EXPLANATORY NOTES(Circulated by the Treasurer, the Hon. B.M. Snedden, Q.C., M.P.)
The provisions of the Income Tax Bill 1972 were explained in the Explanatory Memorandum that was circulated for the information of Honourable Members when the Bill was introduced in the House on 9 December 1971.
The purpose of these notes is to explain the amendments that are now proposed. These relate to both subjects of the Bill, viz., provisions concerning rebates on inter-company dividends and provisions concerning conditions under which a company is to be treated as a public company for income tax purposes.
Very broadly, the amendments will incorporate in the rebate measures guidelines relating to the identification by the Commissioner of Taxation of the sort of operations to be treated as dividend stripping. For the public company subsidiary tests, the amendments will remedy technical deficiencies in the Bill as it would otherwise apply to some companies that have adopted irregular accounting periods for income tax purposes.
Notes on Clauses
Clause 1: Short title and citation.
The amendment to this clause of the Bill changes the short title and citation of the Amending Act and the Principal Act. This is consequent upon the Bill's title being changed to the Income Tax Assessment Bill (No. 3) 1972.
Clause 4: Rebate on dividends paid as part of dividend stripping operations.
This clause of the Bill will insert in the Principal Act a new provision, section 46A, to govern the determination of rebates on dividends arising out of dividend stripping operations.
In defining the area of application of the proposed section 46A, sub-section (1.) refers to a transaction, operation, undertaking, scheme or arrangement that the Commissioner of Taxation is satisfied is by way of dividend stripping. The proposed amendments to clause 4 will expand section 46A by the inclusion of two additional provisions, sub-sections (1A.) and (1B.), relating to the identification of dividend stripping operations. A drafting change to sub-section (1.) of the proposed section is made necessary by the inclusion of the two new sub-sections.
The new sub-section (1A.) will ensure that an operation cannot be treated as dividend stripping unless the shareholder company which is entitled to a rebate on the relevant dividend is also actually or effectively entitled to a deduction for the cost of acquiring its shares in the dividend-paying company. The two entitlements are, of course, a major incentive for a company performing a dividend strip.
Sub-section (1B.) will state matters which, in a case otherwise potentially within the scope of the section, the Commissioner is required to consider when forming an opinion as to whether a dividend arises out of an operation that constitutes dividend stripping. In broad terms, these matters are -
- whether, in effect, the receipt of dividends on the shares amounts to a recoupment of the price paid for the shares;
- whether the value of the shares is substantially reduced after acquisition by the shareholder and, if so, whether the reduction is wholly or mainly attributable to dividends received;
- whether there are special conditions associated with the shareholder's dividend rights which virtually fix the amount that he is to receive as dividends; and
- any other relevant matters.
The sub-section thus directs the Commissioner to consider features common to dividend stripping as the term is ordinarily understood. These features do not exist in normal commercial transactions, e.g., in the purchase in the ordinary way of shares cum div. and the subsequent sale of those shares.
Clause 5: Interpretation.
Clause 6: Private companies.
The technical amendments to paragraph (c) of clause 5 and to clause 6 of the Bill are complementary. They are concerned with the extraordinary case of parent and subsidiary companies whose corresponding years of income end on different dates. Their purpose is to ensure that the provisions of the Bill apply in the same substantial manner in these cases as in the conventional case of identical balancing dates.
Paragraph (c) of clause 5 inserts the new section 103(4.) in the Principal Act to define a listed company that may confer public company subsidiary status on another company under the new section 103A(4B.).
Sub-clause (1.) of clause 6 inserts in the Principal Act the new sections 103A(4.) and 103A(4B.) to provide the basic conditions under which a company may qualify to be taxed as a subsidiary of a public company.
As the Bill now stands, the tests in section 103A(4.) apply to a company that is wholly-owned by one or more public companies; the tests in section 103A(4B.) apply to a company that is not wholly-owned, but is more than one-half owned, by one or more listed public companies. Public company subsidiary status may be conferred under the provisions mentioned on a company in respect of a year of income by a parent company that is a public company in relation to its own corresponding year of income.
The concept of considering only the corresponding income years of the subsidiary and its parent company could be exploited for tax avoidance purposes where those corresponding income years do not end on the same date. For example, where a company balances on 30 June and its parent company on the preceding 31 March, it would be possible for that company to acquire public company subsidiary status for its income year ended 30 June even though its parent company (which is a public company for its corresponding income year ended 31 March) may be controlled by non-public interests for a part of the subsidiary's income year, i.e., during the period 1 March to 30 June.
It is this period of non-public ownership of what would technically be a public company subsidiary under the Bill that could be used for the tax avoiding purposes which the Bill is intended to counter and it is this situation which the amendments proposed to paragraph (c) of clause 5 and to clause 6 are intended to rectify.
The effect of the amendment to paragraph (c) of clause 5 of the Bill is that a company qualifying as a public company subsidiary under the section 103A(4B.) tests will need to be more than one-half owned for the whole of its income year by one or more listed public companies.
The effect of the amendment proposed to clause 6 of the Bill is that public company subsidiary status under the wholly-owned tests in section 103A(4.) will be achieved only by a company, that balances on the same day as its public company parent. Other wholly-owned companies will need to qualify under the tests of section 103A(4B.) that, in the Bill as it now stands, would have applied only in respect of the less than wholly-owned companies.
Clause 12: Application and transitional provisions.
The proposed sub-clauses (2.) to (9.) of clause 12, which will take the place of present sub-clauses (2.) to (8.) of that clause, will make technical changes to the transitional provisions of the Bill.
With one exception, the new tests governing public company subsidiaries are to apply for the 1971-72 income year and all subsequent income years. The exception is under sub- clause (2.) of clause 12 of the Bill which applies the new tests to the 1970-71 income year of an artificial public company subsidiary where the necessary share allotments setting up the tax avoiding structure were not finalised until after the announcement on 28 April 1971 of the proposal to change the tests which a company must meet to be a subsidiary of a public company for income tax purposes.
In the present sub-clause (2.), the new tests could not be applied to the 1970-71 income year of an artificial public company subsidiary in certain circumstances. This would be the case where the artificial structure was finalised after 28 April 1971 but the private operating company that paid dividends to the artificial subsidiary during the latter's 1970-71 income year was not itself a private company for 1970-71.
The amendment to sub-clause (2.) will remove this defect in the Bill. As amended, sub-clause (2.) will operate to apply the new public company subsidiary tests to the 1970-71 income year where the necessary share allotments were finalised after 28 April 1971 and any dividends received by the artificial public company subsidiary during 1970-71 would be taken into account in the private operating company's undistributed income tax assessment for any year.
In its present form, sub-clause (3.) of clause 12 enables a company to be treated as a subsidiary of a public company for 1971-72 even though it does not satisfy the new tests at all times during that income year.
The effect of sub-clause (3.) as it now stands is to provide a period of grace until one month after the Royal Assent to this Bill for a company to comply with the new tests for 1971-72. However, some companies with irregular accounting periods may require similar treatment for their 1972-73 income year also.
The amendment to sub-clause (3.) will enable the period of grace to be applied in relation to the 1971-72 income year as under the present sub-clause (3.) and, in addition, to the 1972-73 income year also if this should be necessary.
The amendment to sub-clause (4.) is a drafting measure necessitated by the amendment to sub-clause (3.).
There are two changes to sub-clause (5.). The first is consequential upon the extension of sub-clause (3.) to provide a period of grace in respect of the 1972-73 income year.
In its present form, sub-clause (5.) excludes from the operation of sub-clause (3.) for 1971-72 an artificial public company subsidiary which has received private company dividends during that period of its 1971-72 income year in which the artificial subsidiary did not comply with the new tests. A company in this position will need to comply with the new tests for the whole of its 1971-72 income year to be treated as a public company subsidiary for that year.
The amendment to sub-clause (5.) will exclude also the 1972-73 income year from the operation of sub-clause (3.) where the artificial subsidiary has received private company dividends during that period of its 1972-73 income year in which the artificial subsidiary did not comply with the new tests.
The other change to sub-clause (5.) will cause this provision to apply only in relation to private company dividends that are paid after the announcement of the proposed amendments on 28 April 1971. In some irregular accounting period cases, sub-clause (5.) in its present form could deny the benefit of sub-clause (3.) to an artificial subsidiary that received private company dividends on or before that date.
Sub-clauses (6.) and (7.) as they now stand define "the relevant period" during which the public company subsidiary tests in the Bill are to be satisfied by a subsidiary company that is to acquire public company status by the operation of sub-clause (3.) for its 1971-72 income year.
Sub-clauses (6.), (7.) and (8.) will replace the present sub-clauses (6.) and (7.) for purposes relating to the extension of the operation of sub-clause (3.) to the 1972-73 income year.
The relevant period in any case will be a period that commences not later than one month after the Royal Assent to this Bill.
The relevant period for the 1971-72 income year will end on the last day of that year where the period commences during 1971-72.
Where the relevant period commences during the 1972-73 income year, it will end on 1 December 1972 (the earliest irregular balancing date for the 1972-73 income year) for the purpose of applying sub-clause (3.) to the 1971-72 income year, and on the last day of the 1972-73 income year for the purpose of applying sub-clause (3.) to the 1972-73 income year.
Sub-clause (9.) re-enacts without change the present sub-clause (8.) of the Bill.