Historically, off-market share buy-backs and share reductions were an effective way for listed public companies to undertake capital management whilst returning franking credits to individual and superannuation fund shareholders in particular.

This capital and franking credit management ability was curtailed by measures announced in the October 2022 Federal Budget designed to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the tax treatment of on-market share buy-backs.

This week Treasury released its Exposure Draft to give effect to these measures.

Summary of the changes

  • Where a listed public company undertakes an off-market buy-back of a share or non-share equity interest, sellers now will not be assessed on any part of the purchase price as a dividend, but rather assessed on the sale as a revenue or capital gain or loss.

  • There will be a new franking debit provision whereby 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. This will fully align with the treatment of on-market buy-backs, and ensures that shareholders will continue to benefit from imputation credits proportionate to their shareholding in the company after the buy-backs.

  • To ensure alignment across the capital management activities of listed public companies, the Bill introduces a new paragraph designed to prevent the selective cancellation of membership interests giving rise to a frankable distribution. Such distributions will now be unfrankable.

  • Where a listed public company makes a distribution as consideration for the cancellation of a membership interest due to a selective reduction of capital, a franking debit arises in the company’s franking account equal to the amount that would have arisen in the case of a frankable distribution.

The measures will apply to buy-backs and selective share reductions announced and undertaken after 7.30pm AEST 25 October 2022.

The Exposure Draft will be open for consultation until 9 December 2022, with responses to be sent to OMSBBpublicconsultation@treasury.gov.au.  

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