The draft legislation is expected to provide more certainty for companies conducting and shareholders participating in off-market share buy-backs.
The draft legislation effectively removes the arbitrary restriction imposed on the level of discount that listed companies can accept in relation to their buy-backs and should, therefore, allow for more efficient management of capital by many companies.
The benefit of “notional losses” will be removed for buy-backs conducted by listed companies.
The new provisions also provide listed companies with a “safe harbour” for conducting off-market share buy-backs without the complex tax integrity provisions applying to them or their shareholders.
The proposed changes in more detail
The Exposure Draft will make it easier for listed companies to conduct off-market share buy-backs and reflects the Board of Taxation’s recommendations following its comprehensive review of off-market share buy-backs undertaken in 2007/8.
Importantly, the proposed legislation effectively removes the administrative restriction on the maximum level of discount that can be offered in off-market share buy-backs undertaken by listed companies. Currently the cap is imposed by the ATO at 14%.
This is a welcome change and should bring about more appropriate outcomes for off-market share buy-backs conducted by listed companies. Shareholders of listed companies should no longer be required to restrict the price at which they tender their shares under a tender buy-back process, with the consequence that, depending on the components of the buy-back price, the tendered price may be at a discount greater than 14%.
The Exposure Draft also includes some complex provisions which seek to legislate the existing administrative practices of the ATO in respect of the capital / dividend split and franking credit “wastage” as provided in Practice Statement Law Administration PS LA 2007/9. In particular, the Exposure Draft imposes an automatic franking debit for companies with non-resident shareholders in order to remove any potential benefit of non-resident to resident streaming.
The measures should, however, provide more certainty for participants and minimise the overall administrative and compliance costs for off-market share buy-backs conducted by listed companies. Notably, the Exposure Draft provides that listed companies which adopt a specific methodology to determine the capital / dividend split will not be subject to the numerous integrity rules that would otherwise need to be considered.
It is, however, important to note that under the proposed legislation, “notional losses” generated by some shareholders whose acquisition cost is higher than the capital component of the buy-back price (after adjustment for market value uplift) will be denied under the new rules for listed shares sold under an off-market share buy-back.
The denial of such losses will affect some taxpayers. The extent to which it has a practical impact on off-market share buy-backs will depend on the value shareholders attribute to losses under the existing rules and the dividend / capital split adopted for the buy-back. Certain groups of shareholders should, however, remain attracted to off-market share buy-backs notwithstanding the denial of those losses.
How Mallesons can assist
Please do not hesitate to contact us should you wish to discuss how the draft legislation may impact you or your company. We are intending to make a submission on the Exposure Draft (submissions are due by 2 December 2011) and we would be happy to incorporate any comments or concerns that you may have.