Bills Digest No. 214 1997-98
Taxation Laws Amendment (Company Law Review) Bill 1998
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
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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