Private ruling: Share buy-back
Date of advice: 19 November 2024
Published: 13 January 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: XX/XX/XXXX

Ruling: Q1: Will the amount calculated using the average capital per share (ACPS) methodology represent the capital component of the buy-back proceeds, with the balance of the buy-back proceeds treated as the dividend component for the purposes of section 159GZZZP of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Will the dividend component of the share buy-back constitute a frankable distribution pursuant to section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes. | Q3: Will the Commissioner seek to make a determination under subsection 45A(2) of the ITAA 1936 in relation to the buy-back? | A3: No. | Q4: Will the Commissioner seek to make a determination under paragraph 45B(3)(b) of the ITAA 1936 in relation to the buy-back? | A4: No. | Q5: Will the Commissioner seek to make a determination under subsection 204-40(3) of the ITAA 1997 in relation to the buy-back? | A5: No. | Q6: Will the Commissioner seek to make a determination under subsection 177EA(5) of the ITAA 1936 in relation to the buy-back? | A6: No.

Relevant facts and circumstances: 1. NewCo was incorporated in Australia under the Corporations Act 2001 (Corporations Act) on XX/XX/XXXX. 2. The Individual is an Australian resident taxpayer and the sole shareholder and director in NewCo. 3. NewCo proposes to be an investment vehicle for the Individual to undertake investments in a variety of assets for the benefit of its shareholder within the corporate environment. 4. The Company is an Australian private company, with share capital of $X, representing $X per ordinary share. 5. The Company was incorporated in Australia under the Corporations Act on XX/XX/XXXX. 6. Prior to the death of Individual's Spouse, the following individuals each held X of the XX shares on issue by the Company: (a) the Individual (b) the Individual's Spouse (c) Individual C, and (d) Individual D. 7. The Individual and the Individual's Spouse were both issued X ordinary shares in the Company on XX/XX/XXXX. Individual C and D were each issued XX ordinary shares on XX/XX/XXXX. 8. The Individual's Spouse passed away on XX/XX/XXXX and their XX shares in the Company was transferred to the Individual in their capacity as the executor of the deceased's estate and will pass to them as a beneficiary of the deceased estate prior to the shares in the Company being transferred to NewCo. 9. The Individual holds XX% of the shares in the Company and Individual C and Individual D each hold XX% of the shares in the Company (collectively referred to as the Shareholders). 10. Each of the Shareholders holds their respective shares in the Company on capital account. 11. None of the shares issued by the Company are deemed for capital gains tax (CGT) purposes to have been issued before 20 September 1985 and each share has a cost base of $X. [1] 12. The Company: (a) has retained earnings of approximately $XX million held in cash and has a franking account balance sufficient to fully frank dividends paid out of these retained earnings. (b) has paid dividends to its shareholders in the 20XX, 20XX, and 20XX income years. (c) is currently involved in investment operations, and it is not proposed that it will be carrying on an active business immediately before the share buy-back. (d) has not disposed of an active business or assets used in an active business in recent years, nor is it disposing of any other type of assets. Decision to separate interests 13. The Shareholders have no written or verbal shareholder agreement in place. 14. Decisions such as the payment of dividends have effectively required unanimous agreement between the Shareholders, with the Shareholders each conferring with their respective advisers in relation to each decision. 15. There have been instances where unanimous agreement has not been reached and, therefore, no action has been able to be undertaken in relation to the particular matter. The impracticality of this control structure was a key driver for the eventual decision of having the Company buy-back the Individual's shares allowing Individual C and Individual D together to control the Company. 16. Due to each of the Shareholders holding their shares in the Company personally, it was not readily apparent as to how the current shareholders could manage this separation of interests in the Company without being subject to a significant income taxation liability. 17. The Shareholders' desired outcome is to separate their interests in the Company whist maintaining their share of the retained earnings in a company registered under the Corporations Act. Particularly, the Individual intends to transfer their XX shares in the Company to NewCo. 18. The disposal by the Individual of their XX shares in the Company to NewCo, followed by the buy-back of these shares by the Company, was determined to be the best way to achieve the desired outcomes of the Shareholders. 19. The Individual states the Shareholders believe this will minimise the: (a) overall administrative burden on the Shareholders, as only the Individual would need to incorporate a new company under the Corporations Act. Whereas Individual C and Individual D would have to also incorporate a new company under the Corporations Acthad the Company been wound up (b) cash-flow burden on the Company, as it would only need to fund a buy-out of the Individual's shares, and not the shares of Individual C and Individual D in the Company. 20. Additionally, the Individual's exit from the Company by a transfer of their shares in the Company to NewCo means the cash does not flow to they (as would happen if they directly participated in the buy-back) and then on to NewCo. 21. It is not intended that the other shareholders (Individual C and Individual D) will be subject to a buy-back or a transfer of their shares. The proposed transaction (Proposed Transaction) 22. The Shareholders propose to undertake the following steps to affect the exit of common control: (a) the Individual will dispose of all of their shares in the Company to NewCo (b) NewCo will issue XX ordinary shares in NewCo in exchange for the Individual's shares in the Company. (c) the Company will then buy back all of its shares from NewCo (the Buy-Back). 23. For accounting purposes, NewCo will issue each of the new shares for a nominal value to the Individual and result in a nominal amount accruing to NewCo's share capital account. The shares in the Company will be taken to have been acquired for a nominal amount by NewCo. 24. It is estimated that NewCo will hold the XX Company's shares for XX days before the Buy-Back takes place. 25. In relation to the transfer of the Individual's share in the Company and the issue of shares in NewCo to the Individual, it is intended that: (a) the share buy-back proceeds (the Buy-Back Price) will be allocated between capital and dividend components consistent with the average capital per share (ACPS) methodology. Relevantly, the Company will debit the amount calculated by the ACPS against its share capital account, and (b) the dividend component of the Buy-Back Price will be fully-franked. 26. In relation to NewCo, it is intended that: (a) NewCo will be an investment vehicle. The funds received from the Buy-Back will be invested according to an investment strategy developed by an independent financial advisor. (b) the Individual is the sole shareholder of NewCo and will remain the sole shareholder after the transfer of the shares in the Company is completed. (c) NewCo will hold its shares in the Company on capital account. 27. It is expected that all future payments from NewCo to the Individual will be in the form of dividends. Distributions from the Company 28. The Company had historically retained its earnings for re-investment and, as at the end of the 20XX income year, the total retained earnings of the Company was approximately $XXX. 29. After the end of the 20XX income year, the Shareholders changed their intent in relation to the retained earnings of the Company and determined that annual dividends should be paid to the shareholders in proportion to their shareholdings. 30. Due to the available franking account balance at that time, it was understood that all dividends to be paid would be fully-franked to the extent permitted. 31. Following this decision, the Company paid its first fully-franked dividends in the 20XX income year and has paid fully-franked dividends in each subsequent year as follows: (a) 20XX income year - total dividends: $XXXX (excluding franking credits) (b) 20XX income year - total dividends: $XXXX (excluding franking credits) (c) 20XX income year - total dividends: $XXXX (excluding franking credits). 32. No franked or unfranked dividends were paid in the 20XX income year.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1936 section 45A | Income Tax Assessment Act 1936 subsection 45A(2) | Income Tax Assessment Act 1936 subsection 45A(3) | Income Tax Assessment Act 1936 paragraph 45A(3)(b) | Income Tax Assessment Act 1936 subsection 45A(4) | Income Tax Assessment Act 1936 section 45B | Income Tax Assessment Act 1936 subsection 45B(2) | 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 subsection 45B(3) | Income Tax Assessment Act 1936 paragraph 45B(3)(b) | Income Tax Assessment Act 1936 paragraph 45B(8)(a) | Income Tax Assessment Act 1936 paragraph 45B(8)(b) | Income Tax Assessment Act 1936 paragraph 45B(8)(c) | Income Tax Assessment Act 1936 paragraph 45B(8)(c) | Income Tax Assessment Act 1936 paragraph 45B(8)(e) | Income Tax Assessment Act 1936 paragraph 45B(8)(f) | Income Tax Assessment Act 1936 paragraph 45B(8)(g) (repealed) | Income Tax Assessment Act 1936 paragraph 45B(8)(h) | Income Tax Assessment Act 1936 paragraph 45B(8)(i) | Income Tax Assessment Act 1936 paragraph 45B(8)(j) | Income Tax Assessment Act 1936 paragraph 45B(8)(k) | Income Tax Assessment Act 1936 subsection 45B(9) | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1936 subsection 45C(1) | Income Tax Assessment Act 1936 section 159GZZZP | Income Tax Assessment Act 1936 subsection 159GZZZP(1) | Income Tax Assessment Act 1936 former paragraph 160APHO(1)(a) | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 paragraph 177D(2)(a) | Income Tax Assessment Act 1936 paragraph 177D(2)(b) | Income Tax Assessment Act 1936 paragraph 177D(2)(c) | Income Tax Assessment Act 1936 paragraph 177D(2)(d) | Income Tax Assessment Act 1936 paragraph 177D(2)(e) | Income Tax Assessment Act 1936 paragraph 177D(2)(f) | Income Tax Assessment Act 1936 paragraph 177D(2)(g) | Income Tax Assessment Act 1936 paragraph 177D(2)(h) | Income Tax Assessment Act 1936 section 177EA | Income Tax Assessment Act 1936 subsection 177EA(3) | Income Tax Assessment Act 1936 paragraph 177EA(3)(a) | Income Tax Assessment Act 1936 paragraph 177EA(3)(b) | Income Tax Assessment Act 1936 paragraph 177EA(3)(c) | Income Tax Assessment Act 1936 paragraph 177EA(3)(d) | Income Tax Assessment Act 1936 paragraph 177EA(3)(e) | Income Tax Assessment Act 1936 subsection 177EA(5) | Income Tax Assessment Act 1936 paragraph 177EA(5)(a) | Income Tax Assessment Act 1936 paragraph 177EA(5)(b) | Income Tax Assessment Act 1936 paragraph 177EA(14)(b) | Income Tax Assessment Act 1936 paragraph 177EA(14)(d) | Income Tax Assessment Act 1936 subsection 177EA(17) | Income Tax Assessment Act 1936 paragraph 177EA(17)(a) | Income Tax Assessment Act 1936 paragraph 177EA(17)(b) | Income Tax Assessment Act 1936 paragraph 177EA(17)(c) | Income Tax Assessment Act 1936 paragraph 177EA(17)(d) | Income Tax Assessment Act 1936 paragraph 177EA(17)(e) | Income Tax Assessment Act 1936 paragraph 177EA(17)(f) | Income Tax Assessment Act 1936 paragraph 177EA(17)(g) | Income Tax Assessment Act 1936 paragraph 177EA(17)(ga) | Income Tax Assessment Act 1936 paragraph 177EA(17)(h) | Income Tax Assessment Act 1936 paragraph 177EA(17)(i) | Income Tax Assessment Act 1936 paragraph 177EA(17)(j) | Income Tax Assessment Act 1936 paragraph 177EA(17)(j) | Income Tax Assessment Act 1936 subsection 177EA(19) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 Subdivision 122-A | Income Tax Assessment Act 1997 subsection 128-15(4) | Income Tax Assessment Act 1997 section 202-5 | Income Tax Assessment Act 1997 section 202-40 | Income Tax Assessment Act 1997 subsection 202-40(1) | Income Tax Assessment Act 1997 paragraph 202-45(c) | Income Tax Assessment Act 1997 section 204-30 | Income Tax Assessment Act 1997 subsection 204-30(1) | Income Tax Assessment Act 1997 subsection 204-30(3) | Income Tax Assessment Act 1997 paragraph 204-30(3)(a) | Income Tax Assessment Act 1997 subsection 204-30(6) | Income Tax Assessment Act 1997 paragraph 204-30(6)(a) | Income Tax Assessment Act 1997 subsection 204-30(7) | Income Tax Assessment Act 1997 subsection 204-30(8) | Income Tax Assessment Act 1997 subsection 204-30(9) | Income Tax Assessment Act 1997 subsection 204-30(10) | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 section 215-10 | Income Tax Assessment Act 1997 section 960-120 | Income Tax Assessment Act 1997 subsection 960-120(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Question 1: Will the amount calculated using the average capital per share (ACPS) methodology represent the capital component of the buy-back proceeds, with the balance of the buy-back proceeds treated as the dividend component for the purposes of section 159GZZZP? | Summary: The Commissioner accepts the dividend/capital split of the Buy-Back determined using the average capital per share (ACPS) methodology as outlined in PS LA 2007/9. Therefore, for the purposes of subsection 159GZZZP(1), the amount of $X will represent the Capital Component of the Buy-Back Price for each share bought back. The remainder of the Buy-Back Price will be a dividend paid by the Company to NewCo. | Detailed Reasoning - Detailed reasoning: 1. Section 159GZZZP deals with the treatment of the purchase price in the event of an off-market buy-back of shares. It acts to treat the difference between the purchase price and that part of the purchase price (if any) which is debited against a credit in the company's share capital account as a dividend paid by the company to the seller out of the company profits on the day the buy-back occurs. 2. Subsection 15GZZZP(1) 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 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. 3. Law Administration Practice Statement PS LA 2007/9 Share buy-backs (PS LA 2007/9), at paragraphs 12 and 69, provides that the average capital per share (ACPS) method is the preferred methodology for determining the 'Dividend/Capital Split' in an off-market share buy-back unless the company can demonstrate exceptional circumstances for the use of an alternative method. 4. The ACPS methodology is summarised at paragraph 62 of PS LA 2007/9, as obtained by dividing a company's ordinary issued capital by the number of shares on issue. The amount so derived is a reasonable estimate of any capital component of the split. The balance of any buy-back price will be treated as a dividend. 5. The Commissioner accepts that the ACPS methodology used by the Company is the appropriate method for determining the dividend/capital split of the Buy-Back price. Therefore, for the purposes of section 159GZZZP, $X per share in the Company represents the capital component of the Buy-Back Price and the balance of the Buy-Back price will be the dividend component for each share bought back. | Detailed Reasoning - Question 2: Will the dividend component of the share buy-back constitute a frankable distribution pursuant to section 202-40? | Summary: The dividend component of the Buy-Back price will be a frankable distribution within the meaning given by subsection 202-40(1). | Detailed Reasoning - Detailed reasoning: 6. Subsection 202-40(1) states: A distribution is a frankable distribution , to the extent that it is not unfrankable under section 202-45. 7. The term 'distribution' is defined in section 960-120. Pursuant to item 1 of the table in subsection 8. 960-120(1), it includes a dividend or something that is taken to be a dividend. 9. As discussed above, section 159GZZZP of the ITAA 1936 will apply to the Buy-Back. Accordingly, the difference between the Buy-Back price and the capital component debited to the Company's Share capital account will be taken to be a dividend paid by the Company (the dividend component) to NewCo out of the profits derived by the Company on the day the Buy-Back occurred. Therefore, the dividend component of the Buy-Back Price will be a 'distribution' within the meaning given by section 960-120. 10. Paragraph 202-45(c) is the relevant provision to determine if the dividend component of the Buy-Back price is a frankable distribution, and states: 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; 11. The requirements of this provision depend on the buy-back price and the relevant market value of the Company's shares. As this ruling is being provided on the assumption that the Buy-Back Price is equivalent to market value of the Company's shares, the Buy-Back Price will not exceed the market value. 12. Therefore, paragraph 202-45(c) will not apply to the dividend component of the Buy-Back Price and, in turn, subsection 202-40(1) will operate to treat the entire dividend component of the Buy-Back price as a frankable distribution. | Detailed Reasoning - Question 3: Will the Commissioner seek to make a determination under subsection 45A(2) in relation to the Buy-Back? | Summary: The Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the whole, or a part, of the capital component of the Buy-Back Price. | Detailed Reasoning - Detailed reasoning: 13. Section 45A is an anti-avoidance rule that applies in circumstances where a company streams capital benefits to certain shareholders who derive a greater benefit from the receipt of capital benefits (advantaged shareholders), and it is reasonable to assume that other shareholders (disadvantaged shareholders) have received or will receive dividends. 14. The Commissioner may make a determination under subsection 45A(2) to the effect that section 45C applies to all or part of a capital benefit. Such a capital benefit is then deemed to be an unfranked dividend under subsection 45C(1). 15. Subsection 45A(3) states that a reference to the 'provision of a capital benefit' includes the distribution to the shareholder of share capital or share premium. 16. Subsection 45A(4) lists circumstances in which a shareholder may derive a greater benefit from a capital benefit than another shareholder, including: (a) some or all of the shares in the company held by the shareholder were acquired, or are taken to have been acquired, before 20 September 1985 (b) the shareholder is a non-resident (c) the cost base for capital gains tax purposes of the relevant share is not substantially less than the value of the applicable capital benefit (d) the shareholder has a net capital loss for the year of income in which this capital benefit is provided (e) the shareholder is a private company who would not have been entitled to a rebate under former section 46F if the shareholder had received the dividend that was paid to the disadvantaged shareholder, and (f) the shareholder has income tax losses. 17. In this case, NewCo is the only shareholder participating in the Buy-Back and the only shareholder who will have share capital distributed to them under the proposed transaction (paragraph 45A(3)(b)). 18. The Company was incorporated in 20XX and for CGT purposes no share is deemed to have been acquired by any of the Shareholders before 20 September 1985. 19. NewCo is a resident of Australia for income tax purposes. 20. The Individual is eligible, and will choose, to obtain roll-over relief under Subdivision 122-A of the ITAA 1997 on the disposal of their Company shares to NewCo. As a result, NewCo's cost base of the Company shares will be $X. 21. Accordingly, NewCo's cost base for the Company shares is not substantially less than the value of the capital benefit determined under section 159GZZZP. 22. NewCo will not have capital losses or tax losses in the year of the Buy-Back. 23. The other shareholders will retain their shares and will have an increased percentage shareholding in the Company once the Buy-Back is complete, but their capital component within the Company remains unchanged. 24. It is considered that the Company is not discriminating between shareholders in relation to the Buy-Back. The circumstances of the Buy-Back are to allow one shareholder to exit, with section 159GZZZP operating so that the shareholder's capital benefit received is equal to the original capital amount paid by shareholders when their shares were issued by the Company to them. 25. Accordingly, the Commissioner considers that section 45A does not apply to the Buy-Back and the Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the whole, or a part, of the capital component of the Buy-Back Price. | Detailed Reasoning - Question 4: Will the Commissioner seek to make a determination under paragraph 45B(3)(b) in relation to the Buy-Back? | Summary: The Commissioner will not make a determination under subsection 45A(2) that section 45C applies to the whole, or a part, of the capital component of the Buy-Back Price. | Detailed Reasoning - Detailed reasoning: 26. The purpose of section 45B is to ensure that capital benefits are treated as dividends for taxation purposes if they are provided in substitution for dividends. 27. Subsection 45B(2) sets out the conditions under which the Commissioner may make a determination under subsection 45B(3) that section 45C applies with the effect that the payment is taken to be an unfranked dividend. These conditions are that: (a) there is a scheme under which a person is provided with a capital benefit by a company [2] (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 [3] , 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 the relevant taxpayer to obtain a tax benefit. [4] The relevant circumstances of the scheme include the various matters listed in paragraphs 45B(8)(a) to (k) (paragraph 45B(8)(k) bringing into the various circumstances the eight matters referred to in subsection 177D(2)). 28. For section 45B to apply, each of the conditions in paragraphs 45B(2)(a) to (c) must be present. | Detailed Reasoning - Scheme under which a person is provided with a capital benefit: 29. The Buy-Back constitutes a 'scheme' within the meaning given by subsection 995-1(1) of the ITAA 1997. NewCo will be provided with a capital benefit under the Buy-Back, as share capital will be distributed to NewCo under the Buy-Back. Therefore, the condition in paragraph 45B(2)(a) will be satisfied in respect of the Buy-Back. 30. In addition, the decision by the Individual to dispose of their shares in the Company to NewCo after the Buy-Back is considered part of the scheme. 31. Before entering into the scheme, you state that the Shareholders benefited from their interests as a result of the Company carrying on a business in the general sense as outlined in paragraphs 15 to 17 of TR 2019/1 Income tax: when does a company carry on a business? . In agreeing to separate the Individual's interests in the Company's value, the Shareholders also wish to continue to benefit from a company carrying on a business in the general sense going forward. 32. Individual C and Individual D determined they do not need to separate their interests from each other and that they could achieve the desired separation by having the Company buy-back the Individual's interest in the Company, rather than the Shareholders exiting their investment through the Company being liquidated. 33. The Individual incorporated NewCo, in part, to continue to benefit from a company carrying on a business in the general sense, in the same way the Individual has benefited from the Company carrying on its business in the general sense since they became a shareholder. 34. The transfer of the Individual's shares to NewCo before the Buy-Back occurred would result in the funds transferring to another company incorporated under the Corporations Act without the need for the Company to transfer of cash (via a dividend or a liquidator's distribution) to the Individual, and the Individual then transferring cash to NewCo. | Detailed Reasoning - A taxpayer obtains a tax benefit under the scheme: 35. Subsection 45B(9) states: A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend. 36. Had NewCo not been incorporated, and the Company shares been transferred to NewCo, the Individual would have participated in the Buy-Back directly. 37. The tax benefit is thus calculated as the $XX capital benefit multiplied by the corporate tax rate applicable to NewCo. Thus, the maximum capital benefit to NewCo is: $XX capital benefit x 30% maximum corporate tax rate = $XXXX. | Detailed Reasoning - Was the purpose of the scheme to enable the relevant taxpayer to obtain a tax benefit: 38. Paragraph 45B(2)(c) provides that it is necessary to have regard to the 'relevant circumstances' of a buy-back to determine whether: 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 39. In this case, the relevant 'persons' are the Company, NewCo and the Individual, as they all participated in the scheme that resulted in the potential tax benefit. 40. In determining the objective purpose for the provision of a capital benefit, paragraphs 45B(8)(a) to (k) lists the relevant circumstances that need to be considered. [5] | Detailed Reasoning - Paragraph 45B(8)(a) the extent to which the capital benefit is attributable to profits of the company or of an associate of the company.: 41. As mentioned above, the capital component of the Buy-Back Price was set having regard to the ACPS methodology in line with PSLA 2007/9. On this basis, the capital benefit is not attributable to, or in substitution for, profits. | Detailed Reasoning - Paragraph 45B(8)(b) The pattern of distributions of dividends, bonus shares and returns of capital by the company.: 42. Until the 20XX income year, the Company historically retained its earnings for re-investment. For the 20XX to 20XX income years inclusive, the Company paid fully franked dividends to the Shareholders in proportion to their shareholdings. In addition, there has been no return of capital to any shareholder. 43. At paragraph 1.35 of the Explanatory Memorandum to the Taxation Laws Amendment (Company Law Review) Bill 1998, the example given is: ...if ordinarily dividends of a certain amount are paid, but then the company instead makes proportionate returns of capital... 44. This example does not apply to NewCo and the Company. NewCo will dispose of its shares in the Company as part of the Buy-Back. There will be no attempt by the Company to distribute annual profits to NewCo in the guise of capital. 45. The effect of section 159GZZZP is that the shareholder's capital benefit equals the original capital amount paid for the shares held by the Individual. Paragraph 45B(8)(c) whether the relevant taxpayer has capital losses that, apart from the capital return, would be carried forward to a later year of income. 46. This arrangement is the first undertaken by NewCo. The proceeds NewCo will receive from the Company will then be used to fund NewCo's activities as an investment vehicle for the Individual. NewCo will not have incurred any capital losses that carried forward to a later income year. Paragraph 45B(8)(d) Whether some or all of the shares held in the company by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985. 47. None of the shares in the Company are deemed to have been acquired by any of the Shareholders before 20 September 1985. Paragraph 45B(8)(e) Whether the relevant taxpayer is a non-resident . 48. When the Buy-Back happens, all the Shareholders of the Company will be Australian residents for income tax purposes. Paragraph 45B(8)(f) Whether the capital gains tax cost base of the taxpayer's shares is not substantially less than the value of the applicable capital benefit. 49. The Individual is eligible and will choose to obtain roll-over relief under Subdivision 122-A of the ITAA 1997 on the disposal of the Company shares they hold to NewCo. As a result, NewCo's cost base of the Company shares will be $X. 50. This means that NewCo's cost base is the same as the capital benefit NewCo will receive under the 51. Buy-Back. Paragraph 45B(8)(h) If the scheme involves the distribution of share capital - whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend has been paid instead of the distribution of share capital. 52. NewCo will have no interests in the Company after the Buy-Back. Therefore, this provision is not applicable. Paragraph 45B(8)(i) If the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the alter disposal of those interests: i. the period for which the ownership interests are held by the holder of the interests; and ii. when the arrangement for the disposal of the ownership interests was entered into. 53. The scheme involves the provision of shares (ownership interests) in the Company being transferred from the Individual to NewCo, after the decision to participate in the Buy-Back was made. 54. NewCo will only hold its ownership interests until the Buy-Back takes place. 55. However, taking into account cash flow considerations and the administrative requirements of undertaking the proposal, it is anticipated that NewCo will hold the Company's shares for XX days before the Buy-Back will happen. | Detailed Reasoning - Paragraph 45B(8)(j) For demerger only: 56. The scheme does not involve a demerger, a demerging entity or a demerged entity and therefore this provision is not applicable. | Detailed Reasoning - Paragraph 45B(8)(k) Any of the matters referred to in subsection 177D(2): 57. The matters in subsection 177D(2) are: (a) the manner in which the scheme was entered into or carried out (b) the form and substance of the scheme (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out (d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme (e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme (f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out; (h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). 58. The Shareholders of the Company have a familial connection. The Buy-Back arose because of a change in family circumstances and the desire for the Individual to separate their interests in the Company from the interests of the other shareholders. 59. The disposal by the Individual of their shares in the Company to NewCo in exchange for NewCo's shares whereby NewCo's share capital account is only credited with a nominal amount means that the dividend component of the Buy-Back Price is credited to the NewCo's retained earnings account or similar account. This means NewCo will not be able: (a) to make a capital return of the entire proceeds of the Buy-Back to the Individual, nor (b) to make loans to the Individual without Division 7A having potential application because NewCo does not have a distributable surplus. 60. Accordingly, none of the matters in subsection 177D(2) in relation to the proposed scheme would support a conclusion there is a more than incidental purpose the proposed scheme is about conversion of the Individual's share of the Company's retained earnings so they can be distributed by capital return or by way of loan to the Individual in a tax -free manner rather than as an dividend. 61. The matters in subsection 177D(2) are also relevant when applying paragraph 177EA(17)(j) which is examined in Question 6 below. Any discussion in respect of paragraph 177EA(17)(j) will be relevant in respect of the application of paragraph 45B(8)(k). | Detailed Reasoning - Conclusion: 62. Having regard to the factors in subsection 45B(8), including those contained in paragraphs 177D(2)(a) to (h), it is considered that none of the participants in the scheme will enter into or carry out the Buy-Back for a more than incidental purpose of enabling a person to obtain a tax benefit. In arriving at the conclusion as to insufficient purpose, the Commissioner notes the following particular matters: (a) the dividend and capital components of the Buy-Back Price as determined by use of the ACPS method in PS LA 2007/9 are acceptable in the circumstances, as discussed above (b) there is no evidence indicating that the capital component is attributable to the profits of the Company (c) the capital component will not be sourced from the Company's retained earnings (d) the Company's dividend history and policy indicate that the Buy-Back or the capital component of the Buy-Back price is not a substitute for dividends (e) the Buy-Back involved the buy-back and cancellation of the entire shares bought back from NewCo, and was not merely a distribution of capital with the effect of a proportionate reduction in the cost base of NewCo's cost base (f) the Buy-Back will result in a reduction of the number of ordinary shares on issue (g) the form and substance of the Buy-Back is consistent with an off-market share buy-back (h) the scheme does not allow NewCo to make capital payments to the Individual that would have otherwise been assessable dividends had the Individual retained ownership of the Company's shares (i) the scheme does not result in NewCo having no distributable surplus as defined in section 109Y that would allow NewCo to make a loan without Division 7A being applicable. 63. Correspondingly, paragraph 45B(2)(c) will not be satisfied in respect of the Buy-Back, and in turn, subsection 45B(2) will not apply to the Buy-Back. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) that subsection 45C(1) applies to the whole, or a part, of the capital benefit provided under the Buy-Back. 64. As the Commissioner will not make a determination that subsection 45C(1) applies, the Commissioner will not make a further determination under subsection 45C(3) in respect of any part of the capital benefit provided under the Buy-Back. | Detailed Reasoning - Question 5: Will the Commissioner seek to make a determination under subsection 204-40(3) in relation to the Buy-Back? | Summary: The Commissioner will not make a determination pursuant to paragraph 204-30(3)(a) that a specified franking debit arises in the Company's franking account in respect of the whole or part of the franked dividend component of the Buy-Back. | Detailed Reasoning - Detailed reasoning: 65. Section 204-30 gives the Commissioner the power to make a determination when distributions and other benefits are streamed. 66. Subsection 204-30(1) states: This section empowers the Commissioner to make determinations if an entity streams one or more distributions (or one or more distributions and the giving of other benefits), whether in a single franking period or in a number of franking periods, in such a way that: (a) an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions; and (b) the member would derive a greater benefit from franking credits than another member of the entity; 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. The member that derives the greater benefit from franking credits is the favoured member . The member that receives the lesser imputation benefits is the disadvantaged member . 67. If section 204-30 applies, the Commissioner may make one or more determinations under subsection 204-30(3) as follows: (a) that a specified franking debit arises in the franking account of the entity for a specified distribution or other benefit to a disadvantaged member; (b) that a specified exempting debit arises in the exempting account of the entity, for a specified *distribution or other benefit to a disadvantaged member; (c) that no imputation benefit is to arise in respect of a distribution that is made to a favoured member and specified in the determination. 68. For section 204-30 to apply, participating shareholders to whom distributions are streamed must derive a greater benefit from imputation benefits than non-participating shareholders. 69. Subsection 204-30(8) states: A *member of an entity *derives a greater benefit from franking credits than another member of the entity if any of the following circumstances exist in relation to the other member in the income year in which the distribution giving rise to the benefit is made, and not in relation to the first member: (a) the other members is a foreign resident; (b) the other members would not be entitled to any *tax offset under Division 207 because of the distribution; (c) the amount of the income tax that, apart from this Division, would be payable by the other members because of the distribution is less than the tax offset to which the other member would be entitled; (d) the other member is a *corporate tax entity at the time the distribution is made, but no *franking credit arises for the entity as a result of the distribution; (e) the other member is a*corporate tax entity at the time the distribution is made, but cannot use *franking credits received on the distribution to *frank distributions to its own members because: (i) it is not a *franking entity; or (ii) it is unable to make *frankable distributions; (f) the other member is an *exempting entity. 70. Paragraph 3.28 of the Explanatory Memorandum to New Business Tax System (Imputation) Bill 2002 (EM) states Streaming is selectively directing the flow of franked distributions to those members that most benefit from the from the imputation credits. 71. Paragraph 3.31 of the EM stares: Broadly speaking, any strategy directed at defeating the policy of the law by avoiding wastage of imputation benefits through directing the flow of franked distributions to members who can most benefit from them to the exclusion of other members, amount to streaming, While it is not possible to specify in every detail every combination of circumstances which can constitute the streaming of franking credits (which in some cases may involve questions of degree). 72. The franked distribution is not being selectively directed to NewCo through the Buy-Back to defeat the policy of avoiding wastage of franking credits. The franking credits are being attached to the frankable distribution from the Company to prevent additional tax being payable on the distribution by NewCo and because the franking credits represent the tax paid on NewCo's share of the profits of the Company. Had the Individual participated in the Buy-Back it would have been expected that the dividend component of the Buy-Back Price would have been franked to the same extent. 73. As the scheme is not being implemented to stream franking benefits to avoid the policy of wastage of imputation benefits, the Commissioner will not make a determination pursuant to paragraph 204-30(3)(a), section 204-30 does not apply. | Detailed Reasoning - Question 6: Will the Commissioner seek to make a determination under subsection 177EA(5) in relation to the Buy-Back? | Summary: The Commissioner will not exercise his discretion to make a determination pursuant to paragraph 177EA(5)(a), to deny the franking credit benefits arising from the scheme or, to post a debit to the Company's franking in respect of the franked dividend component of the Buy-Back. | Detailed Reasoning - Detailed reasoning: 74. The taxation consequences of a share buy-back are primarily contained in Division 16K of Part III. In an off-market share buy-back the purchase price paid to a shareholder who participates in a buy-back is generally divided into a dividend component and a capital component. 75. Subsection 159GZZZP(1) provides that the difference between the purchase price and the part of the purchase price which is debited against amounts standing to the credit of the company's share capital account is taken to be a dividend paid out of profits by the company to the seller on the day the buy-back occurs. 76. The dividend component is a frankable distribution subject to various integrity rules including section 177EA. 77. Section 177EA is directed at schemes involving franking credit trading and dividend streaming. The reason for its introduction was explained in the Explanatory Memorandum to Act No 47 of 1998 (paragraph 8.124) as follows: ...One of the underlying principles of the dividend imputation system is that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves. Franking credit trading, which broadly is the process of transferring franking credits on a dividend from investors who cannot fully use them (such as non-residents and tax-exempts) to others who can fully use them undermines this principle. Similarly, dividend streaming (i.e. the streaming of franking credits to select shareholders) undermines the principle that, broadly speaking, tax paid at the company level is imputed to shareholders proportionately to their shareholdings... 78. The section applies if a scheme involving a disposition of shares is entered into with a more than incidental purpose of enabling the taxpayer to obtain franking credit benefits. In these circumstances, it enables the Commissioner to deny the franking credit benefits arising from the scheme or, if the company is a party to the scheme, to post a debit to the company's franking account. 79. Subsection 177EA(3) states that the section applies if: (a) there is a scheme for 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 the interest in 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, the person (the relevant taxpayer ) would receive, or could reasonably 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. 80. Where the provision applies, the Commissioner may make a determination that a debit arises in the franking account of the corporate tax entity which made the distribution pursuant to paragraph 177EA(5)(a). Alternatively, the Commissioner may make a determination that no imputation benefit arises for the relevant (recipient) taxpayer pursuant to paragraph 177EA(5)(b). 81. For section 177EA to apply, each of the conditions set out in subsection 177EA(3) must be present. For the proposed Buy-Back: (a) paragraph 177EA(3)(a) will be satisfied, as there is a scheme for the disposition of membership interests as defined in paragraphs 177EA(14)(b) and (d), i.e. under the Buy-Back scheme, the Company will enter into a contract (or transactions) that affects the ownership of shares held and disposed by NewCo which are then subsequently cancelled. (b) paragraph 177EA(3)(b) will be satisfied, as a frankable distribution is paid or will be payable as part of the Buy-Back Price pursuant to section 202-40. (c) paragraph 177EA(3)(c) will be satisfied, as the Company intends to fully frank the dividend component. Subsection 995-1(1) of the ITAA 1997 defines a 'franked distribution' if it is franked in accordance with section 202-5 of the ITAA 1997. (d) paragraph 177EA(3)(d) will be satisfied, as NewCo will receive an imputation benefit as per the Note to subsection 177EA(16) and as defined in subsection 204-30(6) of the ITAA 1997. For present purposes, NewCo will be entitled to tax offsets under Division 207 of the ITAA 1997 (paragraph 204-30(6)(a) of the ITAA 1997). 82. Mills v. Commissioner of Taxation [2012] HCA 51; 2012 ATC 20-360; (2012) 83 ATR 514 (Mills Case) concerned the application of section 177EA to an investor who had invested in Perpetual Exchangeable Resaleable Listed Securities V issued by the Commonwealth Bank of Australia. In regard to the assessment of the relevant circumstances the High Court noted (at 61) that: Two uncontroversial features of 'the relevant circumstances' to which s 177EA(3)(e) refers can usefully be noted. The first is that the relevance of the relevant circumstances lies in the extent to which they are probative of the ultimate question as to purpose. The second is that the circumstances referred to in s 177EA(17) are not exhaustive of the circumstances that might be probative of that ultimate question. They are nevertheless mandatory relevant considerations. Where they exist, they must be taken into account and their degree of relevance will vary according to the extent to which they are probative of the ultimate question. 83. The final condition in paragraph 177EA(3)(e) requires having a regard to the relevant circumstances of the scheme and concluding that the Company, its shareholders or any other relevant party entered into the Buy-Back with a more-than-incidental purpose of enabling the participating shareholders, NewCo, to obtain an imputation benefit. In arriving at a conclusion, the Commissioner must have regard to the 'relevant circumstances' of the scheme set out in subsection 177EA(17). | Detailed Reasoning - Paragraph 177EA(17)(a): 84. Paragraph 177EA(17)(a) states: the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding membership interests, or having interests in membership interests, in the corporate tax entity that are respectively borne by or accrue to the parties to the scheme, and whether there has been any change in those risks and opportunities for the relevant taxpayer or any other party to the scheme (for example, a change resulting from the making of any contract, the granting of any option or the entering into of any arrangement with respect to any membership interests, or interests in membership interests, in the corporate tax entity) 85. The risks of loss and the opportunities for profit or gain have, since incorporation of the Company, been borne and were accrued by the Shareholders (except for the Company shares bequeathed to the Individual). This included risks of loss and the opportunities for profit or gain for the Individual proportionate to their shareholding. 86. Although the only shareholder of NewCo is the Individual, the Company shares will be acquired by NewCo with the knowledge that the Buy-Back will occur. 87. This would ordinarily point towards there being the requisite purpose of enabling NewCo to obtain an imputation benefit from the risks that had been borne and were accrued by the Individual. | Detailed Reasoning - Paragraph 177EA(17)(b): 88. Paragraph 177EA(17)(b) states: whether the relevant taxpayer would, in the year of income in which the distribution is made, or if the distribution flows indirectly to the relevant taxpayer, in the year in which the distribution flows indirectly to the relevant taxpayer, derive a greater benefit from franking credits than other entities who hold membership interests, or have interests in membership interests, in the corporate tax entity... 89. Paragraph 177EA(17)(b) is directed to whether a taxpayer receiving the franked distribution would derive a greater franking benefit from franking credits than other entities who hold membership interests in the corporate tax entity. Subsection 177EA(19) describes circumstances in which a taxpayer receives a greater benefit than another entity. 90. The note to subsection 177EA(19) states 'Where the distribution is made directly to the taxpayer, see subsections 204-30(7), (8), (9) and (10) of the Income Tax Assessment Act 1997 for a list of circumstances in which the taxpayer will be treated as deriving a greater benefit from franking credits than another entity.' 91. Paragraph 8.86 in the Explanatory Memorandum to the Taxation Laws Amendment Act (No. 3) 1998 states: It is also relevant to enquire whether, as a result of the scheme, maximum value is derived from the franking credits and wastage is avoided (i.e. the franking credits end up in the hands of the taxpayers who can make most use of them and they are not wasted by being distributed to taxpayers who would not gain the same benefit, or by remaining undistributed in the company's franking account. If the relevant taxpayer derives no additional advantage over anyone else from the franking credits it is less likely that the requisite purpose is present; conversely, if the taxpayer does obtain such an advantage, that may point to the existence of the requisite purposes. 92. NewCo does not derive any additional advantage from the franking credits over the Shareholders of the Company as each of the Shareholders would derive the maximum value any franking credits associated with franked distribution had one been made to them. 93. Accordingly, the tax profiles of the parties to the Buy-Back does not point to the Buy-Back have the requisite purpose of providing an imputation benefit to NewCo that is not available to the other Shareholders of the Company. | Detailed Reasoning - Paragraph 177EA(17)(c): 94. Paragraph 177EA(17)(c) states: whether, apart from the scheme, the corporate tax entity would have retained the franking credits or exempting credits or would have used the franking credits or exempting credits to pay a franked distribution to another entity referred to in paragraph (b) 95. The Company paid fully franked dividends to its shareholders in the 20XX to 20XX income years. Further, the future dividend policy of the Company will only be affected by the Buy-Back by the fact that the Individual will no longer be a director or shareholder of the Company. However, it is expected that the remaining 2 individual shareholders will continue to pay dividends to themselves in the future. | Detailed Reasoning - Paragraph 177EA(17)(d): 96. Paragraph 177EA(17)(d) states: whether, apart from the scheme, a franked distribution would have flowed indirectly to another entity referred to in paragraph (b) 97. As none of the shareholders of the Company is a partnership or a trust, this condition is not a relevant circumstance to the Buy-Back. | Detailed Reasoning - Paragraph 177EA(17)(e): 98. Paragraph 177EA(17)(e) states: if the scheme involves the issue of a non-share equity interest to which section 215-10 of the Income Tax Assessment Act 1997 applies - whether the corporate tax entity has issued, or is likely to issue, equity interests in the corporate tax entity: (i) that are similar, from a commercial point of view, to the non-share equity interest; and (ii) distributions in respect of which are frankable 99. For paragraph 177EA(17)(e) to be a relevant circumstance, the scheme has to involve the issue of a non-share equity interest to which section 215-10 of the ITAA 1997 applies. 100. As the Buy-Back only involves a cash payment in exchange for the shares in the Company, this condition is not a relevant circumstance to the Buy-Back. | Detailed Reasoning - Paragraph 177EA(17)(f): 101. Paragraph 177EA(17)(f) states: whether any consideration paid or given by or on behalf of, or received by or on behalf of, the relevant taxpayer in connection with the scheme (for example, the amount of any interest on a loan) was calculated by reference to the imputation benefits to be received by the relevant taxpayer 102. The consideration received by NewCo for the shares bought back is not calculated with reference to the imputation benefits to be received by NewCo. The imputation benefits arise as an incident of the 103. Buy-Back Price having a dividend component and the Company having sufficient franking credits to do so. | Detailed Reasoning - Paragraph 177EA(17)(g): 104. Paragraph 177EA(17)(g) states: whether a deduction is allowable or a capital loss is incurred in connection with a distribution that is made or that flows indirectly under the scheme 105. NewCo intends to hold the shares on capital account. The capital benefit will be in effect a return of capital, so there will be no capital loss or gain. The dividend component of the Buy-Back Price is taken to be a dividend paid by the Company to NewCo out of profits derived by the Company on the day the Buy-Back occurs under section 159GZZZP. The dividend is to be included in NewCo's assessable income pursuant to subsection 44(1) in the income year in which it is received. 106. As NewCo acquired the Company shares from the Individual in exchange for shares in NewCo, the issue of shares by NewCo is neither a loss nor an outgoing of NewCo and there is no amount that NewCo can deduct under section 8-1 of the ITAA 1997. [6] | Detailed Reasoning - Paragraph 177EA(17)(ga): 107. Paragraph 177EA(17)(ga) states: whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is sourced, directly or indirectly, from unrealised or untaxed profits 108. The income tax returns lodged by the Company disclosed the nature of the income it had received. Based on the nature of this income the distribution by the Company under the Buy-Back will not be from unrealised or untaxed profits. | Detailed Reasoning - Paragraph 177EA(17)(h): 109. Paragraph 177EA(17)(h) states: whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is equivalent to the receipt by the relevant taxpayer of interest or of an amount in the nature of, or similar to, interest 110. There is no indication that all or part of the distribution under the Buy-Back will be interest or in the nature of interest. In addition, the financial statements for the Company do not show any loans or other liabilities. The amount paid to NewCo will be calculated based on the market value of the Company and with reference to NewCo's shareholding percentage. | Detailed Reasoning - Paragraph 177EA(17)(i): 111. Paragraph 177EA(17)(i) states: the period for which the relevant taxpayer held membership interests, or had an interest in membership interests, in the corporate tax entity 112. NewCo will hold the shares in the Company from the effective date they are transferred by the Individual to the date of the Buy-Back. 113. The total time NewCo will hold the shares is not known but it is not expected to be less than XX days, given the desire to separate the Individual's interests in the Company from the other shareholders. 114. However, the information provided states the 45 day primary qualification period' in the former paragraph 160APHO(1)(a) will be satisfied before the Buy-Back occurs. | Detailed Reasoning - Paragraph 177EA(17)(j): 115. Paragraph 177EA(17)(i) states: any of the matters referred to in subsection 177D(2) 116. Subsection 177D(2) has been considered in Question 4 above. Any discussion in respect of paragraph 45B(8)(k) will be relevant in respect of the application of paragraph 177EA(17)(j). 117. The following are the matters set out in subsection 177D(2): (a) the manner in which the scheme was entered into or carried out (b) the form and substance of the scheme (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out (d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme (e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme (f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out; and (h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). 118. As observed in the Mills Case (at 131), many of the matters referred to in subsection 177D(2) have no application beyond the extent to which those circumstances have already been taken into account for the other circumstances in subsection 177EA(17). 119. In the Mills Case ,the High Court held when considering the purpose test under section 177EA(3)(e) that: First, a purpose can be incidental even where it is central to the design of a scheme if that design is directed to the achievement of another purpose. Indeed, the centrality of a purpose to the design of a scheme directed to the achievement of another purpose may be the very thing that gives it a quality of subsidiarity and therefore incidentally. That is not impermissibly to confine the scope of s 177EA(3)(e) to a dominant purpose: the categories of "dominant" and "incidental" are not exhaustive. The parenthesised words in s 177EA(3)(e) make clear that a dominant purpose of enabling a holder to obtain a franking credit is sufficient but not necessary for the requisite jurisdictional fact to exist, but it does not follow that a purpose which does no more than further or follow from some dominant purpose is incidental. Second, counterfactual analysis is not antithetical to the statutory inquiry mandated by s 177EA(3)(e). Purpose is a matter for inference and incidentally is a matter of degree. Consideration of possible alternatives may well assist the drawing of a conclusion in a particular case that a purpose of enabling a holder to obtain a franking credit does or does not exist and, if such a purpose exists, that the purpose is or is not incidental to some other purpose. 120. In this case, the underlying purpose of the Buy-Back is to achieve the separation of the Individual interests in the Company from the other shareholders' interests. It is also the intent of the Individual to continue to use a corporate tax entity as an investment vehicle, in the same way that the Company had been used by the Shareholders as an investment vehicle. 121. The Individual has stated that the reason for the proposed transfer of shares in the Company to NewCo before the Buy-Back was so the proceeds from the Buy-Back would go directly to NewCo and be available for re-investment. This would avoid the need for the proceeds to be paid to the Individual, and then for the Individual transfer of money by the Individual to NewCo. 122. The result of undertaking the above scheme in respect of the Buy-Back is that the Buy-Back proceeds received by NewCo will be subject to at the relevant corporate tax rate, rather than at the higher marginal rate of tax that would be applicable to the Individual as an Australian resident if the Individual had participated in the Buy-Back. 123. However, that element of the scheme is informative in respect of the application of section 177EA in that the conferring of an imputation benefit under the scheme is an incidental purpose. 124. Subsection 177EA(17) provides the relevant circumstances of a scheme that need to be considered in determining whether there was a more than incidental purpose of enabling a relevant taxpayer to obtain an imputation benefit. 125. After consideration of the relevant circumstances, the Commissioner concludes that the provision of imputation benefits to NewCo will be incidental to the Buy-Back. 126. The Commissioner therefore concludes that the Company, the Individual and NewCo did not enter into the Buy-Back for a more than incidental purpose of enabling NewCo to obtain an imputation benefit. 127. The Commissioner will therefore not make a determination under subsection 177EA(5). [1] Pursuant to item 1 of the table in subsection 128-15(4) of the ITAA 1997, the cost base of the Company shares that will pass to the Individual as a beneficiary of the Individuals' deceased spouse's estate will also be $X per share. [2] Paragraph 45B(2)(a). [3] Paragraph 45B(2)(b). [4] Paragraph 45B(2)(c). [5] Paragraph 45B(8)(g) was repleaded by Act No 101 of 2006. [6] Taxation Ruling TR 2008/5 Income tax: tax consequences for a company of issuing shares for assets or for services.