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Taxation Laws Amendment (Company Law Review) Bill 1998
Bills Digest No.214 1997-98
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Taxation Laws Amendme nt (Company Law Review) Bill 1998
To introduce specific anti-avoidance provisions relating to changes proposed to be introduced by the Company Law Review Bill 1997. The amendments principally relate to situations where amounts are paid as capital rather than dividends to confer a tax advantage on the person receiving the benefit and the company paying the amount. There are also a number of changes that do not effect current taxation treatment but result from changes introduced by the Company Law Review Bill 1997.
For a general view of the changes impl emented in the Company Law Review Bill 1997, refer to the Digest for that Bill.
The anti-avoidance provisions contained in the Bill address schemes involved in the directing of tax benefits to those in the company structure who have the most to gain from receiving the tax benefits from the company. While Part IVA of the Income Tax Assessment Act 1936 (ITAA) contains general anti-avoidance provisions, those contained in the Bill will specifically address potential avoidance mechanisms that may arise out of the changes contained in the Company Law Review Bill 1997, and particularly those that may arise due to the changes of capital distribution rules contained in that Bill. Particularly, the Bill aims to address the situations where profits are distributed as a return of capital in respect of capital gains tax (CGT) exempt shares rather than as a dividend. A return of capital on such shares would not be subject to CGT while a dividend payment may be subject to tax. The Bill also deals with situations where little or no CGT would be payable.
Other measures contained in the Bill are a consequence of changes in the Corporations Law, such as the removal of the distinction between par and no par value shares and will have minimum taxation consequences, however amendments are necessary to reflect the changes in the Corporations Law.
The measures contained in the Bill were announced by the Treasurer in a Press Release dated 13 November 1997 and resulted from a Discussion Paper released in July 1996.
I tem 1 of Schedule 1 will insert a new section 45 into the ITAA. Proposed section 45 will apply where a company streams its provision of shares and minimally franked dividends so that shares are received by some shareholders and not others and some or all of the shareholders who do not receive shares receive minimally franked dividends (a minimally franked dividend is one which is either unfranked or franked at less than 10%). The value of the share is to be treated as an unfranked dividend and no rebate will be allowed on the value (this will place the shares in the same position as unfranked dividends).
Proposed section 45A deals with the streaming of dividends and capital benefits. A capital benefit will be provided where a shareholder is provided with shares; receives a distribution of share capital; or something is done to the share that increases its value. Another important concept is that of a shareholder receiving a greater capital benefit. This is defined in proposed subsection 45A(4) to include where a shareholder in relation to another:
â¢ holds some shares that where acquired, or are deemed to ha ve been acquired, before 20 September 1985 (and which are therefore not subject to capital gains tax (CGT));
â¢ the shareholder is a non-resident;
â¢ the cost base of the share is not substantially less than the value of the capital benefit (so that minimal CGT is payable);
â¢ the shareholder has a capital loss in the year in which the capital benefit is provided;
â¢ the shareholder is a private company that would not be entitled to a rebate in respect of the payment of the dividend if it had received the dividend paid to the disadvantaged shareholder (the rebate will be denied where the private company shareholder receives an unfranked dividend); or
â¢ the shareholder has income tax losses.
Where a company streams dividends in such a way that advantaged shareh olders receive a greater capital benefit than other shareholders and it reasonable to assume that the other shareholders will receive dividends, the Commissioner may determine that proposed section 45C applies. Proposed section 45A will not apply where the capital benefit provided to the advantaged shareholders are shares and the other shareholders receive, or will receive, fully franked dividends. Similarly, where the other shareholders receive partly franked dividends, the Commissioner’s determination is only to apply to any capital benefit that relates to the unfranked part of the dividend.
Proposed section 45B will apply where a scheme is used to provide capital benefits rather than dividends. Specifically, the proposed section will apply where:
â¢ there is a scheme where a person receives a capital benefit from the company;
â¢ the person receives a tax benefit; and
â¢ having regard to the circumstances of the scheme, it can be concluded that a person entered into the scheme for the purposes of enabling the taxpayer to receive a tax benefit.
If the above apply, the Commissioner may determine that proposed section 45C applies to all or part of the capital benefit.
Capital benefit is defined in proposed subsection 45B(4) to be the provision of shares in the company; a distribution to the person of share capital or something that is done to the share that increases its value.
The circumstances of the scheme that are to be examined are listed in proposed subsection 45B(5) and, basically, relate to whether the taxpayer gains a tax advantage; will be subject to no or little CGT; and whether there are changes in interests held by the taxpayer or the risks involved for the taxpayer.
If a determination is made under proposed section 45A or 45B , proposed section 45C provides that the capital benefit, or part of the benefit, is to be taken to have been received as an unfranked dividend and no rebate will be allowable in respect of the payment of the dividend. If the Commissioner further determines that the amount was paid as a capital benefit to avoid a reduction in the company’s franking account, a franking debit will arise equal to the value of the capital benefit, or part of the capital benefit, as if the benefit had been paid as a fully franked dividend. This debit is to be reduced by any other franking debit arising on the transaction due to the operation of the CGT rules. The amount of the benefit will be:
â¢ if the benefit was a share, the value of the share;
â¢ the value of any increase in the share’s value; or
â¢ the amount of share capital distributed.
Application: To bonus shares or capital benefits paid after a date fixed by Proclamation except for benefits provided under a legally binding agreement entered into before 13 November 1997 ( item 3 of Schedule 1 ).
Schedule 2 of the Bill introduces the concept of tainting in respect of certain distributions. Proposed Division 7A, titled Tainted share capital accounts, will be inserted into Part IIIA of the ITAA by item 8 of Schedule 2 . A company’s share capital account will be tainted if an amount is transferred from any other account of the company to the share capital account. Such an account will cease to be a tainted account if the company so elects and certain amounts are debited to its franking account or, where relevant, tax is paid (see below). The payment to untaint an account will not give rise to franking credits on the amount paid to untaint the account.
Proposed subdivision B deals with companies other than life insurance companies. For such companies, proposed section 160ARDQ provides that the class C franking account of the company is to be debited by the amount transferred to the share capital account (therefore treating such transfers as though they were payments of dividends for the purpose of the balance of the franking account).
As noted above, a company may elect that an account not be treated as a tainted account. Such an election may be made under proposed section 160ARDR which will allow a company to make a once only election. If the company has higher tax shareholders,(1) the company may specify an amount to a maximum of the debit that arises under proposed section 160ARDQ that is to be taken to be a franking debit on the company’s franking debit account.
For a company that has no higher tax shareholders which wishes to untaint its share capital account, this will occur when an amount equal to the franking debit that arose under proposed section 160ARDQ and, if further amount/s are later transferred to the share capital account the proposed section 160ARDQ amount and the later amount, are debited to the company’s franking account. If the company has higher tax shareholders (see note) and elects to untaint its share capital account, the amount of the untainted reduction will be equal to that elected by the company ( proposed section 160ARDS ).
If a higher tax shareholder company elects to reduce its untainted tax, proposed section 160ARDT provides that the company will be liable to pay tax equal to the difference between the tax payable by top marginal rate shareholder and the notional franking amount. The tax payable by top marginal rate shareholders is to be calculated according to the formula contained in proposed subsection 160ARDT(2) which is the notional franking amount plus the tainted amount multiplied by the top marginal tax rate plus the maximum Medicare levy (currently 47% plus 2.5% Medicare levy which includes the surcharge for those without private health insurance). The notional franking amount is defined in proposed subsection 160ARDT to be the franking debits incurred under these provisions multiplied by 36 divided by 64 (no reason for the basis of this formula is given).
Proposed subdivision C deals with the taxation of life insurance companies. The operation of the proposed subdivision is substantially the same as described above with regard being taken of life insurance companies possibly having both class A and class B franking accounts, so that debits to both accounts may arise. Similarly, elections to untaint an account reflect the possible existence of both classes of franking accounts.
Application: Transfers to share capital accounts made after the commencement of the Schedule (ie. a date fixed by Proclamation).
The remainder of the Bill ensures the same tax treatment for transactions that are effected by changes proposed by the Company Law Review Bill 1998 and have no significant policy implications.
1. Basically a company whose shareholders do not consist entirely of companies, other than life insurance companies and regi stered organisations (principally employee and employee organisations registered under industrial relations law and friendly societies).
15 May 1998
Bills Digest Service
Information and Research Services
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