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Inserts for
Tax Laws Amendment (2011 Measures
No. 9) Bill 2011: Buy-backs
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EXPOSURE DRAFT
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Commencement information
Column 1
Column 2
Column 3
Provision(s)
Commencement
Date/Details
1. Schedule
Buy-backs
The day this Act receives the Royal Assent.
2.
3.
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Schedule BB—Buy-backs of shares and
non-share equity interests
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Part 1—Amendments
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Income Tax Assessment Act 1936
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1 Division 16K
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Repeal the Division.
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Income Tax Assessment Act 1997
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2 Section 10-5 (table item headed “shares”)
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Omit:
buy-backs ........................................................................... 159GZZZJ to
159GZZZT
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substitute:
buy-backs ........................................................................... Division 190
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3 Section 12-5 (table item headed “shares”)
Omit:
buy-backs .......................................................................... 159GZZZJ to
159GZZZT
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substitute:
buy-backs .......................................................................... Division 190
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4 Subsection 116-10(7) (note 1)
Repeal the note, substitute:
Note 1:
Also, these provisions of the Income Tax Assessment Act 1936 modify
capital proceeds:
(a) section 23B (undistributed FIF attribution income on disposal of
an interest in a FIF);
(b) sections 159GZZZF and 159GZZZG (cancellation of shares in a
holding company);
(c) sections 401, 422, 423 and 461 (CFCs).
5 Subsection 116-10(7) (note 2)
Repeal the note, substitute:
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Note 2:
Also, these provisions of this Act modify capital proceeds:
(a) Subdivision 190-B (off-market buy-backs of shares and
non-share equity interests);
(b) section 230-505 (Division 230 financial arrangement as
consideration for provision or acquisition of a thing).
6 Subsection 116-20(1) (note 3)
Repeal the note, substitute:
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Note 3:
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7 Section 118-1 (note 1)
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Repeal the note, substitute:
Note 1:
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If you dispose of shares or non-share equity interests in an off-market
buy-back, the capital proceeds are worked out under
Subdivision 190-B (which is about the consideration received in
respect of a buy-back).
There are also these exemptions in the Income Tax Assessment Act
1936:

section 23AH (about foreign branch gains and losses of
companies);

section 24B (about External Territories);

section 26BC (about securities lending arrangements);

section 121AS (about demutualisation of insurance
companies);

sections 121EL, 121ELA and 121ELB (about offshore
banking units);

section 408 (about calculating the attributable income of a
CFC).
8 Section 118-1 (after note 2)
Insert:
Note 2A:
There are also exemptions in Subdivisions 190-C and 190-D (about
share and non-share equity buy-backs).
9 Paragraph 118-20(1B)(a)
Repeal the paragraph, substitute:
(a) an amount that is taken to be a *dividend or *non-share
dividend by section 190-5 (which relates to *off-market
buy-backs of *shares and *non-share equity interests); or
10 Subsection 125-70(4)
Repeal the subsection, substitute:
Exception: off-market buy-backs
(4) An *off-market buy-back is not a *demerger.
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11 After Division 180
Insert:
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Division 190—Buy-backs of shares and non-share equity
interests
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Table of Subdivisions
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Guide to Division 190
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190-A
Off-market buy-backs: main rules
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190-B
Off-market buy-backs: consideration received by members
and equity holders
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190-C
Off-market buy-backs: rules for buying companies
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190-D
On-market buy-backs
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Guide to Division 190
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190-1 What this Division is about
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This Division sets out the taxation consequences arising from
buy-backs of shares and non-share equity interests.
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For an off-market buy-back, this Division tells you:
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(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.
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For an on-market buy-back, 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 buy-back.
There are modifications of the imputation system rules in some
circumstances.
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Subdivision 190-A—Off-market buy-backs: main rules
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Table of sections
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Operative provisions
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190-5
190-10
190-15
190-20
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Part of purchase price is a dividend or non-share dividend
Meaning of off-market buy-back
Method for determining capital/dividend split
Certain integrity rules excluded for listed companies using approved split
method
Operative provisions
190-5 Part of purchase price is a dividend or non-share dividend
When dividend or non-share dividend taken to be paid
(1) A *dividend or *non-share dividend (as the case requires) is taken
to be paid by a company conducting an *off-market buy-back of a
*share or *non-share 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 in subsection (5); and
(b) the capital component meets the requirement in
section 190-15.
Amount etc. of dividend or non-share dividend
(2) The amount of the *dividend or *non-share dividend is the amount
of the difference mentioned in paragraph (1)(a).
(3) The *dividend or *non-share dividend is taken to be paid on the day
of the buy-back, out of profits derived by the company.
Purchase price
(4) The purchase price for a *share or *non-share equity interest under
an *off-market buy-back is the sum of:
(a) all amounts of money the *member or *equity holder is
entitled to receive in respect of the buy-back of the share or
interest; and
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(b) the *market value at the time of the buy-back of all property
(other than money) the member or equity holder is entitled to
receive in respect of the buy-back of the share or interest.
Capital component
(5) The capital component for a *share or *non-share 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 *non-share
capital account.
190-10 Meaning of off-market buy-back
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A purchase by a company of a *share or *non-share equity interest
in itself from a *member or *equity holder in the company is an
off-market buy-back unless:
(a) the share or interest is listed for quotation in the official list
of an *approved stock exchange; and
(b) the buy-back is made in the ordinary course of trading on the
stock exchange.
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Note:
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For the meaing of on-market buy-back, see section 190-210.
190-15 Method for determining capital/dividend split
(1) The capital component mentioned in subsection 190-5(5) for a
*share or *non-share equity interest under an *off-market buy-back
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 buy-back; or
(b) if the Commissioner of Taxation approves another
calculation method for the buy-back—the amount worked out
using that other method just before the buy-back.
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.
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Average capital per non-share equity interest
(3) For a *non-share equity interest, the average capital amount is
worked out by:
(a) summing the amounts held in the company’s *non-share
capital account; and
(b) dividing the result by the number of non-share equity
interests *on issue.
190-20 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 *off-market buy-back if:
(a) the *shares or *non-share equity interests in the company
conducting the buy-back are listed for quotation in the
official list of an *approved stock exchange just before the
buy-back; and
(b) the capital components mentioned in subsection 190-5(5) for
each of the shares or interests bought back equals the average
capital amount worked out under subsection 190-15(2) or (3)
(as the case requires).
(2) The provisions are as follows:
(a) section 204-30 of this Act;
(b) section 45A of the Income Tax Assessment Act 1936;
(c) section 45B of the Income Tax Assessment Act 1936;
(d) section 177EA of the Income Tax Assessment Act 1936.
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Subdivision 190-B—Off-market buy-backs: consideration
received by members and equity holders
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Table of sections
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Basic rule
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190-70
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General modification
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190-75
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Further modification for listed companies
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190-80
Consideration received
Consideration increase—dividend or non-share dividend not fully taxed
Consideration increase—no notional losses on shares or interests in listed
companies
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Further modifications for unlisted companies
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190-85
190-90
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Consideration increase—market value substitution for unlisted companies
Consideration increase—no losses if unlisted company franks distribution
to corporate tax entity
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Basic rule
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190-70 Consideration received
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(1) In working out, in respect of an *off-market buy-back, 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 Parts 3-1 and 3-3 (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 *non-share equity interest, the amount (the consideration
amount) mentioned in subsection (2).
(2) The consideration amount for a *share or *non-share equity interest
is:
(a) if a *dividend or *non-share dividend is taken by
section 190-5 to be paid—the capital component mentioned
in subsection 190-5(5) for the share or interest (as increased,
if required, under sections 190-75, 190-80, 190-85 and
190-90); or
(b) if paragraph (a) does not apply—the purchase price worked
out under subsection 190-5(4) for the share or interest (as
increased, if required, under section 190-85).
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General modification
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190-75 Consideration increase—dividend or non-share dividend not
fully taxed
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(1) The consideration amount mentioned in paragraph 190-70(2)(a) is
increased if a part (the untaxed amount) of the *dividend or
*non-share dividend that is taken by section 190-5 to be paid:
(a) is not included in the assessable income of the *member or
*equity holder; and
(b) is either:
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(i) debited against a *share capital account, *non-share
capital account, or asset revaluation reserve; or
(ii) attributable (directly or indirectly) to amounts
transferred from a share capital account, non-share
capital account, or an asset revaluation reserve.
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(2) The consideration amount is increased by the untaxed amount.
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(3) For the purposes of paragraph (1)(a), disregard the following
provisions:
(a) section 802-15 of this Act;
(b) section 128D of the Income Tax Assessment Act 1936.
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(4) For the purposes of paragraph (1)(b), assume the *dividend or
*non-share dividend to have been debited against the account or
reserves against which the purchase price worked out under
subsection 190-5(4) was debited, and to the same extent.
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Further modification for listed companies
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190-80 Consideration increase—no notional losses on shares or
interests in listed companies
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(1) The consideration amount mentioned in paragraph 190-70(2)(a) is
increased if:
(a) the *shares or *non-share equity interests in the company
conducting the *off-market buy-back are listed for quotation
in the official list of an *approved stock exchange just before
the buy-back; and
(b) apart from this section (but taking account of
section 190-75), a loss would be *realised for income tax
purposes for the *member or *equity holder in respect of the
buy-back.
(2) The consideration amount is increased by the lesser of:
(a) the amount of the loss; and
(b) the amount that is taken by section 190-5 to be a *dividend or
*non-share dividend.
Example: Shareholder S receives a purchase price of $80 in respect of an
off-market buy-back 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 (section 190-5).
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.
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Apart from section 190-80, S would be taken to have received the $30
capital component in respect of the buy-back. However, this would
give S a capital loss of $70. Section 190-80 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 section 190-80
is $20.
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Further modifications for unlisted companies
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190-85 Consideration increase—market value substitution for
unlisted companies
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(1) The consideration amount mentioned in paragraph 190-70(2)(a) or
(b) (as the case requires) is increased if:
(a) the *shares or *non-share equity interests in the company
conducting the *off-market buy-back are not listed for
quotation in the official list of an *approved stock exchange
just before the buy-back; and
(b) the amount that would have been the market value of the
share or interest at the time of the buy-back if the buy-back
did not occur and was never proposed to occur exceeds the
purchase price for the share or interest worked out under
subsection 190-5(4).
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(2) The consideration amount is increased by the amount of the excess.
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190-90 Consideration increase—no losses if unlisted company franks
distribution to corporate tax entity
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(1) The consideration amount mentioned in paragraph 190-70(2)(a) is
increased if:
(a) the *shares or *non-share equity interests in the company
conducting the *off-market buy-back are not listed for
quotation in the official list of an *approved stock exchange
just before the buy-back; and
(b) apart from this section (but taking account of sections 190-75
and 190-85), a loss would be *realised for income tax
purposes for a *member or *equity holder in respect of the
buy-back; and
(c) the member or equity holder is a *corporate tax entity that is
entitled to a *tax offset under Division 207 in respect of the
*dividend or *non-share dividend taken by section 190-5 to
be paid.
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(2) The consideration amount is increased by the lesser of:
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(a) the amount of the loss mentioned in paragraph (1)(b); and
(b) the amount worked out as follows:
Amount of *tax offset 
100%
 *Corporate tax rate
*Corporate tax rate
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Subdivision 190-C—Off-market buy-backs: rules for buying
companies
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Table of sections
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General rule
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190-140
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Imputation system rules
Buy-back is tax neutral
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190-145
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190-150
190-155
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General rule
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190-140 Buy-back is tax neutral
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Distribution unfrankable where off-market purchase price is more than
market value
Extended time for listed companies to give distribution statement
Additional franking debit for certain off-market buy-backs
In working out, in respect of an *off-market buy-back, whether the
company conducting the buy-back:
(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 Parts 3-1 and 3-3 (about
CGT); or
(c) is allowed a deduction;
the buy-back, and any subsequent cancellation of the *share or
*non-share equity interest, are disregarded.
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Imputation system rules
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190-145 Distribution unfrankable where off-market purchase price
is more than market value
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(1) A part of a *dividend or *non-share dividend a company is taken by
section 190-5 to pay is taken to be an unfrankable distribution to
the extent there is an excess under subsection (2) for the *share or
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*non-share
equity interest on which the dividend or non-share
dividend is paid.
(2) There is an excess if the purchase price for the *share or *non-share
equity interest worked out under subsection 190-5(4) is more than
what would be the market value (as normally understood) of the
share or interest at the time of the buy-back if the buy-back did not
occur and was never proposed to occur.
190-150 Extended time for listed companies to give distribution
statement
(1) Subsection (2) allows a company to give a *distribution statement
for a *frankable distribution at a later time than that set out in
subsection 202-75(2) of this Act.
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(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 *non-share dividend the
company is taken by section 190-5 to pay in relation to a
*share or *non-share equity interest under an *off-market
buy-back; and
(b) the shares or interests are listed for quotation in the official
list of an *approved stock exchange just before the buy-back.
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190-155 Additional franking debit for certain off-market buy-backs
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Franking debit arises for certain off-market buy-backs
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(1) A *franking debit arises in the *franking account of a company
conducting an *off-market buy-back if:
(a) just before the buy-back, one or more *foreign residents are
*members or *equity holders in the company; and
(b) a *dividend or *non-share dividend taken by section 190-5 to
be paid is a *franked distribution to any extent.
Amount of the debit
(2) The amount of the debit is worked out using the formula:
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Weighted
*Corporate
Number of
 WHT
tax rate
*Franking credits
foreign interests
rate


allocated
Number of
Corporate tax rate
total interests
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where:
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foreign interests means shares or non-share equity interests in the
company that:
(a) are held, just before the buy-back, by *foreign residents; and
(b) are of the same kind as those bought back; and
(c) are not bought back.
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*franking
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credits allocated means the sum of the *franking credits
allocated to all the *franked distributions for the *shares and
*non-share equity interests bought back.
total interests means shares or non-share equity interests in the
company just before the buy-back 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 buy-back, 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
Part X of the Income Tax Assessment Act 1936) with the
country.
When the debit arises
(5) The debit arises on the day of the buy-back.
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1
Subdivision 190-D—On-market buy-backs
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Table of sections
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General rule
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190-205
190-210
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Consideration received by members and equity holders
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190-215
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Rules for buying companies
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190-220
190-225
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General rule
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190-205 No dividend or non-share dividend taken to be paid
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No dividend or non-share dividend taken to be paid
Meaning of on-market buy-back
Consideration received
Buy-back is tax neutral
Franking debit for certain on-market buy-backs
(1) No part of the purchase price worked out under subsection (2) in
relation to an *on-market buy-back is taken to be a *dividend or
*non-share dividend.
Purchase price
(2) The purchase price for a *share or *non-share equity interest under
an *on-market buy-back is the sum of:
(a) all amounts of money the *member or *equity holder is
entitled to receive in respect of the buy-back of the share or
interest; and
(b) the *market value at the time of the buy-back of all property
(other than money) the member or equity holder is entitled to
receive in respect of the buy-back of the share or interest.
190-210 Meaning of on-market buy-back
A purchase by a company of a *share or *non-share equity interest
in itself from a *member or *equity holder in the company is an
on-market buy-back if:
(a) the share or interest is listed for quotation in the official list
of an *approved stock exchange; and
(b) the buy-back is made in the ordinary course of trading on the
stock exchange.
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Note:
For the meaing of off-market buy-back, see section 190-10.
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Consideration received by members and equity holders
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190-215 Consideration received
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(1) In working out, in respect of an *on-market buy-back, 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 Parts 3-1 and 3-3 (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 price worked out under subsection
190-205(2) as consideration in respect of the sale of the *share or
*non-share equity interest.
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Rules for buying companies
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190-220 Buy-back is tax neutral
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In working out, in respect of an *on-market buy-back, whether the
company conducting the buy-back:
(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 Parts 3-1 and 3-3 (about
CGT); or
(c) is allowed a deduction;
the buy-back, and any subsequent cancellation of the *share or
*non-share equity interest, are disregarded.
190-225 Franking debit for certain on-market buy-backs
Franking debit arises for certain on-market buy-backs
(1) A *franking debit arises in the *franking account of a company
conducting an *on-market buy-back if a franking debit would have
arisen if:
(a) the purchase of the interest were a *frankable distribution
equal to the one that would have arisen if the buy-back had
been an *off-market buy-back; and
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(b) the distribution were *franked at the entity’s *benchmark
franking percentage for the *franking period in which the
purchase was made or, if the entity does not have a
benchmark franking percentage for the period, at a *franking
percentage of 100%.
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Amount of the debit
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(2) The amount of the debit is the amount of the debit that would have
arisen.
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When the debit arises
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(3) The debit arises on the day of the buy-back.
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12 Paragraph 202-45(c)
Repeal the paragraph, substitute:
(c) an amount that is taken to be an unfrankable distribution
under section 190-145;
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13 At the end of subsection 202-75(2)
Add:
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Note:
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14 Subsection 205-30(1) (after table item 7B)
Insert:
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22
There is a longer period for distribution statements for distributions
taken to be made by listed companies under off-market buy-backs: see
section 190-150.
a *franking debit arises
under subsection 190-155(1)
because a company
conducting an *off-market
buy-back has foreign
resident *members or
*equity holders
the amount of the debit
specified in subsection
190-155(2)
at the time
provided by
subsection
190-155(5)
15 Subsection 205-30(1) (table item 9)
Repeal the item, substitute:
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9
a *franking debit arises
under subsection 190-225(1)
where a company conducts
an *on-market buy-back
the amount of the debit
specified in subsection
190-225(2)
at the time
provided by
subsection
190-225(3)
16
Error! Unknown document property name.
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2
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16 Paragraph 230-515(2)(d)
Repeal the paragraph, substitute:
(d) Division 190 of this Act;
4
17 Section 725-230 (heading)
5
Repeal the heading, substitute:
6
725-230 Off-market buy-backs by unlisted companies
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18 Paragraph 725-230(1)(c)
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10
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12
13
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24
25
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Repeal the paragraph, substitute:
(c) section 190-85 treats you as having received the down
interest’s market value worked out as if the buy-back had not
occurred and was never proposed to occur.
19 Subsection 725-230(2) (note)
Repeal the note, substitute:
Note:
The down interest is not dealt with here because it is already dealt
with in Division 190.
20 After paragraph 975-300(3)(a)
Insert:
(aa) paragraph 190-75(1)(b); and
21 Paragraph 975-300(3)(d)
Repeal the paragraph, substitute:
(d) subsection 44(1B) of the Income Tax Assessment Act 1936.
22 Paragraph 975-300(3)(f)
Repeal the paragraph.
23 Subsection 995-1(1) (definition of “off-market buy-back”)
Repeal the definition, substitute:
off-market buy-back has the meaning given by section 190-10.
24 Subsection 995-1(1) (definition of “off-market purchase”)
Repeal the definition.
25 Subsection 995-1(1) (definition of “on-market buy-back”)
Repeal the definition, substitute:
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Error! Unknown document property name.
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on-market buy-back has the meaning given by section 190-210.
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Part 2—Application
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26 Application
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The amendments made by this Schedule apply to off-market buy-backs
and on-market buy-backs announced by the company conducting the
buy-back after the day the Tax Laws Amendment (2011 Measures No.9)
Act 2011 receives the Royal Assent.
18