Edited version of private advice

Authorisation Number: 1051789638169

Date of advice: 18 December 2020

Ruling

Subject: Off market share buy-back

Question 1

a)    Will the Commissioner accept the 'dividend component' of the share buy-back (the Buy-Back) price is a certain amount per share?

b)    Will the Commissioner accept the 'capital component' of the Buy-Back price is a certain amount per share?

Answer

Yes.

Question 2

Is The Taxpayer a 'qualified person' under former Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the dividend component of the Buy-Back price?

Answer

No. The qualified person provisions in Division 1A of former Part IIIAA of the ITAA 1936 do not apply to The Taxpayer in respect of any franked distribution made by The Company in relation to the Buy-Back.

Question 3

Is The Taxpayer entitled to a tax offset equal to the amount of the franking credit on the dividend component received by The Taxpayer, subject to The Taxpayer being a 'qualified person'?

Answer

Yes. The Taxpayer is entitled to a tax offset equal to the amount of the franking credit on the dividend component received by The Taxpayer. However, the qualified person provisions in Division 1A of former Part IIIAA of the ITAA 1936 do not apply to The Taxpayer in respect of any franked distribution made by The Company in relation to the Buy-Back.

Question 4

Does the assessable income of The Taxpayer in the year in which the Buy-Back occurs include the dividend component of a certain amount per share and, subject to The Taxpayer being a 'qualified person', the amount of the franking credit on the dividend component?

Answer

Yes. The assessable income of The Taxpayer in the year in which the Buy-Back occurs will include the dividend component and the amount of the franking credit on the dividend component. However, the qualified person provisions in Division 1A of former Part IIIAA of the ITAA 1936 do not apply to The Taxpayer in respect of any franked distribution made by The Company in relation to the Buy-Back.

Question 5

Will The Taxpayer make a capital gain in respect of the disposal of The Taxpayer's shares under the Buy-Back?

Answer

No.

Question 6

Will the Commissioner make a determination under subsection 45A(2) or 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936, applies to the whole, or any part, of the capital component of the Buy-Back price received by The Taxpayer?

Answer

No.

Question 7

Will the Commissioner make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received in relation to the dividend component of the Buy-Back price by The Taxpayer?

Answer

No.

Question 8

Will the Commissioner make a determination under paragraph 204-30(3)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to deny the whole, or any part, of the imputation benefits received in relation to the dividend component of the Buy-Back price by The Taxpayer?

Answer

No.

Question 9

Do the general value shifting rules under Division 725 of the ITAA 1997 apply in relation to the shares held in The Company by The Taxpayer?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20YY

The scheme commences on:

Year ended 30 June 20XX

Relevant facts and circumstances

Background

On a certain date, Mr X passed away.

The legal ownership of ordinary shares held by Mr X was subsequently passed onto The Taxpayer.

The Taxpayer is the executor for Mr X's deceased estate.

These shares were ordinary shares (Shares) in a company (The Company). The Company is a private company that was incorporated in Australia. It is an Australian proprietary company limited by shares.

The Company was initially incorporated with a certain number of ordinary shares some of which were held by Mr X. The Company was incorporated before 1 July 1997.

By resolution dated a certain date, the ordinary shares in The Company were split such that The Company had an increased number of ordinary shares on issue.

Shares

The Taxpayer's Shares are held on capital account

The cost base is a certain amount per share.

In addition, the cost base includes the amount of a certain amount per share.

The Buy-Back

The Company proposes to undertake the Buy-Back to allow certain shareholders (Participating Shareholders) to exit their investment.

The Company proposes to offer to buy-back ordinary shares in The Company for a purchase price of a certain amount per share (Purchase Price).

The Buy-Back by The Company will be an off-market buy-back.

All of the shareholders of The Company are residents of Australia for tax purposes.

All of the Shareholders have consented to the Buy-Back.

Participation in the Buy-Back was offered to all Shareholders. The Taxpayer responded in favour of participating in the Buy-Back.

The Buy-Back Purchase Price is the same for all Participating Shareholders.

Non-participating shareholders have not received and are not entitled to receive any property, dividends or distributions as compensation for not participating in the Buy-Back.

The Buy-Back will take place at a future date.

The dividend component of the Buy-Back Purchase Price will be fully franked.

The purchase price for the Buy-Back and the market value of the Shares are the same per Share. This price was negotiated between the parties involved in the Buy-Back and takes into account a number of factors.

Allocation of the Buy-Back Price

The Buy-Back Price will be apportioned as follows per share:

•         An amount will be debited against The Company's share capital account (Capital Component); and the balance of the Buy-Back Price will be debited against the retained earnings account of The Company (Dividend Component).

•         These amounts had been determined using the average capital per share (ACPS) methodology.

For the purposes of the ruling a number of documents provided with The Taxpayer's private binding ruling application also form part of the facts.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 159GZZZP

Income Tax Assessment Act 1936 section 159GZZZQ

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 Division 1A of former Part IIIAA

Income Tax Assessment Act 1936 formersection 160APHH

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 204-30

Income Tax Assessment Act 1997 Division 725

Income Tax Assessment Act 1997 section 45A

Income Tax Assessment Act 1997 section 45B

Income Tax Assessment Act 1997 section 45C

Corporations Act 2001 section249A(2)

Corporations Act 2001 section254H

Reasons for decision

Question 1

Summary

(a)  The Commissioner will accept the dividend/capital split of the Buy-Back, where the 'dividend component' of the share buy-back (the Buy-Back) price is a certain amount per share.

(b)  The Commissioner will accept the dividend/capital split of the Buy-Back where the 'capital component' of the Buy-Back price is a certain amount per share.

Detailed reasoning

ACPS methodology

Practice Statement Law Administration 2007/9 (PS LA 2007/9) provides instruction and practical guidance on the application of various taxation laws in connection with share buy-backs. PS LA 2007/9 provides guidance on the application of section 159GZZZP of the ITAA 1936. Section 159GZZZP 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, PS LA 2007/9 indicates 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 (paragraph 12 and 69 of PS LA 2007/9). 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.

Dividend/capital split

Paragraph 62 of PS LA 2007/9 explains that the ACPS is 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 the Buy-Back price would be a dividend. The Company has 200 ordinary shares on issue with a total issued capital of a certain amount, therefore the ACPS is worked out to be a certain amount per share.

Therefore, for the purposes of section 159GZZZP, a certain amount will represent the capital component of the Buy-Back Price and the balance of a certain amount will present the dividend component of the Buy-Back Price for each share bought back.

Question 2

Summary

The qualified person provisions in Division 1A of former Part IIIAA of the ITAA 1936 do not apply to The Taxpayer in respect of any franked distribution made by The Company in relation to the Buy-Back.

Detailed reasoning

Division 207 of the ITAA 1997 sets out the consequences of an entity receiving directly or indirectly a franked distribution from a corporate tax entity. Generally, an entity receiving a franked distribution will be required to include an amount equal to the franking credit in their assessable income and be entitled to a tax offset equal to the same amount.

Section 207-145 of Subdivision 207-F of the ITAA 1997 applies where a franked distribution is made to an entity and 207-150 applies where a franked distribution flows indirectly to an entity.

Under paragraph 207-145(1)(a) of the ITAA 1997 and paragraph 207-150(1)(a), if an entity to whom a franked distribution is made, or flows indirectly, is 'not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the ITAA 1936' the amount of franking credit received on the distribution is not included in their assessable income, nor can they claim a tax offset equal to the franking credit; and if the distribution flows indirectly through the entity to another entity - subsection 207-35(3) and section 207-45 of the ITAA 1997 do not apply to that other entity.

The very wording of section 207-145 and section 207-150 of the ITAA 1997 makes it clear that regard is to be had to the rules in Division 1A of former Part IIIAA of the ITAA 1936 in determining whether a person is a qualified person for the purpose of these provisions in respect of a franked distribution.

Though former Part IIIAA of the ITAA 1936 ceased to have application from 1 July 2002, it is necessary to have regard to the rules in Division 1A in determining whether an entity is a qualified person, irrespective of whether the distribution is made directly or indirectly to the entity on or after 1 July 2002.

Item 8 of Schedule 4 of the Taxation Laws Amendment Act (No.2) 1999 (93 of 1999) inserted Division 1A of former Part IIIAA of the ITAA 1936. Item 25 of Schedule 4 states that the amendments made by Schedule 4 apply to shares and interests in shares acquired on or after 1 July 1997 unless an exception occurred.

The qualified person provisions of Division 1A of former Part IIIAA of the ITAA 1936 applied to shares that were:

•         If held directly - acquired on or after 1 July 1997; or

•         If held indirectly through a trust - acquired after 3pm on 31 December 1997.

The Company was incorporated on a certain date and Mr X was granted a certain number of ordinary shares in The Company at this time, this represented a certain percentage shareholding in The Company. This certain percentage shareholding in The Company was owned by Mr X until the date of his death.

By resolution dated a certain date, the ordinary shares were split such that Mr X held a certain number of ordinary shares.

As inferred in the paragraph 4.34 of the Explanatory Memorandum to the Tax Laws Amendment Act (No.2) 1999, the splitting of shares is not considered to be a new acquisition of shares. Further Taxation Determination TD 2000/10 Income tax: capital gains: what are the CGT consequences for a shareholder if a company converts its shares into a larger or smaller number of shares? (TD 2000/10) provides that:

While there is a change in the form of the original shares, there is no change in their beneficial ownership...

Once probate was granted, the ordinary shares were transferred to The Taxpayer.

Former section 160APHH of the ITAA 1936 deals with other special provisions relating to acquisition or disposal of shares or interests in shares.

Former subsection 160APHH(4) of the ITAA 1936 deals with shares or interests in shares passing to an executor or administrator and states:

If any shares or interest in shares held by a person who has died has passed to the executor of the will, or the administrator of the estate, of the dead person, the executor or administrator is taken, for the purpose of this Division, to have acquired the shares at the time when they were acquired by the dead person.

In calculating the number of days for which the executor or administrator is taken to have continuously held the shares or interest, any days in respect of which the person materially diminished risks of loss or opportunities for gain in respect of the shares or interest are to be excluded, but the exclusion of those days is not taken to break the continuity of the period for which the executor or administrator is taken to have held the shares or interest.

The legal ownership of the assets owned by Mr X was passed onto The Taxpayer at the time he died. The assets included the certain number of ordinary shares in The Company.

Based on the facts provided, including that the parcel of shares have previously been split, the shares are taken to be acquired by The Taxpayer at the same time Mr X acquired them, being a certain date. As this date is prior to 1 July 1997, the qualified person provisions under paragraph 207-145(1)(a) and 207-150(1)(a) have no application.

Question 3

Summary

Yes. The Taxpayer is entitled to a tax offset equal to the amount of the franking credit on the dividend component received by The Taxpayer. However, the qualified person provisions in Division 1A of former Part IIIAA of the ITAA 1936 do not apply to The Taxpayer in respect of any franked distribution made by The Company in relation to the Buy-Back.

Detailed Reasoning:

Generally, a shareholder who is a qualified person under former Division 1A of former Part IIIAA of the ITAA 1936 and receives a franked dividend is entitled to a tax offset under subsection 207-20(2) of the ITAA 1997 provided none of the other exclusions in section 207-145 apply (Subdivision 207-A).

Subdivision 207-B contains rules that apply to franked distributions that are received through trusts and partnerships.

Subsection 207-5(3) provides that if a franked distribution is made to a member that is a trustee of a trust, an amount equal to the franking credit on the distribution is also included in the member's assessable income. However, subsection 207-5(4) provides that a tax offset in relation to that distribution is only available to an entity (who may be a trustee) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. The tax offset is equal to its share of the franking credit on the distribution.

Section 207-45 of the ITAA 1997 deals with tax offsets where the distribution flows indirectly to an entity. Section 207-45 of the ITAA 1997 states that:

An entity to whom a *franked distribution *flows indirectly in an income year is entitled to a *tax offset for that income year that is equal to its *share of the *franking credit on the distribution, if it is:

a)    an individual; or

b)    a *corporate tax entity when the distribution flows indirectly to it; or

c)    the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust's *net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for that income year; or

d)    the trustee of a *complying superannuation fund, a *non-complying superannuation fund, a *complying approved deposit fund, a *non-complying approved deposit fund or a *pooled superannuation trust in relation to that income year.

Under subsection 207-50(4) of the ITAA 1997 a franked distribution flows indirectly to the trustee of a trust in an income year if, and only if:

(a) during that income year, the distribution is made to the trustee, or flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or (3); and

(b) the trustee is liable or, but for another provision in this Act, would be liable, to be assessed in respect of an amount (the share amount ) that is:

(i) a share of the trust's *net income for that income year under section 98 of the Income Tax Assessment Act 1936; or

(ii) all or a part of the trust's net income for that income year under section 99 or 99A of that Act;

(whether or not the share amount becomes assessable income in the hands of the trustee); and

(c) the trustee's *share of the distribution under section 207-55 is a positive amount (whether or not the trustee actually receives any of that share).

Note:

A trustee to whom a franked distribution flows indirectly under this subsection is entitled to a tax offset under section 207-45 and the distribution does not flow indirectly through the trustee to another entity.

As the distribution is made to The Taxpayer, as the executor of the estate, the distribution will be taken under subsection 207-50(4) of the ITAA 1997 to flow indirectly to the trustee if paragraphs (b) and (c) apply.

Therefore, in the event that The Taxpayer, as executor of the estate, is assessed on the franked distribution as the ultimate recipient they will be entitled to a franking credit under section 207-45 of the ITAA 1997.

Paragraph 207-145(1)(a) and paragraph 207-150(1)(b) of the ITAA 1997 will not impact on The Taxpayer's entitlement to the tax offset. The qualified person rule in paragraphs 207-145(1)(a) and 207-150(1)(a) of the ITAA 1997 has no application to The Taxpayer as discussed above.

Therefore, The Taxpayer is entitled to a tax offset equal to the amount of the franking credit on the dividend component received under the Buy- Back, provided that none of the other exclusions in 207-145 apply. Other relevant exclusions are considered below.

Question 4

Summary

Yes. The assessable income of The Taxpayer in the year in which the Buy-Back occurs will include the dividend component and the amount of the franking credit on the dividend component. However, the qualified person provisions in Division 1A of former Part IIIAA of the ITAA 1936 do not apply to The Taxpayer in respect of any franked distribution made by The Company in relation to the Buy-Back.

Detailed Reasoning:

Generally, vendor shareholders in a buy-back will include in their assessable income the dividend component under section 44 of the ITAA 1936 and an amount equal to the franking credit on the dividend component under subsection 207-20(1) of the ITAA 1997. Vendor shareholders will ordinarily be entitled to a tax offset equal to the amount of the franking credit of the dividend component pursuant to subsection 207-20(2) of the ITAA 1997.

As noted above, subdivision 207-B contains rules that apply to franked distributions that are received through trusts and partnerships.

A trustee receiving a franked dividend includes both the amount of the dividend (subsection 44(1)) and the amount of the franking credit in the trust's assessable income (under subsection 207-35(1) and (2) of the ITAA 1997) when calculating the net income of the trust under subsection 95(1) of the ITAA 1936.

Further, subsections 207-35(4) to (6) of the ITAA 1997 set out the circumstances in which a trustee or beneficiary to whom a franked distribution flows indirectly is required to gross up their assessable income for their share of the franking credit on the franked distribution. Subsections 207-35(5) and (6) deal separately with the treatment of franking credits and franked distributions for the trustee of a trust that, disregarding Division 6E of Part III of the ITAA 1936, would be assessed and liable to tax under section 98, 99 or 99A of the ITAA 1936.

Therefore, The Taxpayer will include in computing the net income of the trust under subsection 95(1) of the ITAA 1936 the dividend component of a certain amount per share under subsection 44(1) of the ITAA 1936 and the franking credit attached to the distribution under subsection 207-35(1) of the ITAA 1997. Further, in accordance with subsection 207-35(6), in the event that The Taxpayer, the executor of the estate, is liable to pay tax on an amount under section 99 or section 99A of the ITAA 1936 (disregarding Division 6E), The Taxpayer will include in the amount on which they are assessed their share of the franking credit on the dividend and their attributable franked distribution determined under section 207-37 of the ITAA 1997.

Question 5

The Taxpayer will not make a capital gain in respect of the disposal of The Taxpayer's shares under the buy-back.

Detailed Reasoning

For a shareholder who holds their shares on capital account, the shares are taken to have been disposed of for CGT purposes on the day the buy-back is executed pursuant to section 104-10 of the ITAA 1997 (CGT event A1).

A Participating Shareholder (other than a partnership) will make a capital gain in respect of the disposal of a share in a Buy-Back if the Sale Consideration per share exceeds the cost base of the share. The capital gain is the amount of the excess. Similarly, a Participating Shareholder (other than a partnership) will make a capital loss in respect of the disposal of a share if the Sale Consideration per share is less than the reduced cost base of the share (subsection 104-10(4) of the ITAA 1997).

For the purposes of determining the amount of a capital gain or capital loss (where the shares are held on capital or revenue account) the consideration in respect of the disposal of a share, the Sale Consideration, under a buy-back 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 received for each share bought back, in this case a certain amount, as consideration in respect of the sale of the share bought back. However, this amount is subject to certain adjustments in order to arrive at the Sale Consideration.

Subsection 159GZZZQ(2) of the ITAA 1936 is one of the adjusting provisions. It 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 as consideration in respect of the sale of the share bought back.

In the case of the Buy-Back, as the market value of the shares is equal to the Purchase Price the Sale Consideration is not adjusted for the purposes of subsection 159GZZZQ(2) of the ITAA 1936.

Pursuant to subsection 159GZZZQ(3) of the ITAA 1936, the deemed consideration of a certain amount is reduced by a 'Reduction Amount'. The Reduction Amount is an amount calculated under subsection 159GZZZQ(4) of the ITAA 1936. In the circumstances of the Buy-Back, the Reduction Amount is equivalent to the dividend component, that is, a certain amount. Therefore, the Sale Consideration for each share disposed of under the Buy-Back is a certain amount.

The Taxpayer holds their shares on capital account. The Sale Consideration of a certain amount per share represents the capital proceeds for CGT purposes pursuant to section 116-20 of the ITAA 1997. The cost base of The Taxpayer's Shares is a certain amount per share. As the Capital Proceeds do not exceed the cost base of the shares The Taxpayer will not make a capital gain in respect to the disposal of their shares under the Buy-Back.

Question 6:

Summary

The Commissioner will not make a determination under subsection 45A(2) or 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936, applies to the whole, or any part, of the capital component of the Buy-Back price received by The Taxpayer.

Detailed Reasoning:

Sections 45A and 45B of the ITAA 1936 are two anti-avoidance provisions which, if they apply, allow the Commissioner to make a determination that section 45C of the ITAA 1936 applies.

The effect of such a determination is that all or part of the distribution of capital received by the shareholders under the buy-back is treated as an unfranked dividend. Accordingly, the application of these two provisions to the buy-back must be considered.

Section 45A of the ITAA 1936 is an anti-avoidance provision that applies in circumstances where capital benefits are streamed to certain shareholders (the advantaged shareholders) who derive a greater benefit from the receipt of share capital and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends.

Although a 'capital benefit' (as defined in paragraph 45A(3)(b) of the ITAA 1936) is provided to participating shareholders under the buy-back, the circumstances of the buy-back indicate that there is no streaming of capital benefits to some shareholders and dividends to other shareholders. Accordingly, section 45A of the ITAA 1936 has no application to the buy-back.

Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends. In broad terms, section 45B applies where:

a.    there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936);

b.    under the scheme, a taxpayer, who may or may not be the person provided with the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936); 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 to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936).

In this case, the conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 have been met. Consideration then turns to whether the requisite purpose of enabling the shareholder to obtain a tax benefit by way of capital distribution is present.

A non-exhaustive list of 'relevant circumstances' are found in paragraphs 45B(8)(a) - 45B(8)(k) of the ITAA 1936. Having regard to the 'relevant circumstances' the Buy-Back, as set out in subsection 45B(8) it is apparent that the inclusion of a capital component as part of the Buy-Back Price was not inappropriate or more than an incidental purpose of enabling shareholder who participated in the Buy-Back to obtain a tax benefit. Some of the key factors supporting this are:

•         the capital component of a certain amount per share accords with the ACPS and could not be said to be attributable to the profits of The Company;

•         the pattern of distributions of The Company does not indicate that the distribution of share capital of a certain amount per share reflects an amount in substitution for a dividend; and

•         the Buy-Back is not expected to alter The Company's dividend policy.

Accordingly, section 45B of the ITAA 1936 has no application to the Buy-Back.

Therefore, in this case, the Commissioner will not be empowered to make a determination that section 45C of the ITAA 1936 applies.

Question 7:

Summary

The Commissioner will not exercise his discretion to deny the imputation benefit to The Taxpayer pursuant to paragraph 177EA(5)(b) of the ITAA 1936.

Detailed Reasoning

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. In essence, 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 would include an off-market share buy-back with a franked dividend component.

Subsection 177EA(3) provides that section 177EA 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.

Where section 177EA of the ITAA 1936 applies, the Commissioner has the discretion to make a determination to deny the imputation benefit to each Participating Shareholder pursuant to paragraph 177EA(5)(b) of the ITAA 1936.

The conditions of paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied in respect of the Buy-Back. Accordingly, the issue is whether, having regard to the relevant circumstances of the scheme, it would be concluded that on the part of The Company, its Shareholders or any other relevant party, there was more than a merely incidental purpose of conferring an imputation benefit under the scheme. In respect of the Buy-Back, the relevant taxpayers are the Participating Shareholders and the scheme comprises the circumstances surrounding the Buy-Back.

In arriving at a conclusion 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. The relevant circumstances listed in subsection 177EA(17) of the ITAA 1936 encompass a range of circumstances which, taken individually or collectively, could indicate the requisite purpose.

The Buy-Back is being carried out to allow Participating Shareholders to exit their investment. Based on the information provided and the qualifications set out in this Ruling, the Commissioner's consideration of all of the relevant circumstances of the scheme would not, on balance, lead to a conclusion that the purpose of enabling Participating Shareholders to obtain imputation benefits is more than incidental.

The proposed transaction involving the buy-back of shares is not being carried out for a more than incidental purpose of enabling taxpayers to obtain an imputation benefit. As a result, and having regard to the relevant circumstances of the scheme, the five conditions in 177EA(3) of the ITAA 1936 have not been satisfied and section 177EA will not apply to any fully franked distribution under the proposed transaction.

Where section 177EA of the ITAA 1936 does not apply, the Commissioner does not have discretion to deny the imputation benefit to each Participating Shareholder pursuant to paragraph 177EA(5)(b) of the ITAA 1936.

Therefore, the Commissioner will not exercise his discretion to deny the imputation benefit to The Taxpayer pursuant to paragraph 177EA(5)(b) of the ITAA 1936.

Question 8:

Summary

The Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny the whole, or any part, of the imputation benefits that The Taxpayer receives in relation to the dividend component of the Buy-Back price.

Detailed reasoning

Section 204-30 of the ITAA 1997 empowers 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); and

(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).

An imputation benefit is (relevantly) received as a result of a distribution where a member is entitled to a tax offset under Division 207 of the ITAA 1997 (paragraph 204-30(6)(a) of the ITAA 1997) or an amount would be included in the member's assessable income as a result of the distribution because of the operation of section 207-35.

If section 204-30 of the ITAA 1997 applies, the Commissioner is vested with a discretion under subsection 204-30(3) to make a determination in writing, relevantly:

(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 (paragraph 204-30(3)(a)); or

(b)          that no imputation benefit is to arise in respect of any streamed distribution made to a favoured member and specified in the determination (paragraph 204-30(3)(c)).

For section 204-30 to apply, a member of an entity must derive a greater benefit from franking credits. 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. Some of the cases in which a member of an entity 'derives a greater benefit from franking credits' are listed in subsection 204-30(8) by reference to the ability of a member to fully utilise franking credits.

The term "streaming" is not defined in the Act. Streaming of distributions is broadly explained in paragraph 3.28 of Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002 as selectively directing the flow of franked distributions to those members who can most benefit from imputation benefits.

Under the Buy-Back, the Participating Shareholders were provided with an imputation benefit as a result of the dividend component paid in relation to the buy-back of their shares. What occurred under the Buy-Back does not constitute streaming of distributions to favoured shareholders. The imputation benefit provided to the Participating Shareholders will be merely incidental to the exit of those shareholders from the Company.

The Company will pay equivalent dividends to each Participating Shareholders and none of The Company's Shares are held by non-resident shareholders who do not benefit from franking credits to the same extent as resident shareholders. Therefore, the conditions in subsection 204-30(1) of the ITAA 1997 will not be met.

The Commissioner concludes that section 204-30 of the ITAA 1997 does not apply and therefore will not make a determination to deny the whole, or any part, of the imputation benefits that The Taxpayer receives in relation to the dividend component of the Buy-Back price.

Question 9

Summary:

The Buy-Back will not give rise to a direct value shift under Division 725 of the ITAA 1997.

Detailed reasoning

Division 725 of the ITAA 1997 deals with a direct value shift which occurs under a scheme involving equity or loan interests in an entity where there is a decrease in the market value of some equity or loan interests and an increase or issue at a discount of other equity or loan interests.

A direct value shift is defined at subsection 725-145(1) of the ITAA 1997 as follows:

There is a direct value shift under a scheme involving equity or loan interests in an entity (the target entity) if:

(a) there is a decrease in the market value of one or more equity or loan interests in the target entity; and

(b) the decrease is reasonably attributable to one or more things done under the scheme, and occurs at or after the time when that thing, or the first of those things is done; and

(c) either or both of subsections (2) and (3) are satisfied.

Subsection 725-145(2) of the ITAA 1997 states:

One or more equity or loan interests in the target entity must be issued at a discount. The issue must be, or must reasonably be attributable to, the thing, or one or more of the things, referred to in paragraph 1(b). It must also occur at or after the time referred to in that paragraph.

Subsection 725-145(3) of the ITAA states:

Or, there must be an increase in the market value of one or more equity or loan interests in the target entity. The increase must be reasonably attributable to the thing, or to one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph.

PS LA 2007/9 states that there may be a direct value shift in the context of a share buy-back where the buy-back is part of a broader capital restructure and consideration should also be given to the existence of any direct value shift prior to the share buy-back. Conducting an off-market share buy-back at a discount or premium may also give rise to direct value shifting consequences (paragraphs 149 to 152 of PSLA 2007/9).

Given the Buy-Back price is equal to the market value of the Shares there has been no buy-back at a premium or a discount. Therefore, section 725-145 of the ITAA 1997 will not be satisfied and the Buy-Back will not give rise to a direct value shift.

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