Taxation of share buy-backs | What you need to know

On 16 February 2023 the Federal Government introduced Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 (Bill) into Parliament which seeks to enact various measures announced in the last Federal Budget impacting capital management strategies for listed public companies going forward. Of particular note, the Bill seeks to treat off-market share buy-backs in the same way as on-market share buy-backs following concerns raised by Treasury and the ATO that the difference in tax treatment was being exploited to stream and maximise franking offset benefits at the expense of Federal Government revenue.

David Ocello, Partner, Tax at BDO, offers a quick rundown for those not well versed in the taxation of share buy-backs.

“With on-market share buy-backs the entire buy-back price is considered capital proceeds for the disposal of a share. Importantly, the company may be required to debit their franking account as if the buy-back had been conducted off-market. From the shareholder’s perspective, typically there is a capital gain or loss for the share disposal.” Mr Ocello states.

With off-market share buy-backs, the buy-back price comprises a mix of dividend and capital proceeds for the disposal of a share. “From the shareholder’s perspective, they will typically receive a franked dividend and otherwise make a smaller capital gain or a larger capital loss” Says Mr Ocello”.

Mr Ocello continues, “for certain low tax rate investors (e.g. superannuation funds, charities, retirees and low-tax rate individuals), accessing off-market share buy-backs has generally been tax effective. While the buy-back price in an off-market buy-back is generally less than an on-market buy-back, the refundable nature of the franking offset is valued as additional proceeds thereby bridging the gap.” As such, participation in off-market share buy-backs is an attractive investment decision for such investors and an efficient capital management strategy.

Given on-market buy-backs do not attract franked dividends, yet result in penalty franking debits to the company buying back its shares, the Government has messaged this change as “improving the integrity of the tax system” by seeking to align the off-market buy-back treatment with the on-market treatment.

Mr Ocello concludes, “going forward, listed public companies will need to carefully manage their capital management strategies and consider seeking tax advice well in advance of announcing their plans. In particular, listed public companies with limited ability to generate franking offsets (e.g. companies with foreign operations or tax losses) appear to be an innocent victim of the new measures as the franking debit is likely to trigger a franking deficit tax liability thereby further increasing the effective tax rate of returns received by investors in such companies.”