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Chapter 20: Preventing double taxation of buy-backs, redemptions and liquidations

A case for reform

The treatment of distributions arising from on-market buy-backs and liquidations is inconsistent with that of dividends and creates the potential for the double taxation of entity income.

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A strategy for reform

To adopt a dividend-consistent treatment for distributions arising in connection with share buy-backs, liquidations and equivalent distributions from other entities, thereby removing the potential for double taxation as well as the need for complex anti-avoidance provisions. The same treatment would apply to trusts and limited partnerships.

Key policy issues

Share buy-backs and equivalent distributions

Liquidations and equivalent distributions

What tax treatment should apply? How should the untaxed profit component be taxed? In what circumstances should dividend or capital gains treatment apply? How should a market value rule apply? What treatment should apply generally? What treatment should apply to interim liquidation distributions? What should be the tax responsibilities of liquidators and receivers?
Option 1
Dividend treatment.

Option 2
Capital gains treatment.

Option 1
As for unfranked profit distributions generally.

Option 2
A different, but parallel, capital gains treatment.

Option
Capital gains treatment would apply to on-market buy-backs. Dividend treatment would otherwise apply.
Option
A market value rule would need to take account of whether a dividend or capital gains treatment applied.
Option
A dividend treatment would apply with a modified slice approach.
Option 1
Apply the profits first rule.

Option 2
Apply the modified slice approach.

Option
Clarify the roles and responsibilities of liquidators and receivers.