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CD 24: Returns of capital: on-market share cancellations
or “Rules for when a company buys back its own shares from the market”
You could also call this:

“Rules for companies buying and holding their own shares”

When a company buys its own shares, it’s not considered a dividend if the company keeps those shares and doesn’t cancel them. This rule doesn’t apply if the company is buying back shares from all shareholders in equal amounts.

If the company cancels the shares within a year, or doesn’t sell them or give them to employees within a year (unless it’s a co-operative company), some special rules apply. These rules also apply if a co-operative company cancels the shares after a year.

When these special rules apply, the company has to reduce the amount of money it has available to pay out to shareholders. This reduction is based on how much the company paid for the shares or how much they’re worth now, whichever is less.

The company also has to follow some tax rules as if they had cancelled the shares on the open market. This might affect how much tax the company has to pay.

If the company gives shares to employees but then takes them back, it’s treated as if the company bought those shares on the day they were taken back.

These rules help make sure companies are treating all their shareholders fairly when they buy back their own shares.

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Next up: CD 26: Capital distributions on liquidation or emigration

or “How payments for shares are treated when a company closes or moves overseas”
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Part C Income
Income from equity

CD 25Treasury stock acquisitions

  1. An amount paid by a company in acquiring any of its shares is not a dividend if—

  2. the shares acquired by the company are held by the company in itself, including shares acquired by the company as the result of the application of section CE 6 (Trusts are nominees) and, in the case of shares acquired other than as the result of the application of section CE 6, section 67A(1) of the Companies Act 1993 or section 24 of the Co-operative Companies Act 1996 apply to provide that the shares are not deemed to be cancelled; and
    1. the acquisition is not part of a pro rata cancellation or something that is in substance a pro rata cancellation.

      1. Subsections (4) to (6) apply in the case of an acquisition of a share to which subsection (1) or section CD 17(1) of the Income Tax Act 2004 or section CF 3(1)(d) or (da) of the Income Tax Act 1994 applies if,—

      2. before the first anniversary of the acquisition, the company cancels the share; or
        1. at the first anniversary, the company has failed to transfer a share of the same class in an arm’s length transfer and has failed to allocate a share or right to a share, of the same class to an employee share scheme beneficiary under an employee share scheme, except if the company is established under New Zealand co-operative company legislation; or
          1. after the first anniversary, the company, which is established under New Zealand co-operative company legislation, cancels the share.

            1. When subsection (2)(b) is applied,—

            2. a transfer is arm’s length only if it is—
              1. to a person not associated with the company; or
                1. in a transaction that occurs on a recognised exchange, through a broker or some other agent independent of the company, and that is not preceded by any arrangement between the transferee and the company for the transfer; and
                2. each arm’s length transfer of a share is taken into account only in relation to a single share acquisition to which subsection (1) has applied.

                  1. If subsection (2) applies, then, with effect from the cancellation or the first anniversary, depending on which first causes subsection (2) to apply, the available subscribed capital of the class of the share is reduced by the lesser of—

                  2. the amount paid to the shareholder on the acquisition; and
                    1. the available subscribed capital per share calculated under the ordering rule and, in the case of the first anniversary, calculated as if the share and any other shares to which this subsection applies on that date were cancelled on that date.

                      1. If subsection (2) applies, then, with effect from the date of the acquisition by the company, section OB 42 (ICA on-market cancellation) applies as if the original acquisition were an on-market cancellation but item ASC per share excess of the formula in section OB 42 were equal to only the excess of the amount received by the shareholder over the reduction described in subsection (4).

                      2. No imputation penalty tax is imposed under section 140B of the Tax Administration Act 1994 (nor any late payment penalty imposed under that Act in relation to the imputation penalty tax) if it would not have arisen had subsection (5) applied only with effect from the date of cancellation or first anniversary, depending on which first causes subsection (2) to apply.

                      3. For the purposes of subsection (2), if the company has, before the first anniversary, allocated a share or right to a share to an employee share scheme beneficiary under an employee share scheme but subsequently the allocation is cancelled, the shares acquired under subsection (1) by the company are treated as acquired by the company on the date of cancellation for the amount the company paid for their acquisition under subsection (1).

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                      Notes
                      • Section CD 25(1)(a): replaced, on , by section 11(1) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                      • Section CD 25(2)(b): replaced, on , by section 11(2) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                      • Section CD 25(4): substituted (with effect on 1 April 2008), on , by section 16(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                      • Section CD 25(7) heading: inserted, on , by section 11(3) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                      • Section CD 25(7): inserted, on , by section 11(3) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                      • Section CD 25 list of defined terms employee share scheme: inserted, on , by section 11(4) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                      • Section CD 25 list of defined terms employee share scheme beneficiary: inserted, on , by section 11(4) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).