Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
Chapter 7 - Company Law Review Amendments
7.1 The amendments to the Income Tax Assessment Act 1936 (ITAA1936) and associated tax laws:
- provide for the necessary machinery provisions to collect untainting tax;
- ensure that distributions from share premium accounts are within the ambit of the capital streaming and dividend substitution rules;
- make some minor technical changes to rectify certain incorrect references; and
- ensure that bonus shares deemed to be a dividend under section 45C have a cost base of the dividend amount where the shares are held on revenue account.
7.2 The purpose of the amendments is to make some technical and clarificatory amendments to the ITAA 1936 and associated tax laws and to ensure that distributions of share premium are within the ambit of the capital streaming and dividend substitution rules.
7.3 The amendment to include distributions of share premium in the capital streaming and dividend substitution rules will apply from the date of introduction of this Bill. The other amendments apply from 1 July 1998, the date of commencement of the Taxation Laws Amendment (Company Law Review) Act 1998 (TLA(CLR) 1998).
7.4 The TLA(CLR) 1998 made various amendments to the tax laws as a result of changes to the company law which included the abolition of par value for shares and the related concepts of share premium and paid-up capital. In addition, the TLA(CLR) 1998 also introduced several anti-avoidance rules including:
- rules that prevent companies from providing shareholders with bonus shares or other capital benefits in lieu of unfranked dividends (the capital streaming rules); and
- a rule that applies where a capital benefit is provided under an arrangement where the company or a taxpayer has a purpose, other than an incidental purpose, of conferring or obtaining a tax advantage in connection with the capital benefit (the dividend substitution rule).
7.5 Companies not incorporated under the Corporations Law (that is, some statutory companies) are also subject to the anti-avoidance rules. These companies continue to have par value shares and share premium accounts in respect of those shares. As a result, these companies can make an equivalent distribution of share capital by distributing share premiums. However, the anti-avoidance rules as currently drafted only apply to distributions of share capital.
7.6 Moreover, the TLA(CLR) 1998 also introduced a share capital tainting rule that treats distributions from a tainted share capital account as unfrankable and unrebatable dividends unless the company elects to untaint that account. In this regard the Income Tax (Untainting Tax) Act 1998 imposes a liability to untainting tax in certain circumstances where a company elects to untaint its share capital account.
7.7 To ensure that distributions of capital in the guise of share premiums can attract the operation of the capital streaming and dividend substitution rules, certain amendments have been made to sections 45A, 45B and 45C of the ITAA 1936. Broadly speaking these amendments extend current references to share capital and distributions of share capital to share premiums and distributions of share premiums. In this way capital streaming or dividend substitution arrangements that rely on the use of share premiums can attract the operation of the anti-avoidance provisions contained in sections 45A and 45B of the Income Tax Assessment Act 1936. [Items 4 to 9 of Schedule 7 ; amended paragraphs 45A(3)(b), 45B(4)(b), 45B(5)(b), 45B(5)(h) and 45C(4)(c)]
7.8 To ensure that certain amendments made by the TLA(CLR) 1998 operate as intended some minor technical and clarificatory amendments have also been made to:
- correct misquoted cross-references and remove erroneous terms; and [Items 2, 3 and 10 to 16 of Schedule 7 ; amended subsections 6BA(4), 6BA(5), 45D(2) and 109-55(1) of the Income Tax Assessment Act 1997 and amended paragraphs 159GZG(6)(e), 159GZG(6)(f), 160ARDW(2)(a) and 160ARDW(2)(b) of the ITAA 1936]
- insert machinery provisions for the proper collection of untainting tax. [Item 17 of Schedule 7 ; new sections 160ARDZ, 160ARDZA, 160ARDZB, 160ARDZC and 160ARDZD of the ITAA 1936]
7.9 It is expressly provided in paragraph 130-20(2)(a) that bonus shares deemed to be a dividend under section 45C have a cost base of the dividend amount for capital gains tax purposes. However, section 6BA the corresponding provision for shares which are held on revenue account, does not expressly refer to section 45C. Amended subsection 6BA(2) provides that if bonus shares are taken to be a dividend including under section 45C, the cost of the shares is so much of the dividend as is included in the relevant taxpayers assessable income. [Item 1 of Schedule 7 ; amended subsection 6BA(2)]