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CONTENTS
Passage History
Purpose
Background
Main Provisions
Contact Officer and Copyright Details
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.
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.
As there is no central theme to the Bill the
background to the measures will be discussed below.
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.
Chris Field
21 June 1999
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 1999
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