Inserts for

Tax Laws Amendment (2011 Measures No.9) Bill 2011: Buybacks

EXPOSURE DRAFT
Commencement information
Column 1 / Column 2 / Column 3
Provision(s) / Commencement / Date/Details
1. Schedule Buybacks / The day this Act receives the Royal Assent.
2.
3.

Schedule BB—Buybacks of shares and nonshare equity interests

Part1—Amendments

Income Tax Assessment Act 1936

1 Division16K

Repeal the Division.

Income Tax Assessment Act 1997

2 Section105 (table item headed “shares”)

Omit:

buybacks ...... / 159GZZZJ to 159GZZZT

substitute:

buybacks ...... / Division190

3 Section125 (table item headed “shares”)

Omit:

buybacks ...... / 159GZZZJ to 159GZZZT

substitute:

buybacks ...... / Division190

4 Subsection 11610(7) (note 1)

Repeal the note, substitute:

Note 1:Also, these provisions of the Income Tax Assessment Act 1936 modify capital proceeds:

(a)section23B (undistributed FIF attribution income on disposal of an interest in a FIF);

(b)sections159GZZZF and 159GZZZG (cancellation of shares in a holding company);

(c)sections401, 422, 423 and 461 (CFCs).

5 Subsection 11610(7) (note 2)

Repeal the note, substitute:

Note 2:Also, these provisions of this Act modify capital proceeds:

(a)Subdivision190B (offmarket buybacks of shares and nonshare equity interests);

(b)section230505 (Division230 financial arrangement as consideration for provision or acquisition of a thing).

6 Subsection 11620(1) (note 3)

Repeal the note, substitute:

Note 3:If you dispose of shares or nonshare equity interests in an offmarket buyback, the capital proceeds are worked out under Subdivision190B (which is about the consideration received in respect of a buyback).

7 Section1181 (note 1)

Repeal the note, substitute:

Note 1:There are also these exemptions in the Income Tax Assessment Act 1936:

  • section23AH (about foreign branch gains and losses of companies);
  • section24B (about External Territories);
  • section26BC (about securities lending arrangements);
  • section121AS (about demutualisation of insurance companies);
  • sections121EL, 121ELA and 121ELB (about offshore banking units);
  • section408 (about calculating the attributable income of a CFC).

8 Section1181 (after note 2)

Insert:

Note 2A:There are also exemptions in Subdivisions190C and 190D (about share and nonshare equity buybacks).

9 Paragraph 11820(1B)(a)

Repeal the paragraph, substitute:

(a)an amount that is taken to be a *dividend or *nonshare dividend by section1905 (which relates to*offmarket buybacks of *shares and *nonshare equity interests); or

10 Subsection 12570(4)

Repeal the subsection, substitute:

Exception: offmarket buybacks

(4)An *offmarket buyback is not a *demerger.

11 After Division180

Insert:

Division190—Buybacks of shares and nonshare equity interests

Table of Subdivisions

Guide to Division190

190AOffmarket buybacks: main rules

190BOffmarket buybacks: consideration received by members and equity holders

190COffmarket buybacks: rules for buying companies

190DOnmarket buybacks

Guide to Division190

1901 What this Division is about

This Division sets out the taxation consequences arising from buybacks of shares and nonshare equity interests.

For an offmarket buyback, this Division tells you:

(a)whether, and how, the purchase price is split into a dividend (which may be frankable) and a capital component; and

(b)how to work out the gain or loss on disposal of the share or interest.

For an onmarket buyback, no dividend will be taken to be paid. This Division tells you how to work out the gain or loss on disposal of the share or interest.

There are no income tax consequences for the company conducting the buyback.

There are modifications of the imputation system rules in some circumstances.

Subdivision190A—Offmarket buybacks: main rules

Table of sections

Operative provisions

1905Part of purchase price is a dividend or nonshare dividend

19010Meaning of offmarket buyback

19015Method for determining capital/dividend split

19020Certain integrity rules excluded for listed companies using approved split method

Operativeprovisions

1905 Part of purchase price is a dividend or nonshare dividend

When dividend or nonshare dividend taken to be paid

(1)A *dividend or *nonshare dividend (as the case requires) is taken to be paid by a company conducting an *offmarket buyback of a *share or *nonshare equity interest if:

(a)there is a difference between:

(i)the purchase price for the share or interest worked out under subsection(4); and

(ii)the capital component for the share or interest mentioned insubsection(5); and

(b)the capital component meets the requirement in section19015.

Amount etc. of dividend or nonshare dividend

(2)The amount of the *dividend or *nonshare dividend is the amount of the difference mentioned in paragraph(1)(a).

(3)The *dividend or *nonshare dividend is taken to be paid on the day of the buyback, out of profits derived by the company.

Purchase price

(4)The purchase price for a *share or *nonshare equity interest under an *offmarket buyback is the sum of:

(a)all amounts of money the *member or *equity holder is entitled to receive in respect of the buyback of the share or interest; and

(b)the *market value at the time of the buyback of all property (other than money) the member or equity holder is entitled to receive in respect of the buyback of the share or interest.

Capital component

(5)The capital component for a *share or *nonshare equity interest is the part of the purchase price mentioned in subsection(4) that is:

(a)for a share—debited against amounts standing to the credit of the company’s *share capital account; or

(b)for an interest—debited against amounts standing to the credit of the company’s share capital account or *nonshare capital account.

19010 Meaning of offmarket buyback

A purchase by a company of a *share or *nonshare equity interest in itself from a *member or *equity holder in the company is an offmarket buybackunless:

(a)the share or interest is listed for quotation in the official list of an *approved stock exchange; and

(b)the buyback is made in the ordinary course of trading on the stock exchange.

Note:For the meaing of onmarket buyback, see section190210.

19015 Method for determining capital/dividend split

(1)The capital component mentioned in subsection 1905(5) for a *share or *nonshare equity interest under an *offmarket buyback meets the requirement in this section if it equals:

(a)the average capital amount worked out under subsection(2) or (3) (as the case requires) just before the buyback; or

(b)if the Commissioner of Taxation approves another calculation method for the buyback—the amount worked out using that other method just before the buyback.

Average capital per share

(2)For a *share, the average capital amount is worked out by:

(a)summing the amounts held in the company’s *share capital account; and

(b)dividing the result by the number of shares *on issue.

Average capital per nonshare equity interest

(3)For a *nonshare equity interest, the average capital amount is worked out by:

(a)summing the amounts held in the company’s *nonshare capital account; and

(b)dividing the result by the number of nonshare equity interests *on issue.

19020 Certain integrity rules excluded for listed companies using approved split method

(1)The integrity provisions referred to in subsection(2) do not apply in relation to an *offmarket buyback if:

(a)the *shares or *nonshare equity interests in the company conducting the buyback are listed for quotation in the official list of an *approved stock exchange just before the buyback; and

(b)the capital components mentioned in subsection 1905(5) for each of the shares or interests bought backequals the average capital amount worked out under subsection 19015(2) or (3) (as the case requires).

(2)The provisions are as follows:

(a)section20430 of this Act;

(b)section45A of the Income Tax Assessment Act 1936;

(c)section45B of the Income Tax Assessment Act 1936;

(d)section177EA of the Income Tax Assessment Act 1936.

Subdivision190B—Offmarket buybacks: consideration received by members and equity holders

Table of sections

Basic rule

19070Consideration received

General modification

19075Consideration increase—dividend or nonshare dividend not fully taxed

Further modification for listed companies

19080Consideration increase—no notional losses on shares or interests in listed companies

Further modifications for unlisted companies

19085Consideration increase—market value substitution for unlisted companies

19090Consideration increase—no losses if unlisted company franks distribution to corporate tax entity

Basic rule

19070 Consideration received

(1)In working out, in respect of an *offmarket buyback, whether a *member or *equity holder:

(a)makes a *capital gain or *capital loss; or

(b)has an amount included in assessable income under a provision of this Act other than Parts31 and 33 (about CGT); or

(c)is allowed a deduction;

the member or equity holder is taken to have received, or to be entitled to receive, as consideration in respect of the sale of the *share or *nonshare equity interest, the amount (the consideration amount) mentioned in subsection(2).

(2)The consideration amount for a *share or *nonshare equity interestis:

(a)if a *dividend or *nonshare dividend is taken by section1905 to be paid—the capital component mentioned in subsection 1905(5) for the share or interest (asincreased, if required,under sections19075, 19080, 19085 and 19090); or

(b)if paragraph(a) does not apply—the purchase price worked out under subsection 1905(4) for the share or interest (as increased, if required,under section19085).

General modification

19075 Consideration increase—dividend or nonshare dividend not fully taxed

(1)The consideration amount mentioned in paragraph 19070(2)(a) is increased if a part (the untaxed amount) of the *dividend or *nonshare dividend that is taken by section1905 to be paid:

(a)is not included in the assessable income of the *member or *equity holder; and

(b)is either:

(i)debited against a *share capital account, *nonshare capital account, or asset revaluation reserve; or

(ii)attributable (directly or indirectly) to amounts transferred from a share capital account, nonshare capital account, or an asset revaluation reserve.

(2)The consideration amount is increased by the untaxed amount.

(3)For the purposes of paragraph(1)(a), disregard the following provisions:

(a)section80215 of this Act;

(b)section128D of the Income Tax Assessment Act 1936.

(4)For the purposes of paragraph(1)(b), assume the *dividend or *nonshare dividend to have been debited against the account or reserves against which the purchase price worked out under subsection 1905(4) was debited, and to the same extent.

Further modification for listed companies

19080 Consideration increase—no notional losses on shares or interests in listed companies

(1)The consideration amount mentioned in paragraph 19070(2)(a) is increased if:

(a)the *shares or *nonshare equity interests in the company conducting the *offmarket buyback are listed for quotation in the official list of an *approved stock exchange just before the buyback; and

(b)apart from this section (but taking account of section19075), a loss would be *realised for income tax purposes for the *member or *equity holder in respect of the buyback.

(2)The consideration amount is increased by the lesser of:

(a)the amount of the loss; and

(b)the amount that is taken by section1905 to be a *dividend or *nonshare dividend.

Example:Shareholder S receives a purchase price of $80 in respect of an offmarket buyback of shares by a listed company (B). Company B debits $30 against its share capital account. Company B is taken to pay S a dividend of $50 (section1905).

S has a cost base and reduced cost base of $100 for the shares and must work out a capital gain or loss on the disposal.

Apart from section19080, S would be taken to have received the $30 capital component in respect of the buyback. However, this would give S a capital loss of $70. Section19080 applies to increase the consideration by $50 (which is the lesser of the dividend amount and the loss amount) to $80. S’s capital loss after applying section19080 is $20.

Further modifications for unlisted companies

19085 Consideration increase—market value substitution for unlisted companies

(1)The consideration amount mentioned in paragraph 19070(2)(a) or (b) (as the case requires)is increased if:

(a)the *shares or *nonshare equity interests in the company conducting the *offmarket buyback are not listed for quotation in the official list of an *approved stock exchange just before the buyback; and

(b)the amount that would have been the market value of the share or interest at the time of the buyback if the buyback did not occur and was never proposed to occur exceedsthe purchase price for the share or interest worked out under subsection 1905(4).

(2)The consideration amount is increased by the amount of the excess.

19090 Consideration increase—no losses if unlisted company franks distribution to corporate tax entity

(1)The consideration amount mentioned in paragraph 19070(2)(a) is increased if:

(a)the *shares or *nonshare equity interests in the company conducting the *offmarket buyback are not listed for quotation in the official list of an *approved stock exchange just before the buyback; and

(b)apart from this section (but taking account of sections19075 and 19085), a loss would be *realised for income tax purposes for a *member or *equity holder in respect of the buyback; and

(c)the member or equity holder is a *corporate tax entity that is entitled to a *tax offset under Division207 in respect of the *dividend or *nonshare dividend taken by section1905 to be paid.

(2)The consideration amount is increased by the lesser of:

(a)the amount of the loss mentioned in paragraph(1)(b); and

(b)the amount worked out as follows:

Subdivision190C—Offmarket buybacks: rules for buying companies

Table of sections

General rule

190140Buyback is tax neutral

Imputation system rules

190145Distribution unfrankable where offmarket purchase price is more than market value

190150Extended time for listed companies to give distribution statement

190155Additional franking debit for certain offmarket buybacks

General rule

190140 Buyback is tax neutral

In working out, in respect of an *offmarket buyback,whether thecompany conducting the buyback:

(a)makes a *capital gain or *capital loss; or

(b)has an amount included in assessable income under a provision of this Act other than Parts31 and 33 (about CGT); or

(c)is allowed a deduction;

the buyback, and any subsequent cancellation of the *share or *nonshare equity interest, are disregarded.

Imputation system rules

190145 Distribution unfrankable where offmarket purchase priceis more than market value

(1)A part of a *dividend or *nonshare dividend a company is taken by section1905 to pay is taken to be an unfrankable distribution to the extent there is an excess under subsection(2) for the *share or *nonshare equity interest on which the dividend or nonshare dividend is paid.

(2)There is an excess if the purchase price for the *share or *nonshare equity interest worked out under subsection 1905(4) is more than what would be the market value (as normally understood) of the share or interest at the time of the buyback if the buyback did not occur and was never proposed to occur.

190150 Extended time for listed companies to give distribution statement

(1)Subsection(2) allows a companyto give a *distribution statement for a *frankable distribution at a later time than that set out in subsection 20275(2) of this Act.

(2)The statement must be given before the end of 7 days after the distribution is made if:

(a)the distribution is a *dividend or *nonshare dividend the company is taken by section1905 to pay in relation to a *share or *nonshare equity interest under an *offmarket buyback; and

(b)the shares or interests are listed for quotation in the official list of an *approved stock exchange just before the buyback.

190155 Additional franking debit for certain offmarket buybacks

Franking debit arises for certain offmarket buybacks

(1)A *franking debit arises in the*franking account of acompany conducting an *offmarket buyback if:

(a)just before the buyback, one or more *foreign residents are *members or *equity holders in the company; and

(b)a *dividend or *nonshare dividend taken by section1905 to be paidis a *franked distribution to any extent.

Amount of the debit

(2)The amount of the debit is worked out using the formula:

where:

foreign interests means shares or nonshare equity interests in the company that:

(a)are held, just before the buyback, by *foreign residents; and

(b)are of the same kind as those bought back; and

(c)are not bought back.

*franking credits allocated means the sum of the *franking credits allocated to all the *franked distributions for the *shares and *nonshare equity interests bought back.

total interests means shares or nonshare equity interests in the company just before the buyback of the same kind as those bought back (and including those that are bought back).

weighted WHT rate means the weighted average of the rates set out in subsection(3) for the foreign interests.

(3)The rate for a foreign interest is:

(a)the rate set out in paragraph 7(a) of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974; or

(b)if subsection(4) applies to the foreign interest—the rate of withholding tax applying to dividends under the relevant double tax agreement.

(4)This subsection applies to a foreign interest if:

(a)according to the register of the company’s members just before the buyback, the foreign resident holding the foreign interest has an address in a country; and

(b)Australia has a double tax agreement (within the meaning of PartX of the Income Tax Assessment Act 1936) with the country.

When the debit arises

(5)The debit arises on the day of the buyback.

Subdivision190D—Onmarket buybacks

Table of sections

General rule

190205No dividend or nonshare dividend taken to be paid

190210Meaning of onmarket buyback

Consideration received by members and equity holders

190215Consideration received

Rules for buying companies

190220Buyback is tax neutral

190225Franking debit for certain onmarket buybacks

General rule

190205 No dividend or nonshare dividend taken to be paid

(1)No part of the purchase priceworked out under subsection(2)in relation to an *onmarket buyback is taken to be a *dividend or *nonshare dividend.

Purchase price

(2)The purchase price for a *share or *nonshare equity interest under an *onmarket buyback is the sum of:

(a)all amounts of money the *member or *equity holder is entitled to receive in respect of the buyback of the share or interest; and

(b)the *market value at the time of the buyback of all property (other than money) the member or equity holder is entitled to receive in respect of the buyback of the share or interest.

190210 Meaning of onmarket buyback

A purchase by a company of a *share or *nonshare equity interest in itself from a *member or *equity holder in the company is an onmarket buyback if:

(a)the share or interest is listed for quotation in the official list of an *approved stock exchange; and

(b)the buyback is made in the ordinary course of trading on the stock exchange.

Note:For the meaing of offmarket buyback, see section19010.

Consideration received by members and equity holders

190215 Consideration received

(1)In working out, in respect of an *onmarket buyback, whether a *member or *equity holder:

(a)makes a *capital gain or *capital loss; or

(b)has an amount included in assessable income under a provision of this Act other than Parts31 and 33 (about CGT); or

(c)is allowed a deduction;

the *member or *equity holder is taken to have received, or to be entitled to receive, the purchase priceworked out under subsection 190205(2) as consideration in respect of the sale of the *share or *nonshare equity interest.

Rules for buying companies