Taxation Law: Share Buy-back Process and FBT Calculations

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TAXATION LAW
ANSWER – 1: PRINCIPLES AND CONCEPTS
Share Buy-back Process
Tranche is a French word and denotes a slice or portion. When implied into the
investment world, it implies that a security/stock has been split up in small portions and
sold to the company/investor. In this case study of Simon Krupcheck1, the banks, to
whom Simon sold-back the shares had started the buy-back process by buying back
some of their own shares. When Simon sold back the shares to the bank, in tranches, the
bank immediately cancels the shares, as it cannot be an investor on its own behalf.
Share Buy-back Payments
As soon as the first tranche is received by the bank, it makes payment to Simon by
splitting it into two components2: (a) the capital component and (b) the dividend
component. The amount debited to the bank’s share capital account will denote the
capital component of the tranche and the balance of the payment will be treated as the
dividend component and will be franked.
Tax Treatment
After the split into capital and dividend components by the bank, the Australian
Taxation Office (ATO) starts investigating the implications of anti-avoidance and the
integrity measures as per the applicable income tax laws3, especially under TD 2004/22,
PS LA 2007/9 and subsection 159GZZZQ(2) of the Income Tax Assessment Act, 1936.
The purpose is to ensure that neither the seller nor the buyer take any inappropriate tax
benefit from the buy-back. Hence, ATO’s primary concern is the distribution of the
allocated payment between the capital and dividend components.
Tax Implications
1 S. Barkoczy, Core tax legislation and study guide (North Ryde, NSW: CCH Australia Limited, 2011),
162.
2 S. Barkoczy, Foundations of Taxation Law (5th ed.; North Ryde, NSW: CCH Australia Limited, 2013),
261.
3 S. Barkoczy et al, Australian tax casebook (10th ed.; North Ryde, NSW: CCH Australia Limited, 2010),
81.

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Tax liability of Simon will be determined by the bank’s splitting of the payment.
However, while making the payment, the bank has to consider that since the tranche
transactions are not being routed through the Market/Exchange and is being conducted
as a direct buyback from the shareholder (known as an off-market deal) there will be no
Securities Transaction Tax (STT), hence the ATO will apply the Capital Gains rule.
The ATO will bring into effect Tax Determination 2004/224 (TD 2004/22) for
evaluating the market value of the shares transacted. TD 2004/22 has ruled that tax
implication for off-market buy-back of shares, whether the price of the buy-back has
been set through a tender process or not, will be determined by applying subsection
159GZZZQ(2) of the Income Tax Assessment Act, 1936 (ITAA 1936)5.
Subsection 159GZZZQ(2) of ITAA 1936 specifies that tax implication for all off-
market buy-back of all share belonging to listed companies will be based on the market
value of the shares at the time of the buy-back. This will be determined through the
Volume Weighted Average Price (VWAP), on the ASX, of the bank's share over a
period of last five trading days, before the announcement of the buy-back’s first
tranche6.
This is done after adjusting the percentage changes in the S&P/ASX 200 Index, from
the time of trading of the first announcement date (termed as the Opening S&P/ASX
200 Index) to the close of the trading of the S&P/ASX 200 Index, when last transaction
of the buy-back is closed (termed as the Closing S&P/ASX 200 Index)7. The formula
used is:
VWAP over last 5 trading days * (Closing S&P/ASX 200 Index / Opening S&P/ASX 200 Index)
However, for all practical purposes, the ATO cannot fulfil all the Principles and
Concepts of the taxation law, for the implementation of subsection 159GZZZQ(2), until
all the relevant information and surrounding circumstances are known, including the
final buy-back price for evaluating the precise calculation of the tax to be implied.
4 Dr. R. Alexander and H. J. Fogarty, Australian Master Family Law Guide, (3rd ed.; Sydney, NSW: CCH
Australia Limited, 2009), 234.
5 R. Deutsch et al, Australian tax handbook. (Pyrmont, NSW: Thomson Reuters, 2011), 234.
6 L. Nethercott, K. Devos and G. Richardson, Australian taxation study manual: questions and suggested
solutions (20th ed.; Sydney, NSW: CCH Australia Limited, 2010), 360.
7 P. McCouat, Australian Master GST Guide (13th ed.; Sydney, NSW: CCH Australia Limited, 2012),
153.

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Conclusion
In Para 12, which relates to ‘Share Buy-backs’, of the Practice Statement PS LA 2007/9,
the ATO states, and I quote: "...prima facie, the Average Capital Per Share [ACPS]
methodology is the preferred methodology for determining the 'Dividend/Capital Split'
in an off-market share buy-back. In the absence of exceptional circumstances, Average
Capital Per Share will be applied to determine the capital component." Unquote.
On the basis of the above explanations and discussion, it is evident that the ATO has a
relevant case of implying Capital Gains/Loss rules on Simon for the transactions which
were conducted by Simon with various banks for off-market sale of shares8. Since
Simon was using an online software for maintaining all records of his transactions, there
is no doubt that ATO will be able to verify all the facts from the data available on the
online software system. In conclusion, Simon will be able to claim the capital loss of
$50,000 from the transactions and report it through his current income statement9.
ANSWER – 2: FBT CALCULATIONS
Understanding Fringe Benefit
As per Fringe Benefits Tax Assessment Act, 1986 (FBTAA, 1986) and Income Tax
Assessment Act, 1997 (ITAA, 1997) ‘Fringe Benefits’ are defined10 as benefits provided
by Contemporary Clothes Co (CCC) to Lucy, as an employee, for providing comfort
and convenience to her for increasing her workplace output. Broadly, the following
benefits, defined under the Act, are covered as facilities that CCC can provide to Lucy
under the FBTAA, 1986:
 Use of a car owned by CCC for personal & official purposes.
 Travel Allowance for Official purposes.
 Loans at interest rates lower than market rates.
8 S. Barkoczy, Foundations of Taxation Law (5th ed.; North Ryde, NSW: CCH Australia Limited, 2013),
261.
9 CCH, Australian Master Tax Guide (Sydney, NSW: CCH Australia Limited, 2012), 207.
10 S. J. Marsden, Australian Master Bookkeepers Guide (3rd ed.; Sydney, NSW: CCH Australia Limited,
2010), 225.