Topic: Why time’s up for the mischief in off-market share buybacks

Last reviewed: 18/12/2025

Focus: Accounting Practice Analysis

Off‑Market Share Buybacks: Time’s Up in 2025

Time is effectively up for “mischief” in off‑market share buybacks because the ATO has made it clear—through long‑running public guidance, sustained compliance activity, and escalating anti‑avoidance outcomes—that buyback structures designed primarily to convert what is economically a capital exit into a tax‑advantaged dividend/franking outcome will be challenged, re‑characterised, or cancelled under Australia’s integrity rules. From an Australian accounting practice perspective, the risk is now less about whether the ATO will review these arrangements and more about the certainty of scrutiny, documentation demands, and potential application of Part IVA (Income Tax Assessment Act 1936) where the dominant purpose is to obtain a tax benefit.

Featured Answer: Off‑market share buybacks have been repeatedly used to “stream” franked dividends and create tax outcomes not aligned with the commercial substance of a shareholder exit. The ATO’s position, supported by legislation and anti‑avoidance doctrine (including Part IVA), is that arrangements with a dominant purpose of obtaining franking or dividend-related tax benefits are unacceptable and will be counteracted. For Australian practices, the practical reality in 2025 is that buyback planning now requires demonstrably commercial drivers, robust valuation support, and careful integrity-rule analysis—or it will be treated as high risk.

What is an off‑market share buyback in Australia (and where does the “mischief” arise)?

An off‑market share buyback is a company’s repurchase of its own shares other than through an exchange-traded on‑market facility, typically via a formal tender or selective buyback to specific shareholders.

The “mischief” arises because off‑market buybacks can split the buyback price into two components that are taxed differently:

Dividend component: Often frankable, potentially attractive for shareholders who can use franking credits efficiently (e.g., super funds in pension phase historically, low‑rate taxpayers, or entities with losses).
Capital component: Generally subject to CGT outcomes, and may access discounts (for individuals/trusts) or be reduced by capital losses.

This split can be legitimate when it reflects commercial pricing and the statutory framework. The problem is when it is engineered primarily to transfer franking credits to those who value them most, or to manufacture tax benefits inconsistent with the economic reality of the exit.

Why does the ATO say the time is up for off‑market share buyback “mischief”?

The ATO’s sustained message is that off‑market buybacks will be challenged where they are structured to deliver tax benefits rather than to meet genuine corporate finance objectives.

In practice, “time is up” because several factors now combine:

ATO focus is mature and data-driven: Off‑market buybacks have been a recurring ATO focus area for many years, with refined risk models and better data matching across registries, dividend/franking reporting, and shareholder profiles.
Anti‑avoidance rules are well-developed and actively applied: Part IVA (ITAA 1936) is routinely considered where a scheme delivers a tax benefit and the objective factors indicate a dominant tax purpose.
Integrity provisions interact with franking outcomes: Franking credit trading and streaming concerns intersect with specific anti‑avoidance rules and the ATO’s administrative approach to franking integrity.
Increased expectations on evidence: In 2025, it is not enough to assert “capital management reasons.” The ATO expects contemporaneous board papers, funding analysis, shareholder fairness analysis, and robust valuation mechanics.

From a practice standpoint, the question is no longer “can we do this?” but “can we defend this with objective evidence that the tax outcome is incidental to real commercial drivers?”

Which laws and ATO guidance drive the crackdown?

The legal risk comes from the interaction of the buyback tax rules, dividend/franking rules, and anti‑avoidance provisions.

Key legislative foundations commonly in scope include:

Income Tax Assessment Act 1936 (ITAA 1936):
Income Tax Assessment Act 1997 (ITAA 1997):
Corporations Act 2001:

ATO sources typically relevant in engagements include:

ATO guidance on share buybacks (general and off‑market), including how consideration is split between dividend and capital components and how franking is treated.
ATO public guidance and rulings on anti‑avoidance and franking integrity where arrangements seek to “stream” franking credits to particular holders or effectively trade franking benefits.
ATO compliance program materials and alerts (where issued) that explain risk factors the ATO is actively reviewing.

Practical note for advisers: the ATO’s view is usually established not by a single document, but by a consistent line of guidance, interpretive decisions, taxpayer alerts (where relevant), and audit outcomes applying the law to recurring fact patterns.

How does “mischief” actually work in real engagements?

“Mischief” typically appears as one or more of the following patterns, which may be dressed up as capital management:

Franked dividend maximisation: Setting the buyback pricing/split so a large part is a franked dividend, disproportionately benefiting shareholders who can best use franking credits.
Selective participation: Designing participation so franking credits are effectively directed to a subset of holders (or those with particular tax profiles), while others exit differently or not at all.
Wash-like economic outcomes: The shareholder’s economic exit resembles a capital sale, but the structure produces a dividend/franking tax result.
Non-arm’s-length or weak valuation anchors: Capital component is suppressed beyond what a defensible market/valuation basis would support, to enlarge the dividend component.
Circular funding or pre-arranged steps: Funding, distributions, reinvestments, or linked transactions that, taken together, reveal the tax outcome as the primary objective.

What are the ATO’s red flags for off‑market share buybacks?

The ATO’s practical red flags generally relate to purpose, participant selection, and pricing mechanics.

Common indicators of higher risk include:

Shareholder profiling: Materials or adviser communications emphasise franking credit benefits as the main rationale, or target specific taxpayer categories.
Dividend-heavy splits without strong valuation basis: The capital amount appears artificially low relative to market value or commercial buyback price benchmarks.
Streaming features: Participation mechanics (or side arrangements) effectively “stream” the franked dividend outcome to some shareholders.
Pre-packaged arrangements: Promoter-driven buyback strategies marketed as “franking credit extraction” or “tax-effective exit” products.
Limited commercial narrative: Board papers focus on tax outcomes, with thin evidence of genuine capital management, solvency impacts, or shareholder equity considerations.
Timing around franking capacity: Buyback occurs to release franking credits that might otherwise remain trapped, without clear non-tax reasons.

What does Part IVA mean for off‑market buybacks in 2025?

Part IVA is the principal “big hammer” because it allows the Commissioner to cancel a tax benefit obtained in connection with a scheme where, having regard to objective factors, a person entered into or carried out the scheme with the dominant purpose of enabling the taxpayer to obtain that tax benefit.

For off‑market buybacks, Part IVA risk is elevated where:

The dominant purpose appears to be unlocking franking credits or converting capital returns into dividend/franking outcomes.
The arrangement is more complex than needed for the stated commercial objective.
The counterfactual (what would reasonably have happened without the scheme) suggests an on‑market buyback, ordinary dividend, or straightforward capital return would have occurred.

Accounting practice implication: if the file is not built as though it will be read in audit—board minutes, valuation reports, shareholder communications, funding analysis, and alternatives considered—Part IVA exposure becomes difficult to manage.

How should accountants assess whether a proposed off‑market buyback is defensible?

A defensible off‑market buyback is one where the tax outcomes follow from a commercially driven design, rather than driving it.

A practical assessment framework (used in many Australian practice reviews) includes:

What is the genuine corporate objective?
Is the off‑market form necessary to achieve it?
Is pricing and the dividend/capital split supportable?
Are participation rules equitable and not “profile-driven”?
Are franking consequences incidental rather than dominant?
Is documentation contemporaneous and audit-ready?

What are practical scenarios (good vs risky) for Australian clients?

A scenario can be commercially legitimate yet still high risk if it is implemented in a way that overweights franking outcomes.

Scenario A (more defensible): capital management with broad fairness

A mature private group has surplus cash, no growth capex, and wants to reduce equity and simplify its shareholder base. The board considers:

Ordinary dividend versus capital return versus buyback
Solvency and creditor impacts
Fairness between participating and non-participating shareholders
Independent valuation benchmarks

If the buyback proceeds on broadly equitable terms, with pricing anchored to a credible valuation methodology and strong corporate evidence, it is more defensible.

Scenario B (higher risk): “franking credit extraction” exit

A controlling shareholder wants liquidity, and the advisers recommend an off‑market buyback because it can be structured with a large franked dividend component. Participation and pricing are tuned to maximise franking credits. Board papers focus heavily on after-tax outcomes.

This scenario is high risk because the dominant purpose indicators point to a tax benefit rather than genuine corporate necessity.

How do off‑market buybacks compare with alternative strategies (and where do clients land in 2025)?

In 2025, clients often compare off‑market buybacks to simpler options that attract less ATO risk.

A practical comparison (high level) is:

On‑market buyback:
Special dividend (fully or partly franked):
Capital reduction/return of capital:
Selective buyback (off‑market) for governance/ownership reasons:

Professional reality: where two methods achieve the same commercial result, the ATO will look closely at why the tax-advantaged path was chosen.

What should be in the accountant’s file to survive an ATO review?

A robust file is the most practical “risk control” available to advisers.

At minimum, a 2025-standard file should include:

Board papers and minutes demonstrating genuine commercial drivers and alternatives considered
Independent valuation support and pricing methodology
Funding narrative (where funds come from, and why that method is commercially appropriate)
Solvency and Corporations Act compliance evidence
Shareholder communications showing fairness and transparency
Tax technical analysis mapping:
Implementation steps and chronology (to show there are no hidden side arrangements)

What does this mean for Australian accounting practices advising in 2025?

For Australian accounting practices, the key shift is that off‑market buybacks should be treated as a high-governance, high-documentation engagement—closer to a “transaction advisory” file than routine tax compliance.

Practice implications include:

Upfront risk triage: identify streaming/tax-dominant purpose features early.
Engagement scoping: fee for valuation support, technical advice, and documentation.
Communication discipline: avoid marketing language that foregrounds franking arbitrage.
Escalation to specialist advice: where facts suggest elevated Part IVA or franking integrity exposure.

How can Fedix help accounting teams manage the work (without missing deadlines)?

Fedix can help reduce the operational load around transaction evidence, working papers, and audit-readiness when advising on complex equity and tax matters (including documenting distributions, shareholder movements, and related reconciliation work).

Practical ways Fedix and MyLedger can assist your practice include:

Automated bank reconciliation (AI accounting software Australia): MyLedger’s AutoRecon reduces reconciliation from 3–4 hours to 10–15 minutes, helping teams free capacity for high-value advisory work.
Working paper discipline: centralised, consistent working papers and transaction snapshots that help maintain an audit trail for transaction-driven engagements.
ATO integration accounting software workflows: where ATO data import and due-date tracking support broader compliance management (noting buyback transactions still require specialist tax analysis and governance documentation).

Next Steps (Fedix)

If your practice is seeing increased client enquiries about off‑market share buybacks, treat 2025 as the year to standardise your “high risk transaction” workflow: triage, evidence collection, valuation support, and integrity-rule analysis.

Learn more at home.fedix.ai about how Fedix and MyLedger can reduce compliance time (including automated bank reconciliation and working-paper workflows), so your team can spend more time on technical analysis and defensible documentation for complex transactions.

Frequently Asked Questions

Q: Are off‑market share buybacks illegal in Australia?

No. Off‑market share buybacks are lawful under the Corporations Act 2001 and have specific tax treatments under Australian income tax law. The risk arises where the structure is implemented with a dominant purpose of obtaining tax benefits (including franking outcomes), which can attract Part IVA and related integrity provisions.

Q: What is the main tax risk with off‑market buybacks?

The main tax risk is that the ATO may conclude the arrangement is a scheme to obtain a tax benefit—often linked to franking credits or dividend/capital engineering—and apply Part IVA (ITAA 1936) or other integrity rules to cancel the benefit and reassess.

Q: What evidence does the ATO expect to see for a defensible buyback?

The ATO typically expects contemporaneous governance and commercial evidence such as board minutes, alternative options analysis, independent valuation support, funding rationale, Corporations Act compliance records, and a clear explanation showing tax outcomes are incidental to commercial objectives.

Q: Can private companies do off‑market buybacks without ATO issues?

Private companies can undertake off‑market buybacks, but the risk profile depends on purpose, pricing, participation design, and documentation. Private groups should be particularly careful where franking capacity, shareholder tax profiles, or selective exits create streaming concerns.

Q: Should accountants recommend an alternative to an off‑market buyback in 2025?

Often, yes—if an on‑market buyback, dividend, or capital reduction achieves the same commercial outcome with materially less integrity risk. Where an off‑market buyback is still preferred, it should be supported by strong commercial reasoning, defensible valuation, and audit-ready documentation.

Disclaimer: This content is general information for Australian accounting and tax professionals as of December 2025 and does not constitute legal or tax advice. Off‑market share buybacks are highly fact-specific and subject to change in ATO interpretation and case law. Specific advice should be obtained for each client’s circumstances.