Review of the Taxation Treatment of Off-Market Share Buybacks

Background

On 10 October 2006 the then Government announced that it had asked the Board of Taxation to undertake a review of the taxation treatment of off-market share buybacks, and provide a report to the Treasurer.

The Board appointed a Working Group of its members comprising Brett Heading (Chairman), Eric Mayne, Dick Warburton AO, Keith James and John Emerson to oversee the Board’s review of the taxation treatment of off‑market share buybacks.

In conducting the review, the Board took into account:

• the factors influencing the increasing trend towards the use of off‑market share buybacks;
• the implications of the current taxation treatment of off‑market share buybacks for different types of shareholders;
• the compliance cost impacts of off‑market share buybacks;
• the administrative practices of the Australian Taxation Office relating to off‑market share buybacks;
• the basis for splitting the proceeds of off‑market share buybacks into a dividend component and a capital component;
• the application of the dividend streaming rules to off‑market share buybacks;
• the capital gains tax implications of off‑market share buybacks; and
• any other matters the Board considered to be appropriate.

Discussion Paper

On 16 July 2007, the Board of Taxation released its discussion paper on the Review of the Taxation Treatment of Off-Market Share Buybacks.

The discussion paper provided some background to and the framework under which off‑market share buybacks operate in Australia; outlined the tax treatment of off‑market share buybacks for various types of shareholders; and examined various issues in relation to the terms of reference for the review. The Board conducted targeted consultation with selected stakeholders in developing the discussion paper.

To assist in the Review process, the Board held consultation meetings in Sydney on 26 July 2007 and in Melbourne on 31 July 2007. The purpose of those meetings was to enable interested stakeholders to seek clarification on any aspects of the review’s terms of reference and its scope and to promote stakeholder discussion on the issues raised in the discussion paper and any other relevant issues. A slide pack relevant to the consultation meeting and submissions is available here.

The Board requested written submissions on the Review of the Taxation Treatment of Off-Market Share Buybacks by 24 August 2007. All submissions received were acknowledged.

Board Report

The Board completed its review of the taxation treatment of off-market share buybacks and provided its report to the Treasurer in June 2008. In preparing its report the Board took into account the various submissions to the review, discussions with stakeholders and the consultants’ evaluations.

In reviewing the taxation treatment of off-market share buybacks the Board considered the benefits that off-market buybacks can bring to companies and the operation of the capital markets, as well as the equity concerns that were raised about some shareholders benefiting at the expense of others. The recommendations set out in the Report sought to weigh up these issues while providing a way forward to reduce the heavy compliance and administrative costs that the current taxation treatment can impose on taxpayers and the Australian Taxation Office.

Government Response

On 12 May 2009, the Assistant Treasurer announced the release of the Board of Taxation’s report on its review of the taxation treatment of off-market share buybacks and that the Government will implement the Board’s recommendations. The release of the Board’s report and the Government’s agreement to the recommendations to improve the taxation treatment of off‑market share buybacks was welcomed by the Chairman of the Board of Taxation, Mr Richard Warburton AO.

In December 2013 the Government announced it would no longer proceed with a number of taxation measures that were announced but unenacted. The recommendations announced and endorsed by the Government in this report did not proceed.

Further information on this review can be obtained from the Board of Taxation Secretariat on (02) 6263 4366 or at Taxboard@treasury.gov.au.

Submissions received