A share buyback occurs when a company repurchases some of its shares from shareholders. This reduces the number of shares on issue and the company’s net assets. Share buybacks are normally only done if a company thinks its shares are undervalued or the company wants to return excess cash or assets to shareholders.
Share buybacks are regulated by the Corporations Act 2001. The five types of share buybacks are: equal access, on-market, employee share scheme, selective buy-back and minimum holding.
Many businesses find operating through a company structure is attractive as the profits are taxed at a flat rate of 28.5% or 30% and a company can retain the after tax profits to fund business expansion.
When the business owners wish to withdraw some cash from the company a share buyback is often an attractive option. This is because the individual business owner may be entitled to apply the small business CGT concessions on the share buyback.
Per PS LA 2007/9 the ATO requires share buyback proceeds to be allocated between capital and dividend components. If the company has minimal paid up capital, then the share buyback proceeds will be treated as a franked dividend, not capital.
The share buyback process involves lodging Form 280 (Notification of share buy-back details), copies of the shareholder notice of meeting, and related material with ASIC. This normally needs to be done 30 days before the shareholder meeting is held to approve the share buyback. Once the shareholders have approved the transaction, Form 484 is lodged with ASIC to update the company records.