IPA calls for off-market buy-back review

“Off-market share buy-backs are different to on-market shares bought directly through the ASX. They comprise of a capital and dividend component and are offered to all shareholders on an opt-in basis. If the shares were sold on-market there would not be any dividend component and the proceeds would be generally capital gains or losses,” IPA chief executive officer, Andrew Conway said.

“In this difficult, fiscal deficit environment that Australia finds itself in, it’s time to have a look at the off-market share buy-back scheme loophole that continues to reduce the Commonwealth revenue line.”

According to the IPA, those on higher marginal tax rates receiving a dividend have to pay “top-up” tax and are, therefore, much less likely to participate in off-market share buy-back schemes.

“This creates an inequitable distribution of franking credits than would ordinarily be the case had the company paid the dividend equally amongst all shareholders. Off-market buybacks are mostly attractive to nil rate or low tax-paying shareholders,” Mr Conway said.

“For entities that pay no tax and superannuation funds paying no tax or up to 15 per cent tax, share buy-backs can be a genuine benefit as they receive the additional incentive of an imputation rebate directly from the government.”

“The government needs to seriously consider the tax treatment of off-market share buy-backs, for the benefit of all taxpayers,” Mr Conway said.

“While buy-backs may be a useful tool for corporate entities in terms of capital management, they come at a cost to the taxpayer, as Treasury coffers miss out on top-up tax due to the skewed distribution of franking credits.”