Published on 01 Jun 20
by "AUSTRALIAN TAX FORUM" JOURNAL ARTICLE
Tax-driven Off-Market Buybacks (TOMBs) have been used by large Australian companies to distribute cash and stream franking (tax) credits to low-tax-rate shareholders. While small in number, the amounts are significant, involving an estimated cost to government tax revenue in 2018 of around $2 billion. This paper reviews the current and historical evolution of the regulation and taxation of TOMBs and argues that there are fundamental problems with corporate use of TOMBs. These include inequitable treatment of shareholders, government tax revenue costs, inconsistency with good principles of taxation, arbitrary tax determinations and practices which are difficult to justify. Since corporates can distribute cash to shareholders using other, quite standard, capital management techniques, we argue that a social cost-benefit analysis leads to the conclusion that TOMBs should be prohibited.
Christine works for Department of Banking and Finance, Monash Business School, Monash University.
Kevin is a Professor of Finance, University of Melbourne, Research Director, Australian Centre for Financial Studies and Professor of Finance, Monash University.
1 July 2016