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This Digest was prepared for debate. It reflects the legislation as
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CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details
Taxation Laws Amendment (Company Law Review) Bill
1998
Date Introduced: 8 April 1998
House: House of Representatives
Portfolio: Treasury
Commencement: Unless otherwise specified in
the Main Provisions section, on a date fixed by Proclamation.
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 implemented 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.
Item 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:
- holds some shares that where acquired, or are deemed to have
been acquired, before 20 September 1985 (and which are therefore
not subject to capital gains tax (CGT));
- the shareholder is a non-resident;
- the cost base of the share is not substantially less than the
value of the capital benefit (so that minimal CGT is payable);
- the shareholder has a capital loss in the year in which the
capital benefit is provided;
- 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
- the shareholder has income tax losses.
Where a company streams dividends in such a way
that advantaged shareholders 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:
- there is a scheme where a person receives a capital benefit
from the company;
- the person receives a tax benefit; and
- 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:
- if the benefit was a share, the value of the share;
- the value of any increase in the share's value; or
- 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).
Tainting
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.
- Basically a company whose shareholders do not consist entirely
of companies, other than life insurance companies and registered
organisations (principally employee and employee organisations
registered under industrial relations law and friendly
societies).
Chris Field
15 May 1998
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
© Commonwealth of Australia 1998
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Published by the Department of the Parliamentary Library,
1998.
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