HOUSE OF REPRESENTATIVES

TAXATION LAWS AMENDMENT BILL (NO. 6) 1992

Taxation Laws Amendment Act (No. 6) 1992

MEDICARE LEVY AMENDMENT BILL (NO. 2) 1992

Medicare Levy Amendment Act (No. 2) 1992

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon. John Dawkins, M.P.)

Dividend Streaming Arrangements

Summary of proposed amendments

Purpose of amendment: to bring into the required franking amount calculation for a franked dividend paid by a resident company, dividends paid by non-resident associates, that are substituted for, or by, the franked dividend under a dividend streaming arrangement.

Date of Effect: the amendment will apply to dividends paid by a resident company on or after the date the Bill receives Royal Assent.

Background to the legislation

It is a general requirement of the imputation system that companies frank to the same extent all dividends paid as part of the same distribution on a particular class of shares. Further, when a company pays a dividend to shareholders, it is generally required to frank the dividend to the extent of the surplus in the franking account on the day that dividend is paid. This amount is known as the required franking amount.

It is important to note that when a company has to calculate this required franking amount for the dividend the provisions allow the company to take into account, broadly, other dividends that are to be paid on the same day and dividends the company is committed to pay in the future.

Prior to the introduction of the dividend streaming provisions, companies were able to avoid franking dividends paid on a single class of shares to the same extent for all shareholders. This was achieved by using dividend selection schemes to stream franked dividends to those shareholders able to benefit from them most.

However, the dividend streaming provisions now treat a resident company involved in a dividend streaming arrangement as having franked to the same extent all dividends paid under the arrangement, including dividends paid by another company.

For example, an Australian resident parent company with a dividend streaming arrangement in place incurs a franking debit in its franking account, for the franked dividend it pays to the Australian shareholders and also for the unfranked dividend that its non-resident subsidiary pays to the non-resident shareholders.

Currently, where the dividend substituted for, or by, the franked dividend is paid at the same time as, or after, the franked dividend under a streaming arrangement, the debit imposed by the streaming provisions arises only after the required franking amount calculation for the franked dividend has been made.

In the above example, if the Australian parent company pays its dividend first, that dividend is required to be franked to the extent permitted by the franking surplus in the franking account. The franking debit that is subsequently imposed by the dividend streaming provisions (in this instance subsection 160AQCB(3)) when the non-resident subsidiary company pays its dividend, may put the franking account of the Australian parent company in debit. If the company does not receive franking credits to cover that franking debit a franking deficit may arise at the end of the franking year. In that event the company may be liable to franking deficit tax under section 160AQJ.

Explanation of proposed amendments

The proposed amendments will bring the dividends substituted for, or by, the franked dividends under a streaming arrangement into the calculation of the required franking amount calculation of that franked dividend.

This will be achieved by including as components in the required franking amount formula in subsection 160AQE(2) the dividends substituted for,or by, the franked dividend. That is the dividends substituted for, or by, the franked dividend will be brought into the calculation in the same way as dividends paid on the same day or committed future dividends.

Note that the proposed amendments to the required franking amount formula in subsection 160AQE(2) will only affect companies paying dividends as part of an international dividend streaming arrangement. For all other companies the value of the proposed new components in that formula will be nil. Their calculations will remain unaffected by these amendments.

Therefore, the proposed legislation will apply to companies that are involved in arrangements described in paragraphs (b)(ii)(C) and (b)(ii)(D) of the definition "dividend streaming arrangement" in section 160APA, as they relate to international arrangements.

Broadly, international dividend streaming arrangements will be encapsulated by the amendments by reference to dividends paid by a company not resident at the time of payment, being the dividends substituted for, or by, the relevant franked dividend [Clause 7, new subparagraph (a)(i)(B) of the definition of "LD" in subsection 160AQE(2) and new subparagraph (a)(ii)(B) of the definition "SD" in subsection 160AQE(2)] .

After the proposed amendments the formula in subsection 160AQE(2) will look like this:

CD * (RFS /(D + CFD + SDD + LD + SD))

The first of the new components is " LD ", meaning "proposed linked dividends", and is defined as one or more dividends that will be paid by a non-resident company and will give rise to a franking debit under subsection 160AQCB(3). [Clause 7, new subparagraph (a)(i) in the definition of "LD" in subsection 160AQE(2)]

Broadly, this is the dividend payable by the non-resident company in substitution for the franked dividend for which we are calculating the required franking amount.

Current dividend in relation to " LD " is defined as one of the substituted dividends under subsection 160AQCB(3) which is paid on or after the date of Royal Assent of this Bill [Clause 7, new subparagraph (a)(ii) in the definition of "LD" in subsection 160AQE(2)] .

For the purposes of subsection 160AQE(2), the total amount of the proposed linked dividends is to be taken into account when calculating the provisional required franking amount.

The second of the new components is" SD ", meaning "eligible substituted dividends", and is defined as one or more dividends that are covered by subsection 160AQCB(4) and were paid, are paid or proposed to be paid by another company when that other company is not a resident.

Broadly, this is the dividend payable by another company that has been substituted by the dividend for which we are calculating the required franking amount.

Current dividend in relation to " SD " is defined as one of the scheme dividends under subsection 160AQCB(4) - the payment of which is the trigger for a franking debit to arise under that subsection - which is paid on or after the date of Royal Assent of this Bill [Clause 7, new subparagraph (a)(i) in the definition of "SD" in subsection 160AQE(2)] .

For the purposes of subsection 160AQE(2), the total amount of the eligible substituted dividends is to be taken into account when calculating the provisional required franking amount.

Example An Australian parent company has franking surplus in its franking account of $50,000 at the time it is to pay an $80,000 dividend to its Australian shareholders. The company has an arrangement with its non-resident subsidiary company to pay a linked dividend to non-resident shareholders in substitution for the first dividend. After the parent company pays its dividend to Australian shareholders, the subsidiary company pays non-resident shareholders a $20,000 linked dividend.Under the current provisions of subsection 160AQE(2) the provisional required franking amount would be calculated at the time when the first dividend is paid as:

80,000 * (50,000 / 80,000) = $50,000

This means that the parent company has to frank the dividends, at least, to the extent of $50,000 or 62.5%.When the subsidiary company pays the linked dividend, a franking debit of $12,500 (being $20,000 x 62.5%) would arise to the parent company under subsection 160AQCB(3). If no other franking credits become available to the company, a franking deficit would arise at the end of that franking year and franking deficit tax may be payable under section 160AQJ.Under the proposed amendment the parent company will be able to take into account the proposed linked dividend when determining the provisional required franking amount for the dividend to be paid to Australian shareholders. Thus, the provisional required franking amount would be calculated as follows:

80,000 * (50,000 / (80,000 + 20,000) = $40,000

The parent company would be required to frank its dividend to, at least, $40,000 or 50%. There would remain in the franking account a surplus of $10,000. When the linked dividend is paid by the subsidiary company, a franking debit of $10,000 (being $20,000 x 50%) will arise. In the absence of other movements in the franking account this debit will be offset against the available franking surplus bringing the franking account balance to nil.


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