The long-anticipated tax legislation impacting off-market share buy-backs and selective share reductions passed the Senate on 16 November 2023 and received Royal Assent on 27 November 2023 as
Treasury Laws Amendment (2023 Measures No. 1) Act 2023.

We previously discussed these measures when they were released as an 
Exposure Draft and as subsequent draft legislation.

Companies must duly consider these changes prior to undertaking such impacted transactions as these rules are complex and could detrimentally impact shareholders from a taxation perspective.

Off-market share buy-back rules for listed public companies

These changes apply retrospectively to buy-backs undertaken by listed public companies that are/were first announced to the market after 7:30pm (AEDT) on 25 October 2022.

The only change to these measures reflected in the final legislation is the start date for selective capital reductions, which was deferred from 25 October 2022 (the initial Budget announcement date) to 18 November 2022 when the Exposure Draft was released.

We outline these measures below.

Off-market buy-back of a share or non-share equity

  • If a listed public company undertakes an off-market buy-back of a share or non-share equity interest, sellers will not be assessed on any part of the purchase price as a dividend, but assessed on the sale as a revenue or capital gain or loss.
  • If a listed public company undertakes an off-market buy-back, a franking debit will arise in the company’s franking account for part of the buy-back price not debited to the company’s share capital account.

Distributions for cancellation of membership interest

  • Distributions by a listed company that is consideration for the cancellation of membership interests in itself as part of a selective reduction of capital will now be unfrankable.
  • 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 may arise in the company’s franking account.

Amount of franking debit to arise

  • In the above scenarios, the amount of the debit is equal to the debit that would have arisen if the distribution were a frankable distribution that was franked at the company’s benchmark franking percentage, or at a franking percentage of 100 per cent if the company doesn’t have a benchmark franking percentage for the franking period.

Frankable distributions arising from capital raisings 

These measures will apply from 28 November 2023, being the day following Royal Assent of the legislation.

These measures have had a long prior history, being initially announced by a previous Government in 2016, with this Government also previously proposing retrospective start dates of 19 December 2016 and 15 September 2022 before settling on the day after Royal Assent.

Briefly, a distribution will be unfrankable if funded by a capital raising if the following conditions are met: 

  1. The distribution is not consistent with an established practice of the entity making distributions of that kind on a regular basis;
  2. There is an issue of equity interests in the entity or another entity (occurring any time before or after the distribution); and
  3. It is reasonable to conclude in the circumstances that: 
    • The principal effect of the issue of any of the equity interests was to directly or indirectly fund a substantial part of the relevant distribution or the relevant part, and
    • Any entity that is issued or facilitated the issue of any of the equity interest did so for the purpose (apart from incidental purpose) of funding a substantial part of the relevant distribution.

The new measures also include the following:

  • Introduction of apportionment rules (e.g. if evidence shows a franked distribution was 40 per cent funded by sources other than capital raising funds, the inability to frank should only apply to the 60 per cent of the franked distribution attributed to the capital raising).
  • Introduction of a “substantial part of the distribution” requirement instead of the “any part” requirement when applying the purpose / principal effect tests.
  • Inclusion of examples in the Explanatory Memorandum indicating that a commercial purpose could be attributed to certain circumstances such as capital raisings to meet APRA requirements, under Dividend Reinvestment Plans and for certain private company restructures to fund the exit of a shareholder.

Please contact your Grant Thornton representative if you wish to discuss these measures further.

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