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  • ATO cautions companies about raising capital to fund franked distributions

    The ATO is reviewing arrangements where companies raise new capital to fund franked distributions and release accumulated franking credits to shareholders.

    “We consider that these arrangements are being entered into by companies with accumulated franking balances to release franking credits which they otherwise would have retained,” Deputy Commissioner Tim Dyce said.

    In a typical case the ATO is seeing companies issue rights to shareholders and use funds raised to make franked distributions via special dividends or an off-market share buy-back.

    These arrangements are distinct from ordinary dividend reinvestment plans involving regular dividends.

    “The distributions are unusually large compared to ordinary dividends and occur at a similar time, and in a similar amount, to the capital raised,” Mr Dyce said.

    “So, a potentially large amount of franking credits is released with minimal net changes to the company’s economic position. There is also minimal impact on the shareholders, except in some cases they may receive refunds of franking credits and in the case of buy-backs they may also get improved capital gains tax outcomes.”

    The ATO considers that these arrangements may not be compliant with the tax law, in particular the general anti-avoidance provisions. Therefore, there may be adverse implications for shareholders and companies involved in these arrangements.

    “In addition to working with taxpayers in recent cases, we are engaging with key large business stakeholders on the arrangement and will work with affected taxpayers to help them comply with the law,” Mr Dyce said.

    Early engagement

    Taxpayers who have entered into, or are contemplating entering into an arrangement similar to this are encouraged to discuss their situation with the ATO by emailing PGI Advice.

    More information

    For more information on these arrangements, refer to Taxpayer Alert TA 2015/2External Link.

    Last modified: 07 May 2015QC 45073