Tax Laws Amendment (2006 Measures No. 3) Act 2006 (80 of 2006)
Schedule 4 Simplified imputation system (share capital tainting rules)
Part 1 The rewritten share capital tainting rules
Division 1 Amendment
Income Tax Assessment Act 1997
1 At the end of Part 3-5
Add:
Division 197 - Tainted share capital accounts
Table of Subdivisions
Guide to Division 197
197-A What transfers into a company's share capital account does this Division apply to?
197-B Consequence of transfer: franking debit arises
197-C Consequence of transfer: tainting of share capital account
Guide to Division 197
197-1 What this Division is about
This Division:
(a) applies to certain amounts transferred to a company's share capital account (see Subdivision 197-A); and
(b) provides for a franking debit to arise if such an amount is transferred to the share capital account (see Subdivision 197-B); and
(c) provides for the tainting of the share capital account if such an amount is transferred, for how the account may be untainted, and for consequences that flow from untainting the account (see Subdivision 197-C).
Subdivision 197-A - What transfers into a company's share capital account does this Division apply to?
Table of sections
197-5 Division generally applies to an amount transferred to share capital account from another account
197-10 Exclusion for amounts that could be identified as share capital
197-15 Exclusion for amounts transferred under debt/equity swaps
197-20 Exclusion for amounts transferred leading to there being no shares with a par value - non-Corporations Act companies
197-25 Exclusion for transfers from option premium reserves
197-30 Exclusion for transfers made in connection with demutualisations of non-insurance etc. companies
197-35 Exclusion for transfers made in connection with demutualisations of insurance etc. companies
197-40 Exclusion for post-demutualisation transfers relating to life insurance companies
197-5 Division generally applies to an amount transferred to share capital account from another account
(1) Subject to subsection (2), this Division applies to an amount (the transferred amount ) that is transferred to a company's *share capital account from another of the company's accounts, if the company was an Australian resident immediately before the time of the transfer.
Note: If a company has 2 or more share capital accounts, those accounts are taken to be a single account (see subsection 975-300(2)).
(2) The other provisions of this Subdivision may stop this Division from applying to some or all of the transferred amount. If those other provisions stop this Division from applying to only some of the transferred amount, this Division (other than this Subdivision) applies to the balance of the transferred amount as if only that balance of the amount had been transferred to the company's *share capital account.
197-10 Exclusion for amounts that could be identified as share capital
This Division does not apply to the transferred amount if it could, at all times before the transfer, be identified in the books of the company as an amount of share capital.
197-15 Exclusion for amounts transferred under debt/equity swaps
(1) Subject to subsection (2), this Division does not apply to the transferred amount if:
(a) the transfer is under an *arrangement under which:
(i) a person discharges, releases or otherwise extinguishes the whole or a part of a debt that the company owes to the person; and
(ii) the discharge, release or extinguishment is in return for the company issuing *shares (other than redeemable preference shares) in the company to the person; and
(b) the transfer is a credit to the *share capital account that is made because of the issue of the shares in return for the discharge, release or extinguishment of the debt.
(2) If the transferred amount exceeds the lesser of:
(a) the *market value of the *shares issued by the company; and
(b) so much of the debt as is discharged, released or extinguished in return for the shares;
subsection (1) does not stop this Division from applying to the amount of the excess.
197-20 Exclusion for amounts transferred leading to there being no shares with a par value - non-Corporations Act companies
This Division does not apply to the transferred amount if:
(a) immediately before the transfer of the amount, the company was not incorporated under the Corporations Act 2001; and
(b) the transfer is under, or in accordance with, a law of the Commonwealth, or of a State or Territory, that requires or allows either or both of the following to become part of the company's *share capital account:
(i) the company's share premium account;
(ii) the company's capital redemption reserve; and
(c) the transfer is made as part of a process that leads to there being no *shares in the company that have a par value; and
(d) the amount is transferred from the company's share premium account or capital redemption reserve.
197-25 Exclusion for transfers from option premium reserves
This Division does not apply to the transferred amount if:
(a) it is transferred from an option premium reserve of the company; and
(b) the transfer is because of the exercise of options to acquire *shares in the company; and
(c) premiums in respect of those options were credited to the option premium reserve.
197-30 Exclusion for transfers made in connection with demutualisations of non-insurance etc. companies
(1) Subject to subsection (2), this Division does not apply to the transferred amount if:
(a) the amount is transferred in connection with a demutualisation of the company; and
(b) Division 326 in Schedule 2H to the Income Tax Assessment Act 1936 applies to the demutualisation; and
(c) the transfer occurs within the limitation period in relation to the demutualisation (see subsection 326-20(3) in that Schedule).
(2) If the sum of:
(a) the transferred amount; and
(b) any other amounts that were previously transferred to the company's *share capital account, from another account of the company, in connection with the demutualisation;
exceeds the total capital contributions amount described in whichever of subsections (3) and (4) applies, subsection (1) does not stop this Division from applying to so much of the transferred amount as equals the lesser of the transferred amount and the amount of the excess.
Note: If there are several transfers of amounts to the company's share capital account in connection with the demutualisation, this section must be applied separately in relation to each transferred amount, in the order in which the transfers are made.
(3) If the company was not formed by the merger of 2 or more mutual entities, the total capital contributions amount referred to in subsection (2) is the sum of all the capital amounts:
(a) that were contributed to the company by *members of the company before its demutualisation; and
(b) in respect of which deductions are not allowable to the members; and
(c) that were not payments for goods or services provided by the company.
(4) If the company was formed by the merger of 2 or more mutual entities, the total capital contributions amount referred to in subsection (2) is the sum of:
(a) all the capital amounts:
(i) that were contributed to the company, before its demutualisation, by persons who became *members of the company at or after the time when the merger took place; and
(ii) in respect of which deductions are not allowable to those members; and
(iii) that were not payments for goods or services provided by the company; and
(b) the *market values, at the time of the merger, of the entities that merged to form the company, as determined by a qualified valuer.
197-35 Exclusion for transfers made in connection with demutualisations of insurance etc. companies
(1) Subject to subsection (2), this Division does not apply to the transferred amount if:
(a) the amount is transferred in connection with the demutualisation of a company; and
(b) the demutualisation is implemented in accordance with a demutualisation method specified in Division 9AA of Part III of the Income Tax Assessment Act 1936; and
(c) the transfer occurs within the listing period in relation to the demutualisation (see subsection 121AE(6) of that Act); and
(d) the company (the issuing company ) to whose *share capital account the amount is transferred is:
(i) if the demutualisation method is the method specified in section 121AF or 121AG of the Income Tax Assessment Act 1936 - the demutualising company; or
(ii) if the demutualisation method is the method specified in section 121AH, 121AI, 121AJ, 121AK or 121AL of the Income Tax Assessment Act 1936 - the company issuing the ordinary shares referred to in that section.
(2) If the sum of:
(a) the transferred amount; and
(b) all amounts that were previously transferred to the issuing company's *share capital account, from another account of the company, in connection with the demutualisation; and
(c) all amounts that were previously transferred to the issuing company's retained profit account in connection with the demutualisation;
exceeds the listing day company valuation amount (see subsection (3)), subsection (1) does not stop this Division from applying to so much of the transferred amount as equals the lesser of the transferred amount and the amount of the excess.
Note: If there are several transfers of amounts to the issuing company's share capital account, this section must be applied separately in relation to each transferred amount, in the order in which the transfers are made.
(3) The listing day company valuation amount has the same meaning as it has for the purposes of table 1 in section 121AS of the Income Tax Assessment Act 1936, as that table applies in relation to the demutualising company (see note 3 to that table).
197-40 Exclusion for post-demutualisation transfers relating to life insurance companies
(1) Subject to subsection (2), this Division does not apply to the transferred amount if:
(a) a *life insurance company (the demutualised company ) has demutualised; and
(b) the demutualisation was implemented in accordance with a demutualisation method specified in Division 9AA of Part III of the Income Tax Assessment Act 1936; and
(c) the amount is transferred after the end of the listing period in relation to the demutualisation (see subsection 121AE(6) of that Act); and
(d) the company transferring the amount to its *share capital account is either:
(i) the demutualised company (whichever demutualisation method was used); or
(ii) if the demutualisation method was the method specified in section 121AH, 121AI, 121AJ, 121AK or 121AL of the Income Tax Assessment Act 1936 - the company (the issuing company ) that issued the ordinary shares referred to in that section; and
(e) if subparagraph (d)(i) applies - the following conditions are satisfied in relation to the transferred amount:
(i) the amount is transferred from an account of the demutualised company consisting of shareholders' capital (within the meaning of the Life Insurance Act 1995) in relation to a statutory fund (within the meaning of that Act);
(ii) the amount was part of such an account at the time of the demutualisation; and
(f) if subparagraph (d)(ii) applies - the amount is transferred from a capital reserve created at the time of or in connection with the demutualisation.
(2) If the sum of:
(a) the transferred amount; and
(b) all amounts that were previously transferred to the demutualised company's *share capital account, from another account of the demutualised company, as described in subsection (1); and
(c) if the demutualisation method was the method specified in section 121AH, 121AI, 121AJ, 121AK or 121AL of the Income Tax Assessment Act 1936 - all amounts that were previously transferred to the issuing company's share capital account, from another account of the issuing company, as described in subsection (1); and
(d) all amounts that were previously transferred, in connection with the demutualisation, to the share capital account of the issuing company (within the meaning of section 197-35) as described in subsection 197-35(1), or to its retained profit account as described in paragraph 197-35(2)(c);
exceeds the listing day company valuation amount (see subsection (3)), subsection (1) does not stop this Division from applying to so much of the transferred amount as equals the lesser of the transferred amount and the amount of the excess.
Note: If there are several transfers of amounts to the share capital account of the demutualised company or the issuing company, this section must be applied separately in relation to each transferred amount, in the order in which the transfers are made.
(3) The listing day company valuation amount has the same meaning as it has for the purposes of table 1 in section 121AS of the Income Tax Assessment Act 1936, as that table applies in relation to the demutualised company (see note 3 to that table).
Subdivision 197-B - Consequence of transfer: franking debit arises
Table of sections
197-45 A franking debit arises in relation to the transfer
197-45 A franking debit arises in relation to the transfer
(1) A *franking debit arises in a company's *franking account if an amount (the transferred amount ) to which this Division applies is transferred to the company's *share capital account. The debit arises immediately before the end of the *franking period in which the transfer of the amount occurs.
(2) The amount of the *franking debit is calculated in accordance with the formula:
Transferred amount x (*Corporate tax rate / (100% - *Corporate tax rate) x Applicable franking percentage
where:
applicable franking percentage means:
(a) if, before the debit arises, the *benchmark franking percentage for the *franking period in which the transfer of the amount occurs has already been set by section 203-30 - that percentage; or
(b) otherwise - 100%.
Subdivision 197-C - Consequence of transfer: tainting of share capital account
Table of sections
197-50 The share capital account becomes tainted (if it is not already tainted)
197-55 Choosing to untaint a tainted share capital account
197-60 Choosing to untaint - liability to untainting tax
197-65 Choosing to untaint - further franking debits may arise
197-70 Due date for payment of untainting tax
197-75 General interest charge for late payment of untainting tax
197-80 Notice of liability to pay untainting tax
197-85 Evidentiary effect of notice of liability to pay untainting tax
197-50 The share capital account becomes tainted (if it is not already tainted)
(1) A company's *share capital account becomes tainted when an amount to which this Division applies is transferred to the account, if, at the time of the transfer, the account is not already tainted (because of the application of this section in relation to a previous transfer).
Note: If a company's share capital account is tainted, then a distribution from the account is taxed as a dividend in the hands of the shareholder. This is because a tainted share capital account does not count as a share capital account for the purposes of paragraph (d) of the definition of dividend in subsection 6(1) of the Income Tax Assessment Act 1936 (see subsection 6D(3) of that Act). However, although the distribution is taxed as a dividend, the company cannot pass on to the shareholder the benefit of the tax it has paid, because a distribution from a share capital account (whether or not tainted) is not frankable (see subsections 46M(1), (3) and (4) of that Act).
(2) The *share capital account remains tainted until the company chooses to untaint the account (see section 197-55).
Note: If, after a choice to untaint is made, the company's share capital account becomes tainted again, the account remains tainted until a fresh choice to untaint is made.
(3) The tainting amount , for a company's *share capital account that is *tainted at a particular time, means the sum of:
(a) the amount transferred to the company's share capital account that most recently caused the account to become tainted; and
(b) any other amounts to which this Division applies that have been transferred to the company's share capital account since the transfer referred to in paragraph (a) and before the particular time.
197-55 Choosing to untaint a tainted share capital account
(1) A company with a *share capital account that is *tainted may make a choice in the *approved form given to the Commissioner to untaint the account.
(2) The choice can be made at any time, but cannot be revoked.
Note: The choice has no effect in relation to a subsequent tainting of the share capital account that occurs after the choice is made.
197-60 Choosing to untaint - liability to untainting tax
Definitions
(1) For the purpose of this section:
(a) a company whose *share capital account is *tainted is a company with only lower tax members in relation to the tainting period if, throughout the tainting period, all *members of the company were covered by one, or a combination of 2 or more, of the following subparagraphs:
(i) other companies;
(ii) *complying superannuation entities;
(iii) foreign residents; and
(b) a company whose share capital account is tainted is a company with higher tax members in relation to the tainting period if it is not a company with only lower tax members in relation to the tainting period.
For this purpose, the tainting period is the period beginning when the share capital account most recently became tainted and ending when the company chooses to untaint the account.
Liability to untainting tax
(2) A company that chooses to untaint its *share capital account is liable to pay tax, known as untainting tax , equal to the amount calculated in accordance with the formula:
Applicable tax amount - (Section 197-45 franking debits + Section 197-65 franking debits)
where:
applicable tax amount has the meaning given by subsection (3).
section 197-45 franking debits means the total *franking debits arising under section 197-45 because of the transfer of the amounts that made up the *tainting amount at the time of the choice.
section 197-65 franking debits means the total (if any) *franking debits arising under section 197-65 because of the choice to untaint.
Note: The payment of untainting tax does not give rise to a franking credit.
(3) In subsection (2), the applicable tax amount is the amount calculated in accordance with the formula:
(*Tainting amount at time of choice to untaint + Notional franking amount) + Applicable tax rate
where:
applicable tax rate means:
(a) for a company with only lower tax members in relation to the tainting period - the *corporate tax rate; or
(b) for a company with higher tax members in relation to the tainting period - the sum of:
(i) the maximum rate specified in column 2 of the table in Part I of Schedule 7 to the Income Tax Rates Act 1986 that applies for the income year in which the choice is made; and
(ii) 2.5%.
Note: The 2.5% referred to in subparagraph (b)(ii) relates to rates of Medicare levy and surcharge.
notional franking amount has the meaning given by subsection (4).
(4) In subsection (3), the notional franking amount is the amount calculated in accordance with the formula:
Tainting amount at time of choice to untaint x (*Corporate tax rate / (100% - *Corporate tax rate))
197-65 Choosing to untaint - further franking debits may arise
When this section applies
(1) This section applies if:
(a) a company chooses to untaint its *share capital account; and
(b) the applicable franking percentage (within the meaning of subsection (3)) is higher than the percentage that was the *benchmark franking percentage in relation to the *franking period in which the transfer of an amount (the transferred amount ) that is, or is part of, the *tainting amount occurred.
Note: If paragraph (b) is satisfied in relation to 2 or more amounts, this section is to be applied separately in relation to each of those amounts (so a separate franking debit will arise in relation to each of those amounts).
Franking debit arises in relation to making the choice
(2) A *franking debit arises in the company's *franking account in relation to the transferred amount. The debit arises immediately before the end of the *franking period in which the choice to untaint is made.
(3) The amount of the *franking debit is the amount by which the amount calculated in accordance with the following formula exceeds the amount of the franking debit that arose under section 197-45 in relation to the transferred amount:
Transferred amount x (*Corporate tax rate / (100% - *Corporate tax rate)) x Applicable franking percentage
where:
applicable franking percentage means:
(a) if, before the debit arises, the *benchmark franking percentage for the *franking period in which the choice to untaint is made has already been set by section 203-30 - that percentage; or
(b) otherwise - 100%.
197-70 Due date for payment of untainting tax
*Untainting tax is due and payable at the end of 21 days after the end of the *franking period in which the choice to untaint was made.
Note: For provisions about collection and recovery of untainting tax, see Part 4-15 in Schedule 1 to the Taxation Administration Act 1953.
197-75 General interest charge for late payment of untainting tax
If any of the *untainting tax that a company is liable to pay remains unpaid 60 days after the day by which it is due to be paid, the company is liable to pay the *general interest charge on the unpaid amount for each day in the period that:
(a) started at the beginning of the 60th day after the day by which the untainting tax was due to be paid; and
(b) ends at the end of the last day on which, at the end of the day, any of the following remains unpaid:
(i) the untainting tax;
(ii) general interest charge on any of the untainting tax.
197-80 Notice of liability to pay untainting tax
(1) The Commissioner may give a company, by post or otherwise, a notice specifying:
(a) the amount of any *untainting tax that the Commissioner has ascertained is payable by the company; and
(b) the day on which that tax became or will become due and payable.
Effect of notice on liability etc.
(2) Subject to section 197-85, the amount of the liability of a company to *untainting tax, and the due date for payment of the tax, are not dependent on, or in any way affected by, the giving of a notice.
Amendment of notice
(3) The Commissioner may at any time amend a notice. An amended notice is a notice for the purposes of this section.
Inconsistency between notices
(4) If there is an inconsistency between notices that relate to the same subject matter, the later notice prevails to the extent of the inconsistency.
Objections
(5) A company that is dissatisfied with a notice made in relation to the company may object against the notice in the manner set out in Part IVC of the Taxation Administration Act 1953.
197-85 Evidentiary effect of notice of liability to pay untainting tax
(1) The production of:
(a) a notice given under section 197-80; or
(b) a document that is signed by the Commissioner and appears to be a copy of such a notice;
is conclusive evidence that:
(c) the notice was duly given; and
(d) the amount of *untainting tax specified in the notice became due and payable by the company to which it was given on the day specified in the notice.
(2) Subsection (1) does not apply in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the review.