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Income tax and capital gains tax (CGT) : share buy-backs

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ir. PRESSll TREASURER RELEASE! .vEMBARGOSTATEMENT BY THE TREASURER, THE HON P J KEATING, MP INCOME TAX AND CAPITAL GAINS TAX (CGT) : SHARE BUY-BACKSAfter the proclamation of various amendments to the Commonwealth and State companies codes, companies will be able to "buy-back" shares in themselves. A number of amendments to the taxation law are necessary to deal specifically with these company share buy-back arrangements.Under the existing law, any payment made by a company to its shareholders will, broadly speaking, be treated as a dividend for tax purposes, unless the payment is made from the company’s paid-up capital or share premium account. Therefore, on a share buy-back, any component of the amount paid for a shareholder’s shares that is drawn from the company's distributable profits would be a dividend to the shareholder.It has been decided that this treatment is appropriate for most types of share buy-back arrangements. However, an exception is warranted where the buy-back takes place "on-market", that is, a company purchases shares in itself through the stock exchange in circumstances where the shareholder is unaware that the company is the purchaser of his or her shares. The taxation treatment applicable to the sale of shares by the shareholders in these "on-market" buy-backs should be the same as if the sale had been/to a ,third party. Therefore, an amendment to the existing law is necessary to ensure that no part of the amount paid to the shareholder is treated as a dividend. The full amount paid will, instead, be taken to be the disposal proceeds of the sale of the shares and, on that basis, any income tax or CGT consequences of the sale will be determined. ‘

2 .

An amendment to the CGT provisions is also necessary in

respect of "off-market" buy-backs where part of the payment received for the sale of shares is paid from the company’s

distributable profits. Depending on the date of acquisition and cost-base of the "bought-back" shares, a taxable capital gain or allowable capital loss may arise to the shareholder on their disposal. The amendment proposed will ensure that, in calculating that gain or loss, the

disposal proceeds on the sale of the shares will not

include any amount that is taxable as a dividend.

Finally, from the company's perspective, two further amendments are proposed. First, the consequences for the company of the buy-back should be "tax-neutral", that is, no gain or loss should arise to the company on the purchase

and cancellation of its own shares. An amendment for both income tax and CGT purposes will therefore be made so that a share buy-back will not be taken to involve the acquisition^nd disposal of an asset.

The other necessary amendment relates to "on-market"

buy-backs partly funded from distributable profits. In

those circumstances, no part of the payment received by the shareholder is to be treated as a dividend. However, for the purposes of the dividend imputation provisions of the taxation law, the company is to be treated as if it had

paid a dividend. Accordingly, the company's franking account will be debited on the same basis as if the amount drawn from the company's distributable profits to finance the share buy-back had been paid as a dividend to



31 October 1989 /


Contact Officers: Amarjit Verick 75 1154(W) 95 7986(H) Jim McMillan 75 1194(W)

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