates to safeguard the imputation system. 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) of the ITAA 1936 states that the section 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 of the ITAA 1936 to apply, each of the five specific conditions set out in paragraphs 177EA(3)(a) to (e) of the ITAA 1936 must be present. In this case as the dividend will not be a franked distribution nor a distribution franked with an exempting credit, paragraph 177EA(3)(c) of the ITAA 1936 is not satisfied. It follows that the Commissioner will not make a determination pursuant to section 177EA(5)(a) of the ITAA 1936 that a franking debit arises in respect of the Buy-Back.

The variation of rights attaching to XX% of Company A shares did not give rise to a CGT event for Company C.