Off Market Share Buy-Back Exposure Draft Legislation released

8 minute read  21.11.2022 Hamish Wallace, Timothy Lynch, Arabella Tuck

On 17 November 2022, the Government announced exposure draft legislation to enact measures announced in the October Budget to align the tax treatment of on-market and off-market share buy-backs.


Key takeouts


  • The ability of listed companies to release franking credits to shareholders via an off-market buy-back will be significantly affected by the amendments.
  • The new laws, together with the recently released exposure draft legislation dealing with franked distributions funded by capital raisings, will significantly affect a listed company's capital management tools.
  • If passed, the amendments will apply retrospectively to share buy-backs that occur or are announced after Federal Budget Night (7.30pm AEDT on 25 October 2022).

In a surprise announcement, the Federal Government signalled its intention in the October Budget to introduce integrity measures to align the tax treatment of off-market share buy-backs undertaken by listed companies with the treatment of on-market share buy-backs.

On 17 November 2022, the Government released exposure draft legislation to enact these proposed integrity measures. To recap, the Government announcement, see MinterEllison's Federal Budget 2022/23 Highlights.

The current situation

Under the current law, a shareholder in an on-market share buyback (i.e. where a company listed on a prescribed financial market purchases its shares in the ordinary course of trading on that market) will generally be subject to capital gains tax on the difference between the capital proceeds from the sale and the CGT cost base of the shares, where the shares are held on capital account.

Conversely, in an off-market share buy-back, a company will purchase the share directly from the seller and, broadly, the part of the buyback price that is not debited against the company's share capital account (or non-share capital account) is treated as a frankable dividend. The seller is treated as having received an amount equal to the purchase price as consideration for the sale of the shares but if the buy-back is undertaken at a discount (which is often been the case), the purchase price is deemed to have been increased to the market value of the share, determined as if the buy-back had not occurred. The purchase price is then reduced by the amount of any deemed dividend, and may be further reduced for a corporate tax entity by any tax offset available for the franking credit attached to the dividend component of the purchase price.

This difference between the two tax treatments has been viewed as creating an incentive for a listed company with a significant franking credit balance to undertake off-market share buybacks as a way of reducing the cost of the share whilst distributing those credits to its shareholders (which is particularly attractive to shareholders such as superannuation funds which have an effective tax rate of less than 30%).

Amendments to law – tax treatment of off-market share buy-backs

The Government announced its intention to amend the laws as they apply to listed companies by preventing any part of the buy-back consideration as being treated as a dividend. It estimated that the amendments would generate approximately $550 million in revenue over the next four years. The Government is also introducing a further integrity measure which was not flagged in the Budget and which will treat a distribution as unfrankable where it is made by a listed company and is consideration for the cancellation of membership interests in the company as part of a selective capital reduction. This includes, but is not limited to, selective capital reductions under the Corporations Act 2001 (Cth).

In releasing the Exposure Draft, the Assistant Treasurer Stephen Jones in an address to the Institute of Public Accountants stated that the changes are about "system integrity and fairness" but then went on to say (perhaps in response to suggestions that the Labor Party is 'anti-franking credits') that 'franking credits will stay – end of story, full stop'.

The Exposure Draft of Treasury Laws Amendment (Off-Market Share Buy-Backs) Bill 2022 (Bill) amends both the Income Tax Assessment Act 1997 (Cth) (ITAA97) and the Income Tax Assessment Act 1936 (Cth) (ITAA36) by:

  • aligning the tax treatment of off-market share buy-backs undertaken by listed companies with the tax treatment of on-market share buy-backs;
  • inserting a new franking debit provision for off-market buy-backs undertaken by listed public companies; and
  • inserting new provisions in respect of selective share cancellations to ensure these amendments are affective by aligning the income tax treatment across capital management activities for listed public companies.

The amendments will apply from the start of the first quarter after the day the Bill receives Royal Assent and will apply to buy-backs and selective share cancellations undertaken by listed public companies that are first announced to the market after 7.30pm on 25 October 2022 (Budget Time) or that occur (and are either not announced to the market or announced after the buy-back occurs) after Budget Time.

Aligning the tax treatment

According to the Explanatory Materials (EM) accompanying the Bill, the Bill amends the share buy-back provisions in the ITAA36 so that listed companies can no longer use off-market purchases and selective reductions of capital to take advantage of the concessional tax status of their shareholders as part of their capital management activities. It also amends the income tax treatment for selective reductions of capital which may be used to achieve similar outcomes. This applies to both buy-backs of shares and non-share equity interests.

Similar to an on-market share buy-back, the amendments ensure that no part of the purchase price in respect of an off-market buy-back undertaken by a listed company is taken to be a dividend. Sections 159GZZZQ(3) to (9) will no longer apply to adjust the amounts of consideration a seller is taken to have received for an off-market share buy-back as no part of the purchase price will be taken to be a dividend. As a result, the purchase price received by a shareholder who participates in an off-market share buy-back undertaken by a listed public company will give rise to either a capital gain or loss (or a revenue gain or loss if the shares are held on revenue account).

A new franking debit provision

The Bill also inserts a new franking debit provision for off-market buy-backs undertaken by listed public companies so that, as in the case of an on-market share buy-back, the company is required to debit its franking account for the part of the buy-back price not debited to the company's share capital account. The amount of the debit is worked out by assuming that the company was not a listed public company and the purchase was a frankable distribution because the whole or part of the purchase price was not debited to the company's share or non-share capital account. The amount of the debit is equal to that frankable distribution, franked at the company's benchmark franking percentage, or at a franking percentage of 100% if the company does not have a benchmark franking percentage for the franking period.

The Bill also amends the franking debit provision as it applies to the on-market share buy-backs to ensure the amount of the franking debit is determined by assuming the company were not a listed public company.

Selective share cancellations

An additional and surprise measure that was not announced in the Budget is a new category of unfrankable distributions in the ITAA97 for a distribution by a listed public company that is consideration for the cancellation of a membership interest in itself as part of a selective reduction of capital. The EM states that the reference to a 'selective reduction of capital' is intended to be broad and the phrase takes its ordinary meaning, so it includes reductions of capital effected through selective cancellations of non-share equity interests and other reductions of capital that in substance result in a disproportionate cancellation of membership interests.

Additionally, if a listed public company makes a distribution that is consideration for the cancellation of a membership interest in itself, as part of a selective reduction of capital, a franking debit arises in the company's franking account. The amount of the debit is equal to the debit that would have arisen if the company were not a listed public company and the distribution were a frankable distribution (because the whole or part of the purchase price were not debited to the company's share or non-share capital account) that was franked at the company's benchmark franking percentage, or at a franking percentage of 100% if the company does not have a benchmark franking percentage for the franking period.

Imposing the changes

The amendments only apply to listed public companies and the Bill inserts a definition of 'listed public company' in subsection 6(1) of the ITA36, which cross-references the definition of that term in the ITAA97. Interestingly, the definition of 'listed public company' in the ITAA97 means a company that has its shares listed for quotation on an approved stock exchange but excludes from the definition companies that are not widely held i.e. because up to twenty people (that are not companies) have control of 75% or more of the voting power in the company or are entitled to (directly or indirectly) 75% or more of any dividends or distributions of capital of the company. It therefore appears that unlisted public companies and companies that are listed on an approved stock exchange but have a concentrated shareholding will not be impacted by these amendments.

Comments on the Bill are due by 9 December 2022.

Please contact any member of the MinterEllison Tax Team if you would like to discuss the Bill or if you would like any assistance in preparing a submission.

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https://www.minterellison.com/articles/off-market-share-buy-back-exposure-draft-legislation-released