Law

Off-Market Buy Back

S 159GZZZN subsection C shows the effect of an off-market buy back on the company, as such the purchase price is considered to be a dividend under this Act. The difference between the purchase price and the part if any if the purchase price in respect to the buy-back of the share or non-share equity interest which is debited against amounts standing to the credit of the company’s share capital account if it is a share that is brought back or the company’s share capital account or non-share capital account if it is a non-share equity interest that is brought back. It is taken to be a dividend paid by the company to the seller as a shareholder in the company and out of profits derived by the company and on the day the buy-back occurs. There are also advisory fees that apply in 177EA debit.

Average Capital Per Share

The Average Capital Per Share method forms the capital component for each of the shares bought back. It is also important for the company to undertake the buy-back for market value consideration.  A failure to do so could result in additional amounts being assessable to the exiting shareholder (potentially in the form of an unfranked dividend).

Whereas, if the dividend is included in any seller’s assessable income of any year of income, it is not taken into account to that extent under section 118-20 97. Any remainder of its purchase price is not taken to be a dividend. Whether an amount is allowable as a deduction to the seller or whether the seller makes a capital gain or capital loss (in this case) in respect to the buy-back, the seller is taken to have received or to be entitled to receive, as consideration in respect of the sale of the share, an amount equal to the purchase price in respect to the buy-back.

Market Value

The capital proceeds are taken to be what the share’s market value would have been if the buy-back hadn’t occurred and was never proposed, less the amount of any dividend paid under the buy-back – if both of the following conditions apply: As the shares are not bought back by the company in the ordinary course of business of a stock exchange – and their buy-back price is less than what the market value of the share would have been if the buy-back hadn’t occurred and was never proposed. This could result in CGT G1.

As the purchase price is less than the market value of the share at the time of the buy-back, then subject to subsection 3 in making determinations mentioned in paragraphs 1a and b, the amount of consideration that the seller is taken to have received or to be entitled to receive in respect of the sale of the share is equal to the market value mentioned in paragraph (b) subsection. This seller incurs a capital loss or an increased capital loss and is allowable as a deduction to the seller under a provision of a Part of this Act.

On-Market Buy Back

Whereas, an on-market buyback debited to the share capital account have become more popular in recent times for capital management, 45A is not applicable as the company would have no control over which shareholders shares it buys. Under a share buy-back, the proceeds received by a shareholder are split into a dividend component; and a capital component. Specifically, an amount debited to the company’s share capital account will be the capital component of the buy-back proceeds, with the balance of the proceeds being treated as a dividend (which is frankable).

ATO’s Focus

The ATO’s particular focus is on whether the split results in an inappropriate streaming of capital or dividend amounts to the participating shareholders. For example, a split that has too low a capital component may stream dividends (and franking credits) and artificially increase capital losses of the participating shareholders. Conversely, a capital component that is too high may stream capital benefits (rather than dividends) to the participating shareholders.The Ralph review tried to address bias against on-market buybacks by deemed capital loss for a company based on franking debit but not adopted. Capital streaming provisions may apply (which cancel the capital benefit and treat the amount as a dividend); cancellation of franking credits; franking benefits may not be able to be streamed; or the general value shifting provisions may apply.

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