Private ruling: Share buy-back
Date of advice: 26 June 2017
Published: October 2017
Ruling period: Year ended XXXX.
Date scheme commenced: During the year ended XXXX.

Ruling: Q1: Will the proposed share buy-back result in an off-market purchase within the meaning of section 159GZZZK of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Will section 159GZZZQ of the ITAA 1936 apply to the proposed share buy-back? | A2: No. | Q3: Will the average capital per share (ACPS) methodology be the most appropriate method of determining the capital and dividend components of the proposed share buy-back purchase price under section 159GZZZP of the ITAA 1936? | A3: Yes. | Q4: Will the Commissioner make a further determination that subsection 45C(3) of the ITAA 1936 applies to the proposed share buy-back? | A4: No. | Q5: Will the Commissioner make a determination pursuant to paragraph 177EA(5)(a) of the ITAA 1936 and paragraph 204-30(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed share buy-back? | A5: No. | Q6: Will the value shifting rules in Divisions 725 and 727 of the ITAA 1997 apply to the proposed share buy-back? | A6: No. | Q7: Will paragraph 202-45(c) of the ITAA 1997 apply to the proposed share buy-back? | A7: No.

Relevant facts and circumstances: Background 1. Company A is an Australian resident company, whose shares are not listed on the Australian Securities Exchange or any other exchange. 2. Company A is the provisional head entity of a multiple entry consolidated (MEC) group. 3. Company A has on issue fully-paid ordinary shares which are solely held by Company B, a non-resident company. 4. Company B acquired its shares in Company A after 20 September 1985. 5. All shares held by Company B in Company A carry voting rights and rights to distributions of capital and profits. 6. All shares in Company A are equity interests for Australian tax purposes pursuant to Division 974 of the ITAA 1997. 7. Company B holds the shares in Company A on capital account, as a capital gains tax (CGT) asset. 8. An intragroup restructure occurred in XXXX whereby Company A disposed of its shares in subsidiary companies to other members of the MEC group and received as consideration cash and related-party receivables. 9. Other than the abovementioned restructure, Company A confirms that it has not, and will not, undertake prior to the proposed share buy-back any other business restructures, intra-corporate loans or other such actions. 10. Company A has a history of regularly declaring fully franked dividends. 11. The MEC group does not have any foreign resident subsidiaries and does not have a conduit foreign income balance. Proposed off-market share buy-back 12. Company A is proposing to undertake a share buy-back totalling $X to return surplus cash funds to Company B (Buy-Back). 13. The Buy-Back is expected to occur at market value. 14. The Commissioner reviewed the market valuation methodology proposed by Company A and is satisfied that the buy-back price represents the market value of a Company A share at the time of the Buy-Back. 15. Company A will use the ACPS methodology to determine the capital and dividend component of the Buy-Back. 16. For each share bought back by Company B, Company A will debit an amount (Capital Component) to its share capital account and the balance of the Buy-Back price (Dividend Component) to its retained earnings. 17. The Dividend Component is intended to be fully franked.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 45C(3) | Income Tax Assessment Act 1936 Section 159GZZZK | Income Tax Assessment Act 1936 Section 159GZZZP | Income Tax Assessment Act 1936 Section 159GZZZQ | Income Tax Assessment Act 1936 Paragraph 177EA(5)(a) | Income Tax Assessment Act 1997 Paragraph 202-45(c) | Income Tax Assessment Act 1997 Paragraph 204-30(3)(a) | Income Tax Assessment Act 1997 Division 725 | Income Tax Assessment Act 1997 Division 727

Reasons for decision: Summary: For the purposes of Division 16K of the ITAA 1936, where a company buys a share in itself from a shareholder, the purchase is a 'buy-back’ (paragraph 159GZZZK(a) of the ITAA 1936). Division 16K of the ITAA 1936 categorises a buy-back as either an 'on-market purchase’ or an 'off-market purchase’. A buy-back is an on-market purchase if the shares bought back are listed for quotation in the official list of a stock exchange in Australia or elsewhere, and the buy-back is conducted in the ordinary course of trading on that stock exchange (paragraph 159GZZZK(c) of the ITAA 1936). A buy-back that is not an on-market purchase is an off-market purchase (paragraph 159GZZZK (d) of the ITAA 1936). In this case, Company A is proposing to buy back shares from its sole shareholder, Company B. Company A’s shares are not listed for quotation in the official list of any stock exchange. Accordingly, for the purposes of Division 16K of the ITAA 1936, the Buy-Back is an off-market purchase within the meaning provided by paragraph 159GZZZK(d) of the ITAA 1936. For the purposes of determining the amount of the gain or loss for the Buy-Back for Company A shares held on capital account, the consideration received is determined in accordance with section 159GZZZQ of the ITAA 1936. Subsection 159GZZZQ(1) of the ITAA 1936 provides that a shareholder is taken to have received an amount equal to the purchase price as consideration in respect of the sale of the shares bought back. However, subsection 159GZZZQ (2) of the ITAA 1936 provides that if the purchase price is less than the market value of the share at the time of the buy-back (calculated as if the buy-back did not occur and was never proposed to occur), the shareholder is taken to have received an amount equal to the market value of the share as consideration in respect of the sale of the share bought back. Company A intends to conduct the Buy-Back at market value. The Commissioner has reviewed the market value methodology proposed by Company A and is satisfied that the buy-back price represents the market value of a share. Accordingly, the consideration that Company B is taken to receive is equal to the Buy-Back purchase price of the shares in Company A, and subsection 159GZZZQ (2) of the ITAA 1936 will not apply. Section 159GZZZP of the ITAA 1936 relevantly provides that: (1) 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. … (2) The remainder of the purchase price is taken not to be a dividend for the purposes of this Act. For the purposes of section 159GZZZP of the ITAA 1936, Practice Statement PS LA 2007/9 Share buy-backs (PS LA 2007/9) indicates at paragraph 69 that the ACPS method is the preferred methodology for determining the 'dividend/capital split’ in an off-market share buy-back unless companies can demonstrate exceptional circumstances for the use of an alternative method. In this case, Company A intends to adopt the ACPS method in determining the capital and dividend components of the Buy-Back price as exceptional circumstances do not exist to support the use of an alternative method. Company A will debit its share capital account by the Capital Component for every share bought-back. The balance of the buy-back price is intended to be a fully-franked dividend. On this basis, the Commissioner accepts that the ACPS methodology is the appropriate method for determining the 'dividend/capital split’ of the Buy-Back price under section 159GZZZP of the ITAA 1936. Subsection 45C(3) of the ITAA 1936 states: If the Commissioner has made a determination under section 45B in respect of the whole or a part of a capital benefit and the Commissioner makes a further written determination that the capital benefit, or the part of the capital benefit, was paid under a scheme for which a purpose, other than an incidental purpose, was to avoid franking debits arising in relation to the distribution from the company: (a) on the day on which notice of the determination is served in writing on the company, a franking debit of the company arises in respect of the capital benefit; and (b) the amount of the franking debit is the amount that, if the company had: (i) paid a dividend of an amount equal to the amount of the capital benefit, or the part of the capital benefit, at the time when it was provided; and (ii) fully franked the dividend; would have been the amount of the franking credit of the company that would have arisen as a result of the dividend. Section 45B of the ITAA 1936 is an anti-avoidance provision which applies where certain capital payments are paid to shareholders in substitution for dividends to treat such capital payments as unfranked dividends. Subsection 45B(2) of the ITAA 1936 states that section 45B of the ITAA 1936 applies if: (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. The conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are met in respect of the Buy-Back as: ● the Buy-Back is a scheme ● a capital benefit being the Capital Component is provided under the scheme to Company B, being the relevant taxpayer; and ● the relevant taxpayer obtains a tax benefit, being less tax payable on the Capital Component if the amount had instead been a dividend. However, the Commissioner considers that neither Company A nor Company B entered into or carried out the Buy-Back for a more than incidental purpose of enabling a person to obtain a tax benefit, having regard to the 'relevant circumstances' (as set out in subsection 45B(8) of the ITAA 1936) of the Buy-Back, as it is apparent that: ● the Capital Component accords with the ACPS method, which is acceptable in Company A’s circumstances ● the pattern of distributions of Company A does not indicate that the Capital Component reflects amounts in substitution for a dividend ● the Buy-Back is not expected to alter Company A's dividend policy ● the Buy-Back will result in a reduction of the number of ordinary shares held by Company B, and therefore the number of shares on issue; and ● the manner, form, substance and timing of the Buy-Back is consistent with it being an off-market share buy-back. Therefore, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat all or part of the Capital Component (the capital benefit) as an unfranked dividend. It follows that the Commissioner will not make a further determination under subsection 45C(3) of the ITAA 1936 in respect of any part of the capital benefit provided under the Buy-Back. | Detailed Reasoning - Section 177EA of the ITAA 1936: Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to a wide range of schemes designed to obtain imputation benefits. It 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. This extends to an off-market share buy-back with a franked dividend component. If section 177EA of the ITAA 1936 of the ITAA 1997 applies, the Commissioner has the discretion to make a determination in writing that a franking debit arises in the franking account of the entity in respect of each distribution made to the relevant taxpayer (paragraph 177EA(5)(a) of the ITAA 1936). Subsection 177EA(3) of the ITAA 1936 provides that section 177EA of the ITAA 1936 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. The conditions of paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied in respect of the Buy-Back. In arriving at a conclusion on paragraph 177EA(3)(e) of the ITAA 1936, the Commissioner must have regard to the relevant circumstances of the scheme which include, but are not limited to, the circumstances set out in subsection 177EA(17) of the ITAA 1936. In this case, the Commissioner considers that neither Company A nor Company B entered into or carried out the Buy-Back for a more than incidental purpose of enabling a person to obtain an imputation benefit, as: ● Company B is the sole shareholder of Company A and therefore there are no other entities which are disadvantaged by the distribution ● accordingly, there is no 'streaming’ of franked distributions; and ● the Dividend Component accords with the ACPS method, which is acceptable in Company A’s circumstances. Accordingly, section 177EA of the ITAA 1936 will not apply and the Commissioner will not make a determination under paragraph 177EA(5)(a) of the ITAA 1936 in relation to the Buy-Back. | Detailed Reasoning - Section 204-30 of the ITAA 1997: Section 204-30 of the ITAA 1997 allows the Commissioner to make certain determinations if a corporate tax entity streams one or more distributions, or one or more distributions and the giving of other benefits, to its members in such a way that: (a) an 'imputation benefit’ is, or apart from section 204-30 of the ITAA 1997 would be, received by a member of the entity as a result of the distribution or distributions (paragraph 204-30(1)(a) of the ITAA 1997) (b) the member would derive a 'greater benefit from franking credits’ than another member of the entity (paragraph 204-30(1)(b) of the ITAA 1997); 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 (paragraph 204-30(1)(c) of the ITAA 1997). If section 204-30 of the ITAA 1997 applies, the Commissioner has the discretion to make a determination in writing that a specified franking debit arises in the franking account of the entity, for a specified distribution or other benefit to a disadvantaged member (paragraph 204-30(3)(a) of the ITAA 1997). For section 204-30 of the ITAA 1997 to apply, a member of an entity must derive a greater benefit from franking credits. In this case, Company B is the sole shareholder of Company A and will receive capital benefits and dividends in direct proportion to its shareholding. Therefore, no member would derive a 'greater benefit from franking credits’ than another member of the entity. Accordingly, section 204-30 of the ITAA 1997 will not apply and the Commissioner will not make a determination under paragraph 204-30(3)(a) of the ITAA 1997 in relation to the Buy-Back. | Detailed Reasoning - Question 6: Division 725 of the ITAA 1997 may apply if under a scheme, there is a 'direct value shift’ whereby value is shifted from equity or loan interest in a company to other equity or loan interest in the same company. Division 727 of the ITAA 1997 deals with an indirect value shift which involves an unequal exchange of economic benefits between two entities - the losing entity and gaining entity (subsection 727-150(3) of the ITAA 1997). Direct value shift or indirect value shift can occur if there is a buy-back of shares other than at market value. In the current case, the Buy-Back is expected to occur at market value. Therefore, there is no direct or indirect value shifting and the provisions of Divisions 725 and 727 of the ITAA 1997 will not apply. | Detailed Reasoning - Question 7: The Dividend Component of the Buy-Back purchase price is taken to be a dividend paid by Company A in accordance with paragraph 159GZZZP(1)(b) of the ITAA 1936 and will be a distribution by Company A under item 1 of the table in subsection 960-120(1) of the ITAA 1997. Pursuant to subsection 202-40(1) of the ITAA 1997, this distribution will be a frankable distribution to the extent that it is not unfrankable under section 202-45 of the ITAA 1997. Paragraph 202-45(c) of the ITAA 1997 provides that the amount of the buy-back purchase price that exceeds the market value of the share at the time of the buy-back is an unfrankable distribution. In this case, Company A intends to conduct the Buy-Back at market value. Accordingly, there is no expected difference between the Buy-Back purchase price and the market value of Company A’s shares at the time of the Buy-Back. Therefore, no part of the Dividend Component of the Buy-Back purchase price will be unfrankable under paragraph 202-45(c) of the ITAA 1997.