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Return of capital and share buy-backs

We pick the mechanism and run the process, so the payment reaches shareholders as capital rather than as a surprise dividend.

Paying money out of a company to the people who own it sounds like a transfer. It is not. Whether the payment is treated as a return of capital or as a dividend decides whether each shareholder pays tax on it this year at their own marginal rate, or reduces the cost base of their shares and pays nothing until they sell. Those are very different outcomes for the people receiving it, and the characterisation does not follow what the board called the payment. It follows how the transaction was structured, approved and documented, which means it is settled before the money moves or not at all.

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Capital, not a dividend

The structure and the documents support the treatment your shareholders were told to expect.

The solvency call supported

Directors make the solvency judgment on a proper basis, because that decision attaches to them personally.

Approvals in the right order

Resolutions, shareholder approval and ASIC notification happen in the sequence the Act requires.

What are the ways to return capital to shareholders?

Three, broadly. An equal capital reduction goes to all shareholders in proportion to their holdings. A selective reduction goes to one shareholder or to some of them, and needs the approval of the shareholders who are not receiving it. A share buy-back has the company purchase and cancel its own shares, which is the usual route when a particular shareholder is leaving. Each carries its own approval requirements under the Corporations Act 2001 (Cth) (the Act) and its own ASIC notification, and all of them require the directors to be satisfied the company can still pay its debts afterwards. Which one fits depends on who is being paid and why.

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What is the difference between a return of capital and a dividend?

A dividend distributes profit and is assessable income for the shareholder, though franking credits may reduce the tax payable. A return of capital gives back money that was contributed rather than earned. It is not assessable when received. It reduces the cost base of the shares, so the tax effect is deferred until the shares are sold. For most shareholders the difference is substantial.

When is a selective reduction used?

When only some shareholders are being paid, most commonly where one is exiting. Because it is not proportional, it needs a special resolution of the shareholders who are not receiving it, and it has to be fair to the shareholders as a whole. That approval requirement is the main practical difference from an equal reduction.

What is the solvency test?

Before a reduction proceeds, the directors must be satisfied the company will still be able to pay its debts as and when they fall due, and pass a resolution saying so. It is a judgment they make personally, and a director who forms it without reasonable grounds can be liable. It is the reason a capital return should involve both legal and accounting input rather than just a board minute.

How does a buy-back work in a private company?

The company agrees a price with the selling shareholder, buys the shares and cancels them. Board approval is always required and shareholder approval often is, depending on the type of buy-back and its size. The tax treatment is the complicated part: the price is split between a dividend component and a capital component under specific rules, and how that split falls matters a great deal to the person selling.

Settle the mechanism before the money moves

Tell us who is being paid, how much, and why. We will tell you which mechanism fits, what approvals it needs, and how the payment will be characterised in the hands of the shareholders receiving it.

The company makes the decision and the shareholders get the tax bill

There is surplus capital in the company and the shareholders should have it, and what looks like an administrative step is a regulated transaction with a tax consequence attached to every recipient. Get the mechanism or the documentation wrong and the payment can be characterised as an unfranked dividend, which is assessable income in the hands of people who were told they were receiving capital. The directors also carry a solvency judgment that attaches to them personally.

We will advise which mechanism fits, whether an equal reduction, a selective reduction or a buy-back.
We will work through the solvency position with the board before any resolution is passed.
We will prepare the board and shareholder resolutions the chosen mechanism requires.
We will manage the ASIC notifications and the timetable they impose.
We will work with your accountant so the characterisation and the reporting match the documents.

There is capital in the company that should be with the shareholders

The company is holding more capital than the business needs. An asset was sold, or the working capital requirement has fallen, or the enterprise is being wound back deliberately. The shareholders would like the money. Or one shareholder is leaving and the company is going to buy their shares, rather than the others finding the cash personally. Either way the board has to move it out correctly, satisfy the solvency requirement, and avoid handing everybody an unexpected tax bill.

What's included in your return of capital service

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Mechanism advice for your circumstances.
Solvency assessment support for the directors' resolution.
Board and shareholder resolutions.
ASIC notifications and timetable management.
Execution documents, register updates and accountant coordination.

When capital turns out to be a dividend

The risk in a capital return is not that it fails. It is that it completes and is then characterised differently. A payment the board treated as a return of capital, but which was not structured or documented to support that treatment, can be assessed as a dividend instead. Where the company has no franking credits to attach, that is an unfranked dividend, taxed as income at each shareholder’s marginal rate.

It lands on the shareholders rather than on the company, usually a year or more later, after the money has been spent. Sitting beside it is the solvency question: directors who approve a reduction without reasonable grounds for believing the company can still pay its debts carry that personally. Both are entirely avoidable, and both are avoided by decisions made before the payment rather than after it.

From surplus capital to a distribution that holds up

We start with who is being paid and why, because that picks the mechanism. Paying everybody in proportion is a different transaction from buying one shareholder out, and the approval requirements diverge sharply between them. We work through the solvency position with the board so the resolution rests on something real, since that judgment attaches to the directors who make it.

Then we run the process. Board resolutions, shareholder approval where the mechanism requires it, the ASIC notifications and the timing they impose, and the execution documents and register updates at the end. Alongside it we work with your accountant on the characterisation, so what the documents say and what gets reported are the same thing. Shareholders receive the money with the tax treatment settled rather than pending.

How we run the distribution

From surplus capital to money in shareholders' hands, correctly characterised.

Pick the mechanism

We establish who is being paid and why, then advise whether an equal reduction, a selective reduction or a buy-back is the right route.

Run the approvals

We work through solvency with the board, prepare the resolutions, obtain any shareholder approval required and manage the ASIC notifications.

Pay and record

We prepare the execution documents, update the register, and work with your accountant so the reporting matches the documents.

Capital returns run by Accredited Specialists in Business Law

Moving money from a company to the people who own it feels like it ought to be simple, and the frustration of this area is that it is not. The mechanics are not difficult, but they are prescriptive, and the cost of an informal approach falls on the shareholders rather than on whoever chose it.

We have 2 Accredited Specialists in Business Law. We run equal and selective reductions and off-market buy-backs, including the buy-outs that happen when a shareholder leaves, and we work directly with your accountant so the legal documents and the tax reporting say the same thing.

Our great lawyer guarantee

Six principles we hold to, whatever you bring us and however long it takes.

Take the time

We listen carefully to understand what you want to achieve, then step you through the advice and the documents.

Share our knowledge

We pass on as much as we can, so you can make your own informed decisions.

Stick to our knitting

We only do what we are good at, so you never pay for our learning.

Work as one team

Someone is always available to answer your question or point you the right way.

Fair pricing

A fixed or capped quote for advice and documents, so you do not carry the price risk.

It is your show

We are in it for a front row seat to witness your success, not for our egos.

Get the distribution structured correctly

Tell us who is being paid, how much, and why. We will pick the mechanism, run the approvals and the ASIC steps, and make sure your shareholders receive it as capital rather than as an unexpected dividend.

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