Private ruling: Proposed buyback of dividend access shares
Published: March 2014
Ruling period: 1 July 2013 to 30 June 2014
Date scheme commenced: The scheme has commenced

Ruling: Q1: Does the fact that the directors of the company have not exercised their discretion to pay a dividend to the Class A and Class B shareholders mean that there has been no value shifting between the ordinary shares and the Class A and Class B shares for the purposes of section 725-145 of the Income Tax Assessment Act 1997 (ITAA 1997) and Division 19B of Part IIIA of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: If the answer to Question 1 is that there has been no value shift, does a return of the paid up capital to the Class A and Class B shareholders of the $X per share originally paid by the Class A and Class B shareholders and the cancellation of the Class A and Class B shares by way of a reduction in capital pursuant to section 256B of the Corporations Act 2001 ensure there is no capital gain under section 104-25 of the ITAA 1997 from the disposal of the Class A and Class B shares? | A2: Yes provided the capital proceeds received equates to market value. | Q3: If only $X per share is returned to the Class A and Class B shareholders when they are cancelled is there any dividend or deemed dividend resulting from the share cancellation that is assessable under section 44 of the ITAA 1936? | A3: No.

Relevant facts and circumstances: Before 2000 the company issued a number of Class A shares for $X each to the trustee of an associated trust. At the same time the company issued the same number of Class B shares for $X each to the trustee of another associated trust. These shares had the following rights attached to them: • The directors of the company shall have an absolute discretion to declare a dividend to the Class A or Class B shareholders in their absolute discretion to the exclusion of the shareholders of all or any other class; • The Class A or Class B shares are non-voting shares; • The Class A or Class B shareholders have no right to a distribution of surplus assets of the company upon the winding up of that company. Since the Class A and Class B shares were issued, the directors of the company have not exercised their discretion in relation to the declaration of a dividend in favour of the Class A or Class B shareholders. The directors of the company have not declared or paid any dividends in respect to any other shares on issue. The company proposes to cancel the Class A and Class B shares by way of a selective capital reduction under section 256B of the Corporations Act 2001 . The company is proposing to pay consideration of $X for each Class A and Class B share. The Class A and Class B shareholders would be repaid their initial subscription price. The consideration paid for the Class A and Class B shares will be debited against the share capital account of the company, which is not 'tainted' for the purposes of section 197-50 of the ITAA 1997. No dividend will be declared and paid in favour of the Class A or Class B shareholders prior to the proposed share buyback taking place.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 subsection 6(4) | Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 subsection 159GZZZP(1) | Income Tax Assessment Act 1936 section 160ZZRL | Income Tax Assessment Act 1936 section 160ZZRM | Income Tax Assessment Act 1936 section 160ZZRN | Income Tax Assessment Act 1936 section 160ZZRO | Income Tax Assessment Act 1936 section 160ZZRP | Income Tax Assessment Act 1936 section 160ZZRQ | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 116-30(2) | Income Tax Assessment Act 1997 section 197-50 | Income Tax Assessment Act 1997 section 725-145

Reasons for decision: Summary: Value has not shifted between the ordinary shares and the Class A and Class B shares. | Detailed Reasoning - Detailed reasoning: As the Class A and Class B shares in the company were issued prior to enactment of the Income Tax Assessment Act 1997 (ITAA 1997), it is necessary to consider the share issue in terms of the former direct value shifting provisions of Division 19B of Part IIIA of the ITAA 1936. Section 160ZZRL of the ITAA 1936 sets out the requirements necessary for the operative provisions of the Division to apply (sections 160ZZRP and 160ZZRQ of the ITAA 1936). Based on the facts provided in this case, the issue of the Class A and Class B shares did not result in a shift in value between these shares and the ordinary shares in the company. As the proposed buyback of the Class A and Class B shares is to take place in the relevantincome year it is necessary to consider the provisions of Division 725 of the Income Tax Assessment Act 1997 (ITAA 1997) to see whether a direct value shift may occur when the buyback takes place. In the circumstances no direct value shift will occur when the buyback of the Class A and Class B shares takes place. | Summary: A capital gain will not arise on the share buy-back. | Detailed Reasoning - Detailed reasoning: When, as proposed, the company buys back and cancels the Class A and Class B shares a CGT event C2 will happen under section 104-25 of the ITAA 1997. As the proposed amount to be paid for each share is $X, which is equal to the issue price (or cost base), the holders of the Class A and Class B shares would make no capital gain or capital loss from the buy-back of the shares. An exception would be in the event that at the time of the buy-back the $X buy-back price was more or less than the market value of the shares at the time of the buy- back. The market value of the shares would replace the actual capital proceeds received ($X per share) under subsection 116-30(2) of the ITAA 1997 to determine the capital gain or loss. However, it is unlikely that the market value of the Class A and Class B shares has altered from the issue price of $X per share. | Summary: The return of capital under the share buy-back will not constitute a dividend. | Detailed Reasoning - Detailed reasoning: The definition of a 'dividend' contained in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders but excludes moneys debited against an amount standing to the credit of the share capital account. By virtue of paragraph (d) of the definition of a dividend contained in subsection 6(1) of the ITAA 1936, moneys debited against an amount standing to the credit of the share capital account are not defined as dividends except to the extent that subsection 6(4) of the ITAA 1936 excludes those monies from this definition. In the proposed buyback of shares in the company the paragraph (d) exclusion does not apply as the arrangement is not one that triggers the operation of subsection 6(4) of the ITAA 1936, that is, the capital reduction is not part of an arrangement where: • a person pays or credits any money or gives property to the company and the company credits its share capital account with the amount of the money or the value of the property; and • the company pays or credits any money, or distributes property to another person, and debits its share capital account with the amount of the money or the value of the property so paid, credited or distributed. As subsection 6(4) of the ITAA 1936 would not apply to negate the effect of paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936, the moneys paid by the company to its shareholders as a capital return from its "untainted" share capital account do not constitute a dividend under subsection 6(1) of the ITAA 1936. Based on the facts provided, no other income tax provisions will apply and cause a deemed dividend to arise from the proposed buyback of class A and class B shares.