Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 9 - Imputation - thresholds for franking credit trading rules
Outline of Chapter
9.1 This Chapter explains the amendments made by Part 4 of Schedule 3 to this Bill to the franking credit trading rules. These amendments will increase the threshold for the small shareholder exemption under the holding period rule (the '45-day rule') from $2,000 to $5,000, and simplify the exemption by applying the threshold without a taper, for the 1999-2000 year of income and later years.
Context of Reform
9.2 This measure will ensure that more small investors are relieved of the effect of the holding period rule. It is part of the Government's response to the Recommendations of the Review concerning the dividend streaming and franking credit trading rules.
9.3 The holding period rule requires taxpayers to hold shares at risk for at least a certain number of days (45) to be eligible for the franking rebate. Individual taxpayers with small shareholdings can bypass the requirements of the holding period rule by electing for a cap to apply to their franking rebate entitlement. The current threshold for this exemption is $2,000. Taxpayers with a total franking rebate entitlement of $2,000 or less receive a full rebate. Increasing the threshold to $5,000 will allow more small shareholders to receive their franking rebates without having to comply with the holding period rule.
Summary of new law
9.4 The threshold for the small shareholder exemption under the holding period rule will be increased from $2,000 to $5,000. The exemption will also be simplified by removing the taper that applies to the existing threshold of $2,000. Taxpayers who do not satisfy the holding period rule are currently entitled to a partial rebate if their franking rebate entitlement is between $2,001 and $2,499.
9.5 Under the new rules, the exemption will apply to all individual taxpayers with a total franking rebate entitlement of $5,000 or less. The exemption will be easier for taxpayers to understand and apply. In particular, they will no longer need to elect for the exemption to apply as it will always be no less favourable than complying with the holding period rules. These changes will apply to assessments for the 1999-2000 year of income and later years.
Comparison of key features of new law and current law
| New Law | Current Law |
|---|---|
| The threshold for the small shareholder exemption under the 45-day rule will be $5,000. | The threshold is $2,000. |
| The exemption will not be tapered. | The exemption is tapered. |
| The exemption will apply to all individual taxpayers with a total franking rebate entitlement of $5,000 or less. | Taxpayers have to elect for the exemption to apply, because if the taper applies it may be more or less favourable than the 45-day rule. |
Detailed explanation of new law
9.6 The threshold for the small shareholder exemption will be increased to $5,000. [Schedule 3, item 98, new section 160APHT]
9.7 The exemption is currently tapered. If a taxpayer's total franking rebates are greater than $2,000, the taxpayer's franking rebate entitlement is reduced under section 160AQZJ by $4 for every $1 that the taxpayer's total franking rebates exceed $2,000. The franking rebate cuts out at $2,500. A taxpayer is entitled to a deduction under section 160AQZK equal to any reduction of his or her franking rebate entitlement under the taper to offset the gross-up of the taxpayer's assessable income on receipt of the franked dividends.
9.8 Under the existing rules, taxpayers have to elect for the exemption to apply under section 160AQZI because of the taper. If the exemption was not elective, a taxpayer with a total franking rebate entitlement between $2,001 and $2,499 who satisfied the 45-day rule would be denied part of his or her rebate.
9.9 The exemption will be simplified by removing the taper. A taxpayer will not need to make an election for the exemption to apply. Also, the rules for the proportionate reduction of the rebate and the complementary deduction will no longer be necessary. Accordingly, Subdivision BB of Division 7 of Part IIIAA, which contains sections 160AQZI, 160AQZJ and 160AQZK, will be repealed. The conditions for this exemption otherwise remain unchanged. [Schedule 3, item 99]
Application and transitional provisions
9.10 The increased threshold of $5,000 for the small shareholder exemption will apply to assessments for the 1999-2000 year of income and later years. [Schedule 3, item 100]
Consequential amendments
9.11 There are no consequential amendments for this measure.