Submission on exposure draft for taxation of share buy-backs

On 16 December 2011, the Institute lodged a submission on the exposure draft legislation (ED) and explanatory material for the taxation of share buy-backs.

The proposed changes are to implement recommendations made by the Board of Taxation to improve the taxation arrangements relating to the buy-back of shares and non share equity interests, with effect from the date of Royal Assent of the amending legislation.

The changes were announced as part of the 2009-10 Budget.

The submission raises concerns under the following topics:

• Part of the purchase price a dividend (section 190-5) - The Institute recommends that a note to proposed section 190-5 be included to explain its relationship to section 190-15, as well as providing additional explanation in the ED 
• Interaction with definition of a dividend - It is unclear how subsection 190-5(1) interacts with the definition of dividend in section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) 
• Redeemable preference shares (and debit to liability account) 
• Commissioner’s approval for alternative methods (section 190-15) – The Institute’s major concern with the current drafting here is that it is contrary to the Review of Discretions in the Income Tax Law undertaken during 2007 and goes against self-assessment more generally 
• More than one class of shares (and the average capital method) 
• No safe harbour for non-listed entities (section 190-20 only applies for listed companies) - Although recommended by the Board of Taxation, the Institute remains concerned that the integrity provisions will continue to apply to off-market share buy-backs conducted by unlisted companies even if the average capital per share method is used 
• Listed entities and section 190-20 - The ED is silent when it comes to listed companies that may also have unlisted shares. 
• Consideration increase – section 190-75(1) – The Institute recommends that this section should be re-considered and then clarified 
• Denial of notional losses - The Institute does not support the policy decision to deny notional losses to shareholders who participate in listed company off-market share buybacks for the reasons given in previous submissions 
• Buy-back is tax neutral (section 190-140) - Clarification around section 190-140 in relation to expenditure other than the actual buy-back amount that has been incurred in respect of the buy-back itself is required 
• Additional franking debit - The Institute recommends that the legislation should specifically state that section 177EA of the ITAA 1936 will not apply to the extent that a debit is made under proposed section 190-155.

Further details are given in the submission.

Article last Updated 23 April 2012