Private ruling: Share buy-back and frankability of distributions
Date of advice: 30 October 2015
Published: October 2015
Ruling period: A particular income year
Date scheme commenced: A particular income year

Ruling: Q1: Will the buy-back of shares by the Company be an on-market share buy-back for the purposes of division 16K of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Will the buy-back and subsequent cancellation of any shares bought-back by the Company be disregarded by the Company for income tax purposes under section 159GZZZN of the ITAA 1936? | A2: Yes | Q3: Will any franking debit arise to the Company as a consequence of the buy-back, including under item 9 of the table in subsection 205-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The description of the scheme is based on information provided by Taxpayer A in the following documents, which are to be read in conjunction with the facts as set out below: • the Company's request for a Private Binding Ruling (the Application ). Background 1. The Company is an ASX listed public company. 2. For the income years through to the year ending year X, the Company presented its consolidated statutory accounts in Australian dollars ( AUD ) from which point the Company's statutory accounts have been presented in US dollars ( USD ). 3. However, Company's functional currency for both Australian tax and accounting purposes remains AUD. That is, the accounting general ledger for the Company remains in AUD. On-market share buy-backs 4. On a particular date, the Company announced an on-market share buy-back program. Under the program, the Company proposes to buy back up to $XXX million, of shares over a 12-month period commencing shortly after this date (unless completed at an earlier time). 5. The Company has undertaken undertook two on-market share buy-backs in prior years. 6. The Company has confirmed that they do not presently have an off-market buy-back program and that they have no present intention to implement an off-market buy-back. Share capital account 7. In order to prepare the Company's consolidated statutory accounts in USD, the share capital was converted using a particular spot rate. 8. The Company has confirmed that any further movements in the share capital account are translated at the average rate for the year in which the relevant transaction occurred. 9. Due to the strengthening of the AUD relative to the USD from the time of the initial conversion to the time after each of the two prior share buy-backs, this has resulted in a disproportionately larger diminution of the USD share capital. Proposed accounting treatment 10. The buy-back proceeds are proposed to be debited wholly against the amount standing to the credit of the Company's share capital account. No part of the buy-back will be debited against retained earnings or other profit accounts. 11. Specifically, depending on the extent of the shares bought back, the Company will debit the amount of the share buy-back against the amount in the credit balance of its AUD share capital ledger account. 12. For statutory accounting purposes, the Company will translate the buy-back amounts (up to the total amount of the buy-back) into USD using the average exchange rate for the year in which the on-market buy-back is to occur. This amount will be debited against the USD balance of its 'contributed equity' in the Company's consolidated statutory accounts. 13. The Company expects that the USD balance of its 'contributed equity' will be reduced to nil, with any amount in excess of the USD 'contributed equity' balance to be recorded as a debit balance in a 'buy-back reserve equity' account in the Company's consolidated statutory accounts.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 159GZZZK | Income Tax Assessment Act 1936 Section 159GZZZN | Income Tax Assessment Act 1936 Section 159GZZZR | Income Tax Assessment Act 1997 Section 202-40 | Income Tax Assessment Act 1997 Section 202-45 | Income Tax Assessment Act 1997 Section 205-30

Reasons for decision: Summary: The buy-back of shares by the Company will be an on-market share buy-back for the purposes of division 16K of the ITAA 1936. In this question, all legislative references are to the ITAA 1936, unless otherwise specified. | Detailed Reasoning - Detailed reasoning: 14. Division 16K deals with the tax consequences for shareholders when a company buys back shares issued to its shareholders. A company may either buy-back its shares on-market or off-market. 15. A company's buy-back will constitute an on-market buy-back if the requirements in section 159GZZZK are satisfied. Section 159GZZZK states: 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. 16. Under the buy-back, the Company proposes to buy shares in itself from existing shareholders. As the Company is listed for quotation on the ASX; and, the buy-back will occur in the ordinary course of trading on the stock exchange, paragraph 159GZZZK(c) is satisfied. 17. Consequently the buy-back will be an on-market share buy-back for the purposes of division 16K. | Detailed Reasoning - Question 2: Will the buy-back and subsequent cancellation of any shares bought-back by the Company be disregarded by the Company for income tax purposes under section 159GZZZN of the ITAA 1936? | Summary: The buy-back and subsequent cancellation of any shares bought-back by the Company will be disregarded by the Company for income tax purposes under section 159GZZZN of the ITAA 1936. In this question, all legislative references are to the ITAA 1936, unless otherwise specified. | Detailed Reasoning - Detailed reasoning: 18. The effect of a share buy-back is set out in section 159GZZZN, which states: If 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. 19. As the Company buys-back shares in the Company, the buy-back and any subsequent cancellation of the shares will be disregarded by the Company for income tax purposes under section 159GZZZN. | Detailed Reasoning - Question 3: Will any franking debit arise to the Company as a consequence of the buy-back, including under item 9 of the table in subsection 205-30(1) of the ITAA 1997? | Summary: A franking debit will not arise to the Company as a consequence of the buy-back, including under item 9 of the table in subsection 205-30(1) of the ITAA 1997. In this question, all legislative references are to the ITAA 1997, unless otherwise specified. | Detailed Reasoning - Detailed reasoning: 20. As stated at paragraphs 14 to 17 above, the share buy-back will be an on-market share buy-back under section 159GZZZK of the ITAA 1936. 21. Section 159GZZZR of the ITAA 1936 states: For the purposes of this Act, where a buy-back by a company of a share is an on-market purchase, no part of the purchase price in respect of the buy-back of the share is taken to be a dividend. 22. As no part of the purchase price is a dividend, prima facie, there will not be a frankable distribution. 23. However, pursuant to item 9 of the table in subsection 205-30(1), a franking debit may apply: • if an on-market buy-back by a company of a membership interest in the company occurs, • a debit of an amount equal to the debit that would have arisen if: • the purchase of the interest were a frankable distribution equal to the one that would have arisen if the company had purchased the interest off-market; and • the distribution were franked at the entity's benchmark franking percentage for the franking period in which the purchase was made or, if the entity does not have a benchmark franking percentage for the period, at a franking percentage of 100%; and • arises on the day on which the interest is purchased. 24. The purpose of item 9 in the table in subsection 205-30(1) is provided at paragraph 4.25 of the Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002 , which states: Also consistent with the existing law, a franking debit arises if a company buys back a share on-market. The debit is equal to the debit that would have arisen had the buy-back been off-market. Again, this prevents streaming by companies buying back some shares off-market (giving rise to a frankable dividend) and other shares on-market (which results in no dividend). 25. In order to determine whether item 9 in the table in subsection 205-30(1) could apply, it needs to be considered whether a franking debit would have arisen, if the on-market buy-back was carried out as an off-market share buy-back. 26. As stated at paragraph 10 to 13 above, the entire amount of the buy-back will be debited against the Company's share capital account. To this effect, paragraph 202-45(e), relevantly states: The following are unfrankable: … (e) a distribution that is sourced, directly or indirectly, from a company's * share capital account … 27. Subsection 202-40(1) relevantly states that: A distribution is a frankable distribution, to the extent that it is not unfrankable under section 202-45. 28. Consequently, the Company will not make a frankable distribution, under sections 202-40 and 202-45 when it buys-back shares in the Company, as buy-back amounts debited to share capital are incapable of being franked. Therefore, this distribution is not capable of delivering franking credits to participants of the share buy-back regardless of whether the buy-back is off-market or on-market. 29. Hence, a franking debit will not arise to the Company as a consequence of the buy-back, including under item 9 of the table in subsection 205-30(1).

Question 1: Will the buy-back of shares by the Company be an on-market share buy-back for the purposes of division 16K of the ITAA 1936?