Taxation Laws Amendment Act (No. 3) 1998 (47 of 1998)

Schedule 7   Franking of dividends and other distributions

Part 2   Income Tax Assessment Act 1936 (schemes to provide franking credit benefits)

25   After section 177E

Insert:

177EA Creation of franking debit or cancellation of franking credits

Definitions

(1) In this section, unless the contrary intention appears:

distribution , in relation to an interest in shares, has the meaning given by subsection (15).

franked :

(a) in relation to a dividend, means franked in accordance with section 160AQF; and

(b) in relation to a distribution in respect of an interest in shares, has the meaning given by subsection (16).

franking credit benefit has the meaning given by subsection (18).

greater benefit from franking credits has a meaning affected by subsection (20).

interest in shares has the meaning given by subsection (13).

relevant circumstances has a meaning affected by subsection (19).

relevant taxpayer has the meaning given by subsection (3).

scheme for a disposition , in relation to shares or an interest in shares, has a meaning affected by subsection (14).

share has a meaning affected by subsection (12).

Expressions to have same meanings as in Part IIIAA

(2) Subject to subsection (1), expressions used in this section that are defined in Part IIIAA have the same meanings as in that Part.

Application of section

(3) This section applies if:

(a) there is a scheme for a disposition of shares, or an interest in shares, in a company; and

(b) a frankable dividend has been paid, or is payable or expected to be payable, in respect of the shares or a distribution has been paid, or is payable or expected to be payable, in respect of the interest, as the case may be; and

(c) the dividend or distribution was, or is expected to be, franked; and

(d) except for this section, a person (the relevant taxpayer ) would receive, or could reasonably be expected to receive, franking credit benefits as a result of the dividend or distribution; and

(e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a franking credit benefit.

Bare acquisition of shares or interest in shares

(4) It is not to be concluded for the purposes of paragraph (3)(e) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph merely because the person acquired shares, or an interest in shares, in the company.

Commissioner to determine franking debit or deny franking credit

(5) The Commissioner may make, in writing, either of the following determinations:

(a) if the company is a party to the scheme, a determination that a franking debit of the company arises in respect of each dividend paid to the relevant taxpayer;

(b) a determination that no franking credit benefit is to arise in respect of a dividend or a specified part of a dividend paid, or in respect of a distribution or a specified part of a distribution made, to the relevant taxpayer.

A determination does not form part of an assessment.

Notice of determination

(6) If the Commissioner makes a determination under subsection (5), the Commissioner must:

(a) in respect of a determination made under paragraph (5)(a) - serve notice in writing of the determination on the company; or

(b) in respect of a determination made under paragraph (5)(b) - serve notice in writing of the determination on the relevant taxpayer.

The notice may be included in a notice of assessment.

Publication in national newspaper of determination in relation to listed public company denying franking credit benefit

(7) If the Commissioner makes a determination under paragraph (5)(b), in respect of a dividend paid by a listed public company within the meaning of the Income Tax Assessment Act 1997, the Commissioner is taken to have served notice in writing of the determination on the relevant taxpayer if the Commissioner causes the notice to be published in a daily newspaper that circulates generally in each State, the Australian Capital Territory and the Northern Territory. The notice is taken to have been served on the day on which the publication takes place.

Evidence of determination

(8) The production of:

(a) a notice of a determination; or

(b) a document signed by the Commissioner, a Second Commissioner or a Deputy Commissioner purporting to be a copy of a determination;

is conclusive evidence of:

(c) the due making of the determination; and

(d) except in proceedings under Part IVC of the Taxation Administration Act 1953 on an appeal or review relating to the determination, that the determination is correct.

Objections

(9) If a taxpayer to whom a determination relates is dissatisfied with the determination, the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953.

Effect of determination of franking debit

(10) If the Commissioner makes a determination under paragraph (5)(a):

(a) on the day on which notice in writing of the determination is served on the company, a franking debit of the company arises in respect of the dividend; and

(b) the amount of the franking debit is such amount as is stated in the Commissioner's determination, being an amount that:

(i) the Commissioner considers reasonable in the circumstances; and

(ii) does not exceed the amount of the franking debit of the company arising under section 160AQB in respect of the dividend.

Effect of determination that no franking credit benefit is to arise

(11) If the Commissioner makes a determination under paragraph (5)(b), the determination has effect according to its terms.

Meaning of share

(12) A share includes:

(a) the interest in a corporate limited partnership (within the meaning of Division 5A of Part III) that a partner in the partnership has; and

(b) if a company does not have a share capital - the interest in the company that a member has.

Meaning of interest in shares

(13) A person has an interest in shares if:

(a) the person has any legal or equitable interest in the shares; or

(b) the person is a partner in a partnership and:

(i) the assets of the partnership include, or will include, the shares; or

(ii) the partnership derives, or will derive, income indirectly through interposed companies, trusts or partnerships, from dividends paid on the shares; or

(c) the person is a beneficiary of a trust (including a potential beneficiary of a discretionary trust) and:

(i) the shares form, or will form, part of the trust estate; or

(ii) the trust derives, or will derive, income indirectly through interposed companies, trusts or partnerships, from dividends paid on the shares.

Meaning of scheme for a disposition

(14) A scheme for a disposition of shares or an interest in shares includes, but is not limited to, a scheme that involves any of the following:

(a) issuing the shares or creating the interest;

(b) entering into any contract, arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the shares or interest;

(c) creating, varying or revoking a trust in relation to the shares or interest;

(d) creating, altering or extinguishing a right, power or liability attaching to, or otherwise relating to, the shares or interest;

(e) substantially altering any of the risks of loss, or opportunities for profit or gain, involved in holding or owning the shares or having the interest;

(f) the shares or interest beginning to be included, or ceasing to be included, in any of the insurance funds of a life assurance company.

Meaning of distribution

(15) A distribution in respect of an interest in shares is made if a partnership amount within the meaning of Part IIIAA, or a trust amount within the meaning of that Part, is included in, or is allowable as a deduction from, a person's assessable income.

Meaning of franked distribution

(16) A distribution in respect of an interest in shares is taken to be franked if there is a class A flow-on franking amount, a class B flow-on franking amount or a class C flow-on franking amount in relation to the relevant partnership amount or trust amount.

Assumptions to be made for purposes of subsections (15) and (16)

(17) In determining whether:

(a) a partnership amount or a trust amount is included in, or allowable as a deduction from, a person's assessable income for the purposes of subsection (15); or

(b) there is a flow-on franking amount in relation to a partnership amount or a trust amount for the purposes of subsection (16);

assume:

(c) that sections 110C, 112A, 116FB, 282B, 283 and 297B had not been enacted; and

(d) that the definition of eligible insurance policy in section 116E were amended by omitting “an RA policy, a superannuation policy, a sickness policy, a funeral policy or an eligible policy” and substituting “an RA policy or a superannuation policy”.

When franking credit benefit is received

(18) A taxpayer receives a franking credit benefit if:

(a) the taxpayer is a company and:

(i) a franking credit of the company arises under section 160APP or 160APQ; or

(ii) the company is entitled to a rebate under section 46 or 46A in respect of a franked dividend or a part of a franked dividend, or in respect of a franked distribution in respect of an interest in shares, and would not be so entitled if the dividend or distribution were not franked; or

(b) the taxpayer is a trustee or a partnership and an amount is included in the taxpayer's assessable income because of the operation of section 160AQT; or

(c) the taxpayer is entitled to a rebate of tax under section 160AQU, 160AQX, 160AQY, 160AQYA, 160AQZ or 160AQZA; or

(d) the taxpayer is not liable to pay tax under section 128B on a dividend or a part of a dividend because of the operation of paragraph 128B(3)(ga).

Meaning of relevant circumstances of scheme

(19) The relevant circumstances of a scheme include the following:

(a) the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding shares, or having interests in shares, in the company that are respectively borne by or accrue to the parties to the scheme, and whether there has been any change in those risks and opportunities for the relevant taxpayer or any other party to the scheme (for example, a change resulting from the making of any contract, the granting of any option or the entering into of any arrangement with respect to any shares, or interests in shares, in the company);

(b) whether the relevant taxpayer would, in the year of income in which the dividend is paid or the distribution is made, derive a greater benefit from franking credits than other persons who hold shares, or have interests in shares, in the company;

(c) if the scheme involves the payment of a franked dividend - whether, apart from the scheme, the company would have retained the franking credits or would have used the franking credits to pay a franked dividend to another person referred to in paragraph (b);

(d) if the scheme involves the making of a franked distribution - whether, apart from the scheme, a franked distribution would have been made to another person referred to in paragraph (b);

(e) whether any consideration paid or given by or on behalf of, or received by or on behalf of, the relevant taxpayer in connection with the scheme (for example, the amount of any interest on a loan) was calculated by reference to the franking credit benefits to be received by the relevant taxpayer;

(f) whether a deduction is allowable or a capital loss is incurred in connection with the paying of a dividend or the making of a distribution under the scheme;

(g) whether a dividend paid or a distribution made under the scheme to the relevant taxpayer is equivalent to the receipt by the relevant taxpayer of interest or of an amount in the nature of, or similar to, interest;

(h) the period for which the relevant taxpayer held shares, or had an interest in shares, in the company;

(i) any of the matters referred to in subparagraphs 177D(b)(i) to (viii).

Meaning of greater benefit from franking credits

(20) The circumstances in which the relevant taxpayer would, in a year of income, derive a greater benefit from franking credits than another person include, but are not limited to, any of the following circumstances existing in relation to the other person and not in relation to the relevant taxpayer:

(a) the person is a non-resident;

(b) the amount of tax (if any) that, apart from Part IIIAA, would be payable by the person is less than the amount of the rebate of tax to which the person would be entitled under section 160AQU, 160AQX, 160AQY, 160AQYA, 160AQZ or 160AQZA;

(c) the person is a company that is unable to pay a dividend to its shareholders in the year of income because it has not made any profits or has not made sufficient profits to do so;

(d) the person is a company for which no franking credits arise.