Bills Digest No. 202  1998-99 Taxation Laws Amendment Bill (No. 7) 1999


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WARNING:
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.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Contact Officer and Copyright Details

Passage History

Taxation Laws Amendment Bill (No. 7) 1999

Date Introduced: 13 May 1999

House: House of Representatives

Portfolio: Treasury

Commencement: The formal provisions of the Bill commence on Royal assent. The operative provisions will have effect from 1 July 1998.

 

Purpose

To:

  • Amend rules relating to when a distribution from a 'tainted' share capital account of a company will be deemed to be a dividend. The amendments are largely technical and provide minor extension to the cases where such a distribution will not be deemed to be a dividend, and
  • Provide relief for managed investment schemes that alter their structure to comply with new legislative requirements or who make minor changes to the scheme while also undertaking such a restructuring.

 

Background

As there is no central theme to the Bill the background to the measures will be discussed below.

 

Main Provisions

Tainted Share Capital Accounts

In a pure form, a share capital account consists solely of the amount paid for the par value (ie the value allocated to the shares by the company on foundation) of the shares issued by the company to form its capital. However, the share capital account may be less than this amount as not all shares have been allocated or shares have been issued with an amount of their value remaining on call from the purchaser. It is also possible for the share capital account to exceed the nominal value of the number of shares multiplied by their par value where other funds, such as capitalised profits, are transferred to the account.

Where shares remain unissued and the price of the share has risen from their par value they can be subsequently issued at a premium on the par value. Prior to recent reforms to be mentioned below, the premium was allocated to a share premium account, separate from the share capital account.

Changes to the Corporations Law with effect from 1 July 1998 abolished the concepts of par value for shares and the distinction between share accounts, so that there is only a single share capital account. Where that account consists of funds other than those that would exist in the previous share capital account, the new share capital account will be deemed to have been 'tainted'. Transitional provisions provided that the share capital account would not be taken to have been tainted by the initial amalgamation with the share premium account or capital redemption reserve as required by the changes to the Corporations Law.

There are important taxation differences between payments from the untainted and tainted share capital accounts. Payments from an untainted account are treated as capital payments and so subject to, where applicable, capital gains tax. Unlike dividend payments, there is no franking of such payments so that the recipient receives no credit for any company tax paid. Where payment is from a tainted account, the amount is treated as an unfranked dividend and the company is required to incur a franking debit on the value of the deemed 'dividend'.

In addition to the transitional arrangements noted above, on 20 November 1998 the Assistant Treasurer announced further easing in the circumstances where an account would be taken to be tainted. The announced changes are due to have effect from 1 July 1998, the date of the changes to the Corporations Law and, according to the explanatory memorandum to the Bill, will 'prevent an unintended gain to revenue that is not capable of being quantified.' The amendments are of a relatively minor nature, although important to those effected, and have been operating since the intended date of effect.

A new definition of share capital account will be inserted into the Income Tax Assessment Act 1936 (ITAA) by item 2 of Schedule 1 of the Bill. The new definition is substantially the same as the old but is expressed to address cases where there is another account to which capital funds are credited and to include such accounts in the definition of a share capital account.

Subsection 160ARDM(2) of the ITAA provides that a share capital account will not be taken to be tainted if a debt is transferred to the account as part of a debt/equity swap. The term 'debt/equity swap' is defined in section 63E and a number of conditions must be met to satisfy the definition. The attachment to the Assistant Treasurer's Press Release of 20 November 1998 states:

However, for technical reasons some debt for equity swaps fail to qualify as the definition is currently expressed. To ensure that all arrangements which should qualify do so, the government will be amending the income tax law so that for the purposes of the tainting rule a debt for equity swap will include all arrangements whereby an amount or part of a debt owed by a company is discharged, released or otherwise extinguished in return for the issue of shares to the creditor, provided the amount of the debt transferred to the share capital account does not exceed the lesser of the value of the shares issued to the creditor and the amount of the debt.

Basically, this means that the current definition in section 63E is not wide enough for the tainting rules and so a specific wider definition will be included.

A new subsection 160ARDM(2) will be substituted into the ITAA by item 3 of Schedule 1 which will:

  • exempt a share capital account from being taken to be tainted if the amount transferred to it can be identified at all times in the company's books as share capital, and
  • insert a new rule relating to debt/equity swaps. This will apply where a debt is transferred under such an arrangement (ie where a taxpayer discharges or otherwise extinguishes all or part of a debt owed to the taxpayer in return for shares in the debtor), and the value of the debt transferred will be the lesser of the value of the shares and the amount of the debt extinguished.

To qualify as a debt/equity swap, the debt must be discharged, extinguished or otherwise released in exchange for shares, other than redeemable preference shares, issued by the debtor (proposed subsection 160ARDM(3) (item 4).

Item 9 deals with situation where, through the wording of the changes contained in the Taxation Laws Amendment (Company Law Review) Act 1998, the intention that a merging of a tainted share premium account and a share capital account has resulted in the later account being tainted for tax purposes. Subitem 9(2) provides that in such a situation the share capital account will only be taken to be tainted where the balance of the account is equal to the net tainted amount (which is defined to be the lower of the previous tainted amount and the balance of the share capital account so that if the balance of the share capital amount is equal to or less than the tainted amount the account will be deemed to be tainted). If a share capital account is tainted under this provision, no franking debit will arise. Where there is a distribution of capital and as a result the share capital account is tainted, a proportion of the share distributions will be taken as tainted (this will be in the same proportion as the tainted distributions to the total distribution).

Transitional relief for Managed Investment Schemes

Prior to the passage of the Managed Investments Act 1998 (MIA), managed investment schemes with more than 20 members usually operated with two principal entities, a management company that was responsible for the day-to-day management of the scheme and investment strategy and a trustee who was responsible for oversight and ensuring that the trust deed was complied with.

The MIA amended the Corporations Law and replaced this structure with one of a single responsible entity, which led to the need for many managed investment schemes to restructure to meet the requirements of the MIA. Transitional provisions within the MIA allow 2 years from the commencement of the MIA on 1 July 1998 for existing investment schemes to restructure.

A change in structure would, in the absence of relief, trigger a number of tax consequences, particularly in regard to capital gains tax (CGT) where the transfer of assets to the new entity would constitute a disposal by the old entity and acquisition by the new with CGT being payable on gains realised in the transfer. There would also be other repercussions, including for members who would be deemed to have disposed of their old entitlements and to have acquired new capital. For such reasons, relief is usually allowed where a restructuring is a result of changes in other, non-taxation laws which force an entity to restructure.

Relief in respect of managed investments was announced in a Press Release by the Assistant Treasurer dated 28 July 1998 and to have effect from 1 July 1998. The relief measures were expanded, principally to include relief in certain circumstances where the MIA does not require the restructuring, in a Press Release dated 12 March 1999 and will apply so long as the conditions referred to in the Press Releases were met (such relief is not always a feature of relief where changes are necessary due to legislative changes). The rules are contained in Schedule 2 of the Bill which will amend the Income Tax (Transitional Provisions) Act 1997 to insert a new Subdivision 660-E.

Proposed section 960-10 provides that proposed Subdivision 960-E will apply where all of the following conditions are met:

  • The entity is a managed investment scheme under the Corporations Law
  • The scheme is registered under the Corporations Law
  • The entity was a managed investment scheme at all times between from 1 July 1998 and registration
  • The entity was the same kind of entity immediately before and after registration as a managed investment scheme
  • Changes to the scheme to enable registration occurred between 1 July 1998 and 30 June 2000
  • Membership of the scheme did not change due to the alterations, and
  • Any other changes made during that time:
    • were made only to improve the administration or operation of the scheme
    • if there was any increase in the value of member's interests they were applied proportionately to all members
    • there was no decrease in the value of member's interests, and
    • membership did not alter as a result of the changes.

If the above conditions are satisfied, proposed subdivision 960-E will also apply to the interests of the members of the scheme so long as they were members before and after the changes (proposed subsection 960-105(2)).

If the proposed Subdivision applies, proposed section 960-110 provides that there are to be no taxation consequences as a result of the change and, specifically, that:

  • The entity will be taken to be the same before and after the change
  • The legal and/or beneficial ownership of the assets and interests in the entity will not have changed and there will be no CGT implications for either the entity or the members.

 

Contact Officer and Copyright Details

Chris Field
21 June 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1999.

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