Effect on capital gains tax
If you dispose of shares you hold on capital account back to the company, it is a capital gains tax (CGT) event. This means you must:
- calculate your capital gain or loss by subtracting the cost of the shares from your capital proceeds
- report your capital gain or loss in your income tax return.
If it is an off-market buy-back arrangement, your capital proceeds may be based on the market value of the shares, rather than the amount you receive.
Time of capital gain or loss
The point at which you make a capital gain or loss depends on the conditions of the buy-back offer. For example, it may be the time the company accepts your application to participate in the buy-back or, if it is a conditional offer of buy-back, the time you accept the offer.
You report your capital gain or loss in your tax return for the year in which the CGT event happens.
Capital proceeds from an off-market share buy-back
An off-market share buy-back is when a company offers to buy its shares back from you directly, rather than buying them through a stock exchange in the open market. Usually the company writes to you with the offer.
For CGT purposes, your capital proceeds cannot be less than what the market value of your shares would have been if the buy-back had not been proposed.
Listed public company
Any off-market share buy-back announced by listed public companies after 7:30 pm AEDT on 25 October 2022 will not contain a dividend component in the price. The entire buy-back price will be treated as capital proceeds.
Company that is not a listed public company
If the buy-back price is equal to or more than this market value, your capital proceeds are the amount paid, excluding any dividend paid as part of the buy-back.
If the buy-back price is less than this market value, your capital proceeds are:
- what the market value of your shares would have been if the buy-back had not been proposed
- less any dividend paid under the buy-back.
In this situation, the company may tell you the market value or obtain a class ruling from us.
There are some further adjustments in circumstances where the participating shareholder is itself a company.
Where a share buy-back affects a large shareholder group, we may publish a class ruling setting out the tax consequences for shareholders. For further information you can:
- ask the company for details
- go to our legal database and search <company name> for class rulings – you may need to refine your search by ‘Rulings’.
Example: off-market buy-back
Ranjini bought 10,000 shares in a company that was not a listed public company at a cost of $6 per share, including brokerage.
A few years later, the company wrote to its shareholders offering to buy back 10% of their shares for $9.60 each. The buy-back price included a franked dividend of $1.40 per share, with each dividend to carry a franking credit of $0.60.
Ranjini applied to participate in the buy-back to sell 1,000 of her shares.
The company approved the buy-back on the same terms as its earlier letter of offer.
The market value of the company's shares at the time of the buy-back, assuming the buy-back had not been proposed, was $10.20.
Ranjini received a cheque for $9,600 (1,000 shares × $9.60 = $9,600).
Ranjini must work out her capital gain using the market value of the shares because:
- it is an off-market share buy-back
- the buy-back price is less than what the market value of the shares would have been if the buy-back had not been proposed.
Ranjini works out her capital gain as follows:
- Market value of shares: $10.20 × 1,000 = $10,200
- Dividend: $1.40 × 1,000 = $1,400
- Capital proceeds: $10,200 − $1,400 = $8,800
- Cost base: $6.00 × 1,000 = $6,000
- Capital gain (before applying any discount) is $8,800 − $6,000 = $2,800
Ranjini must report her capital gain as well as her dividend of $1,400 and franking credit of $600 in her tax return.
End of exampleFor detailed information about share buy-backs, see:
- TD 2004/22 Income tax: for off-market share buy-backs of listed shares, whether the buy-back price is set by tender process or not, what is the market value of the share for the purposes of subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936
- PS LA 2007/9 Share buy-backs.