Off-market share buy-back: Division 16K applies

Does Division 16K of the Income Tax Assessment Act 1936 (ITAA 1936) apply to treat the amount received for shares sold 'off-market' back to the issuing company as an assessable dividend?

Yes. Division 16K of the ITAA 1936 applies to treat the amount received for shares sold off-market back to the issuing company as an assessable dividend.

An Australian resident individual purchased 100 shares in a company that is not listed on a stock exchange for $10,000. The company bought back 90 shares from the shareholder for $10,000. No part of the purchase price was debited against the company's share capital account.

Under section 159GZZZK of the ITAA 1936, where a company buys a share in itself from a shareholder in the company (a share buy-back), the share is not a share that is listed on a stock exchange and the buy-back is not made in the ordinary course of trading on that stock exchange, the buy-back is an off-market purchase.

As the 90 shares sold to the company were not listed on the stock exchange the buy-back by the company is an off-market purchase.

Under paragraph 159GZZZM(a) of the ITAA 1936, the purchase price in respect of a buy-back is, if the seller as a shareholder has received or is entitled to receive an amount or amounts of money as a result of or in respect of the buy-back, that amount or the sum of those amounts.

In this case, the purchase price of the 90 shares bought back by the company was $10,000.

Under subsection 159GZZZP(1) of the ITAA 1936, where a buy-back of a share is an off-market purchase, the difference between the purchase price and the part (if any) of the purchase price which is debited against amounts standing to the credit of the company's share capital account, is a dividend. The dividend is taken to be paid by the company to the seller in the company out of profits derived by the company on the day the buy-back occurs. The dividend is required to be included in the seller's assessable income under section 44 of the ITAA 1936.

As no amount was debited against amounts standing to the credit of the company's share capital account, the full amount of the buy-back purchase price ($10,000) is taken to be a dividend paid by the company to the shareholder.