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  • Share capital account tainting rules

    The share capital account tainting rules are integrity rules that prevent a company from:

    • transferring profits into a share capital account, and
    • distributing those amounts to shareholders disguised as a non-assessable capital distribution.

    The share capital account tainting rules are in Division 197 of the Income Tax Assessment Act 1997 (ITAA 1997).

    Once a company's share capital account becomes tainted, it will remain tainted. This is until the company chooses to untaint the account. A company can make a choice to untaint their share capital account at any time. However, once the choice is made it cannot be revoked.

    A share capital account is either:

    • an account that the company keeps of its share capital
    • any account created on or after 1 July 1998 where the first amount credited to the account was an amount of share capital.

    If the company has more than one account, the accounts are taken to be a single account for the tainting rules.

    Share capital takes its ordinary meaning. Share capital can include:

    • amounts received by a company in consideration for the issue of shares
    • unpaid amounts owed by members for issued shares.

    On this page:

    When a company’s share capital account becomes tainted

    A company's share capital account will become tainted if:

    • there is a transfer of an amount to the share capital account that is not an excluded amount
    • the company was an Australian resident immediately before the transfer took place.

    Excluded amounts include:

    • an amount that can be identified as share capital
    • certain amounts that are transferred under debt or equity swaps
    • an amount transferred by a non-Corporations Act 2001 company to remove shares with a par value
    • certain amounts that are transferred from an option premium reserve
    • certain amounts that are transferred in connection with the demutualisation of certain non-insurance and insurance companies. This is where the method of demutualisation is permitted by the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997).

    Broadly, a company’s share capital account is not tainted where amounts are transferred to its share capital account under a dividend re-investment plan (refer to subsection 6BA(5) of the ITAA 1936 and TD 2009/4).

    See also:

    • TD 2009/4 Income tax: in accounting for a Dividend Re-investment Plan, can a company taint its share capital account for the purposes of Division 197 of the Income Tax Assessment Act 1997?

    Consequences of tainting a share capital account

    If a company's share capital account is tainted, then:

    • a franking debit arises in the company's franking account at the end of the franking period in which the transfer occurs
    • any distribution from the account is taxed as an unfranked dividend in the hands of the shareholder
    • the account is generally not taken to be a share capital account for the purposes of the ITAA 1936 and ITAA 1997.

    Note: a company's share capital account will remain tainted until the company chooses to untaint the account. Once the choice is made it cannot be revoked.

    Find out about:

    Calculating the franking debit from tainting

    When an amount is transferred to a company's share capital account (transferred amount) that causes the account to become tainted, a franking debit arises in the company's franking account. The debit arises immediately before the end of the franking period in which the transfer occurs.

    Additional franking debits can also arise in a company’s franking account for any subsequent transfers to a tainted share capital account.

    Calculate the amount of the franking debit under section 197-45 of the ITAA 1997, as follows:

    Calculation of the franking debit is the transferred amount multiplied by the result of the corporate tax amount divided by 100% minus the corporate tax rate and then multipled by the applicable franking percentage.

    The applicable franking percentage is either:

    • the company's benchmark franking percentage for the franking period in which the transfer occurred
    • 100% if the company does not have a benchmark franking percentage for the period.

    Example: Working out the franking debit from a tainted account

    A company’s share capital account becomes tainted when an amount of $700 is transferred to the account from another account. The company has a benchmark franking percentage of 80% for the franking period in which the tainting occurred.

    The corporate tax rate is 30% at the time, so the franking debit arising from the transfer at the end of the franking period is calculated as:

    • ($700 × 30%) ÷ (70% × 80%) = $240.
    End of example

    See also:

    Untainting a share capital account

    If a company's share capital account becomes tainted, it will remain tainted until the company chooses to untaint the account.

    A company that has a tainted share capital account may make a choice using the approved form to untaint the account. The choice can be made at any time, but once the choice is made it cannot be revoked.

    If a company chooses to untaint its share capital account, the company may have:

    • a further franking debit to its franking account
    • a liability to pay untainting tax.

    Any untainting tax is due and payable 21 days after the end of the franking period for which the choice was made.

    Calculating further franking debits from untainting

    If a company chooses to untaint its share capital account, one or more franking debits may arise in the company's franking account.

    Franking debits will arise in the company's franking account where the company's applicable franking percentage (at the end of the franking period in which the choice to untaint is made) is greater than its applicable franking percentage (at the end of the franking periods in which the transfer of an amount which most recently tainted the share capital account, or in which amounts that have been transferred since then that would have tainted the account if it had not already been tainted).

    The franking debits, if they arise, will arise in the company's franking account immediately before the end of the franking period in which the choice to untaint is made.

    Where a franking debit arises, the amount of the franking debit is the amount by which the following formula exceeds the amount that arose under section 195-45 of the ITAA 1997 in relation to the transferred amount:

    Calculation of the franking debit is the transferred amount multiplied by the result of the corporate tax amount divided by 100% minus the corporate tax rate and then multipled by the applicable franking percentage.

    The applicable franking percentage is either:

    • the company's benchmark franking percentage for the franking period in which the choice to untaint was made
    • 100% if the company does not have a benchmark franking percentage for the period.

    Example: Working out a further franking debit after untainting

    A company’s share capital account becomes tainted when an amount of $700 is transferred to the account from another account. The company’s benchmark franking percentage at the end of the franking period in which the share capital account was tainted is 80%. A franking debit of $240 was made to the company’s franking account at that time.

    The company chooses to untaint its share capital account. Its applicable franking percentage at the end of the franking period when it chose to untaint is 100%. The corporate tax rate is 30%. A further franking debit which arises in the company's franking account at the end of the franking period in which the choice to untaint is made is calculated as:

    • [(700 × 30%) ÷ (70% × 100%)] − 240 = $60.
    End of example

    See also:

    Calculating the untainting tax liability

    A company that chooses to untaint its share capital account may be liable to pay untainting tax.

    The untainting tax recoups any tax that may have been avoided by the shareholders receiving non-assessable distributions from a tainted share capital account.

    The amount of untainting tax liability is calculated under section 197-60 of the ITAA 1997 as follows:

    The applicable tax amount minus the sum of section 197-45 franking credits and section 197-65 franking debits.

    Section 197-45 franking debits are the franking debits that arise from the transfer of an amount that taints the share capital account.

    Section 197-65 franking debits are the franking debits that arise from the choice to untaint the share capital account.

    The applicable tax amount is calculated as:

    The sum of the tainting amount at the time of choice to untaint and the notional franking amount, then multiplied by the applicable tax rate.

    The tainting amount includes the amount that was transferred to the share capital account that most recently resulted in the account becoming tainted. It also includes any other amounts that have been transferred since then that would have tainted the account if it had not already been tainted.

    The applicable tax rate is:

    • if the company has only lower tax members in relation to the tainting period – the corporate tax rate
    • if a company has higher tax members in relation to the tainting period – the sum of 3% plus the top marginal tax rate that applies in the income year in which the choice to untaint is made. This is specified in Part 1 of Schedule 7 to the Income Tax Rates Act 1986).

    The applicable tax rate for a company with higher tax members in relation to the tainting period was increased to the sum of 3% plus the top marginal rate from 1 July 2014 by the Tax Laws Amendment (Untainting Tax) (Temporary Budget Repair Levy) Act 2014External Link. Prior to 1 July 2014, the applicable tax rate was 2.5% plus the top marginal rate.

    This legislative amendment also increases the applicable tax rate where a company has higher tax members by an additional 2%. This is where the choice to untaint is made in the 2014–15 to 2016–17 financial years. It corresponds with the increase due to the temporary budget levy. For example, in the 2014–15 financial year the applicable tax rate for a company that has higher tax members would be 50%.

    A company will have only lower tax members in relation to the tainting period if all members of the company were either other companies, complying superannuation entities or foreign residents in that period. If not, the company will have higher tax members in relation to the tainting period.

    The notional franking amount is calculated as:

    The product of the tainting amount at the time of choice to untaint multiplied by one divided by the applicable gross-up rate.

    Where the company is liable for untainting tax, this amount is due and payable at the end of 21 days after the end of the franking period in which the choice to untaint was made.

    You can send your payments to us at:

    • Australian Taxation Office
      PO Box 9990
      PENRITH NSW 2740.

    Example calculations

    Example 1: Working out the additional franking debit

    ABC company's share capital account becomes tainted when an amount of $700 is transferred to the account. The company's benchmark franking percentage is 80% at the end of the franking period in which the account was tainted.

    The franking debit arising from the transfer at the end of the franking period is $240.

    ABC chooses to untaint its share capital account. Its applicable franking percentage at the end of the franking period in which it chose to untaint is 90%.

    At this time, the corporate tax rate is 30%. The applicable tax rate where the company has higher tax members is 47.5%.

    The franking debit arising from the choice to untaint is calculated as:

    The transferred amount multiplied by the applicable franking percentage divided by the applicable gross-up rate.

    less the amount of franking debits arising under section 197-45 of the ITAA 1997 from the transfer of the amount that tainted the company's share capital account.

    The franking debit arising from the choice to untaint is $30, calculated as:

    • ($700 × 30%) ÷ (70% × 90%) = $270
    • $270 – $240 = $30.
    End of example

     

    Example 2: Working out the untainting tax liability where the company has only lower tax members

    For ABC company in Example 1:

    • Step 1. Work out the notional franking amount, calculated as:

    The product of the tainting amount at the time of choice to untaint multiplied by one divided by the applicable gross-up rate.

    In this case, the notional franking amount is calculated as $700 × 30/70 = $300.

     

    • Step 2. Work out the applicable tax amount, calculated as:

    The sum of the tainting amount at the time of choice to untaint and the notional franking amount multiplied by the applicable tax rate.

    The applicable tax amount is calculated as (700 + 300) × 30% = $300.

     

    • Step 3. Workout the liability for untainting tax, which is:

    The applicable tax amount minus the sum of section 197-45 franking credits and section 197-65 franking debits.

    In this case, the company's liability for untainting tax is 300 – (240 + 30) = $30.

    End of example

     

    Example 3: Working out the untainting tax liability where the company has higher tax members

    For ABC company in Example 1:

    • Step 1. Work out the notional franking amount, calculated as:

    The product of the tainting amount at the time of choice to untaint multiplied by one divided by the applicable gross-up rate.

    In this case, the notional franking amount is calculated as $700 × 30% ÷ 70% = $300.

     

    • Step 2. Work out the applicable tax amount, calculated as:

    The sum of the tainting amount at the time of choice to untaint and the notional franking amount multiplied by the applicable tax rate.

    The applicable tax amount is calculated as (700 + 300) × 47.5% = $475.

     

    • Step 3. Work out the liability for untainting tax, which is:

    The applicable tax amount minus the sum of section 197-45 franking credits and section 197-65 franking debits.

    In this case, the company's liability for untainting tax is 475 – (240 + 30) = $205.

    End of example

    See also:

    Making a written notice of choice to untaint

    The company makes the choice to untaint its share capital account by providing a written notice in the approved form to the Commissioner of Taxation. Your notice must be signed by the company's public officer, and include:

    • the company's name and tax file number (TFN)
    • the date on which the choice to untaint the company's share capital account was made.

    It is helpful to also supply the following information:

    • any amount of untainting tax the company is liable to pay as a result of the choice to untaint its share capital account
    • any additional franking debits that may arise from the choice to untaint.

    Send your notice and any additional information to us at:

    • Australian Taxation Office
      PO Box 9990
      PENRITH NSW 2740.

    See also:

      Last modified: 01 Mar 2021QC 50658