Private ruling: Share buy-back
Published: December 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is any part of the buyback amount of $X considered a dividend under section 159GZZZP of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 159GZZZK | Income Tax Assessment Act 1936 Section 159GZZZP

Reasons for decision: Summary: Division 16K of the Income Tax Assessment Act 1936 (ITAA 1936) provides the basic consequences of a buy-back for income tax purposes. It applies where a company buys a share in itself from a shareholder and cancels the share. Section 159GZZZK of the ITAA 1936 defines on-market and off-market purchases. It 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 the 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. In this case the company intends to buy X shares in itself back from shareholders. The shares in the company 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. As the buy-back is not covered by paragraph (c) the buy-back is an off-market purchase. Section 159GZZZP of the ITAA 1936 discusses what part of an off-market purchase price is a dividend. Subsection 159GZZZP of the ITAA 1936 states 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 capital account if it 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 this case the purchase price will be $X. $X will be debited against the Issued & Paid up capital account. As there is no difference between these amounts no part of the buy-back is considered a dividend. The whole amount of X is considered capital.

Relevant facts: The company is a private company. | The Company has excess funds and a share buyback of X ordinary shares on issue is being considered. | The paid up capital is $1 per share. | The company intends to treat all of the buyback funds as capital and will cancel X of the ordinary shares on issue once the buy-back has been completed. | $X will be debited from the Issued & Paid up capital account. | The X ordinary shares will be bought back at $1 each. | The Balance Sheet as at 30 June 2014 shows there is an amount in excess of $X in the issued and paid up capital account.