Supplementary Explanatory Memorandum
(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)Chapter 3: Parliamentary amendments to Schedule 5 - Franked distributions funded by capital raisings
Outline of chapter
3.1 The parliamentary amendments to Schedule 5 to the Bill make the following changes to the operation of the Schedule.
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- Schedule 5 will now apply from the day after Royal Assent.
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- A distribution is funded by capital raising if that capital raising funds at least a substantial part of the distribution (rather than any part of the distribution).
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- Only the portion of the distribution that is funded by the capital raising will be unfrankable.
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- Where an equity issue is in response to a regulatory requirement, directive or recommendation (e.g., by the Australian Prudential Regulation Authority). That distribution will not be unfrankable merely because of the amendments in Schedule 5.
3.2 These changes will improve the operation of Schedule 5 to the Bill by:
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- operating after the day of Royal Assent thereby providing greater certainty; and
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- ensuring the measure is more targeted to artificial and contrived arrangements and mitigates any unintended impacts.
Context of amendments
3.3 Schedule 5 to the Bill amends the ITAA 1997 by making certain distributions that are funded by capital raisings unfrankable.
3.4 The measure is intended to discourage arrangements that feature the raising of capital to fund the payment of franked distributions and the release of those franking credits in a way that does not significantly change the financial position of the entity. These arrangements may be associated with driving artificial and contrived tax outcomes without an underlying commercial purpose.
3.5 The Bill was introduced to the Australian Parliament on the 16 February 2023 and was referred to the Senate Economics Legislation Committee for inquiry and report by 26 May 2023. As part of that inquiry, the Committee received submissions from a range of stakeholders, and concerns were raised about Schedule 5 as it initially appeared in the Bill. The parliamentary amendments to the provisions in Schedule 5 seek to address those concerns by providing greater clarity and certainty in their application.
3.6 The Explanatory Memorandum to the Bill provides further information about Schedule 5.
Detailed explanation of amendments
Franked distributions-application
3.7 Schedule 5 to the Bill will only apply to distributions that are made after commencement of the schedule. This provides greater certainty in relation to transactions that have already commenced and will ensure the amendments do not impact transactions that cannot be reversed.
3.8 This amendment will change two aspects of the link between the equity issue and the distribution that is made.
Franked distributions-substantial part of the distribution
3.9 After this amendment, a distribution will only be unfrankable where the principal effect of the equity issue is to fund, either directly or indirectly, the whole distribution or a substantial part of the distribution (rather than any part of the distribution). It will also be necessary to show that the entity undertook the capital raising with a purpose to fund at least a substantial part of the relevant distribution.
3.10 The meaning of 'substantial' will depend on the facts and circumstance of each distribution. A relevant factor is the proportion of the distribution funded by the capital raising. This proportion does not need to be a majority but must be more than a small or minor part of the distribution.
3.11 It may also be necessary to consider additional factors such as market conditions or the size or performance of the entity that is making the distribution.
Franked distributions-proportionality
3.12 The amount of the distribution that is unfrankable is only limited to the portion funded by the capital raising.
3.13 Where the principal effect of the capital raising is to fund the entire distribution, the entire distribution will be unfrankable. Conversely, if the principal effect of the equity issue is to fund a substantial part of the distribution, the amount of the distribution that is unfrankable will be determined in proportion to the part of the distribution funded by the equity issue.
Franked distributions-regulatory requirements
3.14 A distribution will not be made unfrankable if the capital raising that funded that distribution is made in response to a requirement, direction or recommendation from APRA or ASIC. In these circumstances, while the transaction may not have an underlying commercial purpose, it would have been made as a response to a regulatory requirement and be exempt from the application of the integrity provisions under the amendments.