Private ruling: Share Buy-Back
Date of advice: 26 February 2026
Published: 20 April 2026
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: XX XX XXXX

Ruling: Q1: Will the portion of the Share Buy-Back which exceeds the Capital Component debited to the Company's share capital account be taken to be a dividend under section 159GZZZP of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Will the Dividend Component of the Share Buy-Back be a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes | Q3: Will the Commissioner make a determination under subsections 45B(3) and 45C(3) of the ITAA 1936, that all or part of the Buy-Back Price is to be treated as an unfranked dividend and/or that a franking debit applies to the Capital Component of the Buy-Back? | A3: No | Q4: Will the Commissioner make a determination under paragraph 177EA(5)(a) of the ITAA to debit the Company's franking account or under paragraph 177EA(5)(b) to deny the Minority Shareholder's imputation benefits in relation to the Buy-Back? | A4: No | Q5: Will the Commissioner make a determination under paragraph 204-30(3)(a) of the ITAA 1997 to debit the Company's franking account or under paragraph 204-30(3)(c) to deny the Minority Shareholder's imputation benefits in relation to the Buy-Back? | A5: No

Relevant facts and circumstances: The Company 1. The Company is a private company incorporated in Australia in XXXX. 2. The Company is an Australian resident for tax purposes. 3. The Company is a subsidiary of Parent Company. 4. The Company does not have a history of paying dividends. 5. Prior to the Buy-Back the Company had X shareholders and X ordinary shares on issue. 6. All of the ordinary shares on issue in the Company had the same rights and there were no other classes of shares on issue. 7. In January 20XX the Company obtained a report from X providing an estimate of the Company's market value as at 31 July 20XX. The report found that the estimated fair market value fell between $X and $X. Parent Company 8. Parent Company is incorporated and has tax residency in Country A. 9. On XX XX 20XX, an unrelated company, also a resident of Country A, entered into an agreement to acquire 100% of the equity interests in Parent Company and its subsidiaries. 10. Prior to the acquisition Parent Company undertook a re-organisation of its group to simplify its capital structure in order to facilitate the acquisition. This simplification included the Buy-Back of all outstanding shares held by minority shareholders in the Company. 11. Prior to the Buy-Back the Parent Company held X% of the shares in the Company, with the remaining X% held by X minority Australian resident entities. 12. The completed acquisition of Parent Company was announced on XX XX 20XX. The Buy-Back 13. In order to simplify the Parent Company's capital structure prior to its acquisition, the Company undertook a selective buy-back and cancellation of shares (the Buy-Back). 14. On XX XX 20XX the Company undertook the Buy-Back of shares held by the minor shareholders (collectively, the Minority Shareholders). 15. The Buy-Back involved the buy-back of X shares from the Minority shareholders for $X AUD per share (Buy-Back Price). 16. The Total Buy-Back value was $X AUD. 17. The Buy-Back Price was calculated using a Formula set out in the Shareholder Agreement. 18. Using the Formula the Company calculated their market price as AUD$X, which falls within the estimated range determined by the X report. 19. The Buy-Back Price of $X was comprised of a. A capital component of A$X (Capital Component) which the Company worked out using the average capital per share (ACPS) methodology; and b. A dividend component of A$X (Dividend Component). 20. The Capital Component of A$X (A$X x X shares) was debited to the Company's share capital account, and the Dividend Component of A$X (A$X x X shares) was debited to the Company's retained profit account. 21. The Company was not a 'base rate entity' and was subjected to a 30% corporate tax rate for the year ended 31 XX 20XX. As such, the Company's corporate tax rate for imputation purposes is 30% in respect of the Buy-Back. 22. Prior to the Buy-Back the Company has $X of franking credits. 23. The Company's share capital account was not 'tainted' in accordance with Division 197. 24. The Dividend Component was not sourced, directly or indirectly, from the Company's share capital account. 25. The Dividend Component was not funded by a capital raising by any entity. 26. All transactions were undertaken at arm's length. The Minority Shareholders 27. The Minority Shareholders did not have any 'short positions' over their Company shares. 28. The Minority Shareholders held their Company shares on capital account. 29. The cost bases of the Company shares held by the Minority Shareholders are greater than the Capital Component of the Buy-Back. 30. The Minority Shareholders do not have any carry forward losses, nor were they in a loss position in the income year in which the Buy-Back occurred. Assumptions As the Company is unlisted and the market value of its shares is not readily apparent, it is assumed that the market value used by the Company (being the value estimated by the X report) is accurate.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 45B | Income Tax Assessment Act 1936 subsection 45B(3) | Income Tax Assessment Act 1936 subsection 45B(8) | Income Tax Assessment Act 1936 paragraph 45B(8)(a) | Income Tax Assessment Act 1936 paragraph 45B(8)(b) | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1936 subsection 45C(3) | Income Tax Assessment Act 1936 section 159GZZZP | Income Tax Assessment Act 1936 section 159GZZZQ | Income Tax Assessment Act 1936 subsection 159GZZZQ(1) | Income Tax Assessment Act 1936 subsection 159GZZZQ(2) | Income Tax Assessment Act 1936 subsection 159GZZZQ(3) | Income Tax Assessment Act 1936 subsection 159GZZZQ(4) | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 subsection 177D(2) | 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 subparagraph 177EA(3)(b)(i) | 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 subsection 177EA(7) | Income Tax Assessment Act 1936 subsection 177EA(8) | Income Tax Assessment Act 1936 subsection 177EA(9) | Income Tax Assessment Act 1936 subsection 177EA(10) | Income Tax Assessment Act 1936 paragraph 177EA(14)(b) | Income Tax Assessment Act 1936 subsection 177EA(17) | 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)(g) | Income Tax Assessment Act 1936 paragraph 177EA(17)(j) | Income Tax Assessment Act 1936 subsection 177EA(18) | Income Tax Assessment Act 1936 subsection 177EA(19) | Income Tax Assessment Act 1936 paragraph 177EA(19)(a) | Income Tax Assessment Act 1997 section 202-40 | Income Tax Assessment Act 1997 subsection 202-40(1) | Income Tax Assessment Act 1997 section 202-45 | Income Tax Assessment Act 1997 subsection 202-45(c) | Income Tax Assessment Act 1997 section 204-30 | Income Tax Assessment Act 1997 paragraph 204-30(3)(a) | Income Tax Assessment Act 1997 paragraph 204-30(1)(a) | Income Tax Assessment Act 1997 paragraph 204-30(1)(b) | Income Tax Assessment Act 1997 paragraph 204-30(1)(c) | Income Tax Assessment Act 1997 subsection 204-30(8) | Income Tax Assessment Act 1997 paragraph 204-30(8)(a)

Reasons for decision: Summary: The portion of the Share Buy-Back which exceeds the Capital Component debited to the Company's share capital account is taken to be a dividend under section 159GZZZP of the ITAA 1936. | Detailed Reasoning - Detailed Reasoning: Section 159GZZZP of the ITAA 1936 provides that where the buy-back of a share is an off-market purchase, the difference between the purchase price and the part (if any) of the purchase price which is debited against the share capital account, is taken to be a dividend paid by the company to the seller on the day the buy-back occurs. Law Administration Practice Statement PS LA 2007/9 Share buy-backs (PS LA 2007/9) 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. 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. The Dividend Component, being the difference between the Share Buy-Back Price and the part of the Buy-Back Price which is debited against the company's share capital account (Capital Component), will be taken to be a dividend in accordance with subsection 159GZZZP(1) of the ITAA 1936. Therefore, the portion of the Share Buy-Back which exceeded the Capital Component debited the Company's share capital account, being $X per share bought back, is taken to be a dividend made by the Company to the shareholders. | Summary: The Dividend Component of the Share Buy-Back will be a frankable distribution within the meaning given by subsection 202-40(1) of the ITAA 1997. | Detailed Reasoning - Detailed Reasoning: Subsection 202-40(1) states: A distribution is a frankable distribution , to the extent that it is not unfrankable under section 202-45. The term 'distribution' is defined in section 960-120. Pursuant to item 1 of the table in subsection 960-120(1), it includes a dividend or something that is taken to be a dividend. As discussed above, section 159GZZZP of the ITAA 1936 will apply to the Share Buy-Back. Accordingly, the difference between the Buy-Back price and the Capital Component debited to the Company's share capital account (the Dividend Component) will be taken to be a dividend paid by the Company to the Minority Shareholders. Therefore, the Dividend Component of the Buy-Back Price will be a 'distribution' within the meaning given by section 960-120. 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 . The requirements of this provision depend on the Buy-Back price and the relevant market value of the Company's shares. As the Company used a formula to determine the Buy-Back Price which equalled the market value of the shares at the time of the Buy-Back, falling within the expected range provided for in the market valuation report, the Buy-Back Price will not exceed the market value. 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. | Summary: The Commissioner will not make a determination under subsection 45B(3) that subsection 45C(3) of the ITAA 1936 applies to find the whole or part of the Buy-Back Price is to be treated as an unfranked dividend, or that a franking debit applies to the Capital Component of the Buy-Back. | Detailed Reasoning - Detailed Reasoning: 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. 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 (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 the relevant taxpayer to obtain a tax benefit. The relevant circumstances of the scheme include the various matters listed in paragraphs 45B(8)(a) to (k), with paragraph 48B(8)(k) requiring consideration any of the 8 matters referred to in subsection 177D(2). For section 45B to apply, each of the requirements in paragraphs 45B(2)(a) to (c) must be present. Paragraph 45B(2)(c) can 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. 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. | Summary: The Commissioner will not exercise his discretion to make a determination under paragraph 177EA(5)(a) of the ITAA 1936 to debit the Company's franking account. The Commissioner will not make a determination under paragraph 177EA(5)(b) to deny the Minority Shareholder's imputation benefits in relation to the Buy-Back. | Detailed Reasoning - Detailed Reasoning: Section 177EA of the ITAA 1936 is a general anti-avoidance provision that operates to safeguard the imputation system. The provision 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 which includes an off-market share buy-back with a franked dividend component. For section 177EA of the ITAA 1936 to apply, each of the five specific conditions set out in paragraphs (a) to (e) of the operative provision, subsection 177EA(3) of the ITAA 1936, must be present. Paragraph 177EA(3)(e) requires a conclusion, having regard to the relevant circumstance of the scheme, about whether the Company, the Minority Shareholders or any other relevant party entered into the Share Buy-Back for a more than incidental purpose of enabling a relevant taxpayer to obtain an imputation benefit. It is considered that the scheme was not entered into for a purpose of obtaining an imputation benefit and that any imputation benefit obtained by the resident shareholders participating in the scheme is merely incidental. The Commissioner will therefore not issue a determination under paragraph 177EA(5)(a), nor deny imputation benefits to shareholders under paragraph 177EA(5)(b). | Summary: The Commissioner will not make a determination under paragraph 204-30(3)(a) of the ITAA 1996 to debit the Company's franking account. | Detailed Reasoning - Detailed Reasoning: Section 204-30 of the ITAA 1997 applies where a corporate tax entity streams the payment of dividends, or the payment of dividends and the giving of other benefits, to its members 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 (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. Relevantly, if section 204-30 of the ITAA 1997 applies the Commissioner may make one or more of the following written determinations set out in subsection 204-30(3) of the ITAA 1997: (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. For section 204-30 of the ITAA 1997 to apply, members to whom distributions are streamed must derive a greater benefit from imputation benefits than the members who do not participate in the Buy-Back. The words 'derives a greater benefit from franking credits' (imputation benefits) are defined in subsection 204-30(8) of the ITAA 1997 by reference to the ability of the members to fully utilise imputation benefits. The Dividend Component of the Buy-Back Price will be a "distribution" within the meaning given by section 960-120 of the ITAA 1997. Relevant to this case, an imputation benefit is received as a result of a distribution under subparagraphs 204-30(6)(a) or (c) if: a member is entitled to a tax offset under Division 207 of the ITAA 1997; or a franking credit would arise in the franking account of the member as a result of the distribution. Each participating Minority Shareholder will receive an imputation benefit as a result of the distribution. Subsection 204-30(8) provides that: 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. Streaming is selectively directing the flow of franked distributions to those members who can most benefit from imputation credits. The law uses an essentially objective test for streaming, although purpose may be relevant where future conduct is a relevant consideration. It will normally be apparent on the face of an arrangement that a strategy for streaming is being implemented. The distinguishing of members on the basis of their ability to use franking benefits is a key element of streaming. Under the Buy-Back there was no distinguishing of members on the basis of their ability to use franking benefits. The Minority Shareholders were distinguished only in that they were the only shareholders in the Company other than the Parent Company. As the Buy-Back was undertaken to simplify the capital structure of the Parent Company prior to its acquisition this distinction is not indicative of streaming. Accordingly, there is no streaming and the Commissioner will not make a determination under paragraph 204-30(3)(a) of the ITAA 1997 that a franking debit arises in the Company's franking account in respect of the dividend because the conditions of section 204-30 of the ITAA 1997 are not satisfied.