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Ruling
Subject: Substituting tax-exempt bonus shares for franked distribution
Question 1
Whether, pursuant to section 204-25 of the Income Tax Assessment Act 1997 (ITAA 1997), the issue of bonus shares in substitution for a franked distribution gives rise to a franking debit in the company's franking account?
Advice/Answers
Yes.
This ruling applies for the following period
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commenced on
1 July 2010
Relevant facts
The company is a listed public company (within the meaning of the ITAA 1997).
The company has historically paid fully franked dividends in respect of its ordinary shares for each year since 1998.
The company currently offers its shareholders the choice to receive dividends in cash or via participation in a dividend reinvestment plan (DRP). If shareholders participate in the DRP, they will receive dividends in the form of fully paid ordinary shares in the company. An amount is credited to the share capital account of the company in connection with the issue of shares under the DRP.
The company is considering a revision to its dividend policy. In addition to allowing shareholders to choose between receiving cash dividends or participating in the DRP, the company is proposing to offer its shareholders the choice to participate in a Bonus Share Plan (BSP).
Under the proposed BSP, shareholders can choose to have some or all of their shares participate in the BSP (subject to minimum and maximum levels as determined from time to time by the directors of the company). Participation in the proposed BSP is optional and voluntary, and may be varied and terminated at any time subject to notice requirements.
If shareholders choose to participate in the BSP, they will not receive dividends in respect of the shares that they have chosen to participate in the BSP. Instead, they will be issued with fully paid ordinary shares in the company to the equivalent value of the dividend foregone. Pursuant to the rules of the BSP, the company will not credit the share capital account in connection with the issue of shares under the BSP.
Reasons for decision
Section 204-25 of the ITAA 1997 states:
SECTION 204-25 Substituting tax-exempt bonus shares for franked distributions |
Franking debit arises if tax-exempt bonus shares are issued in substitution for a franked distribution |
204-25(1) This section gives rise to a *franking debit in an entity's *franking account if:
(a) the exercise of a choice or selection by a *member of the entity; or
(b) the member's failure to exercise a choice or selection;
has the effect of determining (to any extent) that the entity issues one or more *tax-exempt bonus shares, to that member or another member of the entity, in substitution (in whole or in part) for one or more *franked distributions by the entity to that member or another member.
Amount of the debit |
204-25(2) The debit is equal to the one that would arise in the entity's *franking account if the entity made a *distribution, equal to the *franked distributions referred to in subsection (1), franked at the entity's *benchmark franking percentage for the *franking period in which the shares are issued.
When does the debt arise
204-25(3) The debit arises on the day when the shares are issued.
Meaning of tax-exempt bonus share
204-25(4) For a company whose *shares have no par value, tax-exempt bonus share means a share issued by the company in the circumstances mentioned in subsection 6BA(6) of the Income Tax Assessment Act 1936.
204-25(5) For any other company, tax-exempt bonus share means a *share issued by the company to a *shareholder in the company where:
(a) the amount or value of the share is debited against an amount standing to the credit of a share premium account of the company; and
(b) no part of the paid-up value of the share is a dividend; and
(c) the share is issued:
(i) as a bonus share; or
(ii) in the circumstances mentioned in subsection 6BA(1) of the Income Tax Assessment Act 1936, as in force immediately before 1 July 1998.
Where a company has no benchmark franking percentage for the franked period
204-25(6) If a company has no *benchmark franking percentage for the *franking period in which the *tax-exempt bonus share is issued, this section applies as if the entity had a benchmark franking percentage of 100% for that period.
Subsection 6BA(6) of the ITAA 1936 states:
6BA(6) [When no application of subsection (5)] |
Subsection (5) does not apply if:
(a) a shareholder in a listed public company (within the meaning of the Income Tax Assessment Act 1997) has a choice whether to be paid a dividend (other than a minimally franked dividend within the meaning of subsection 45(3)) or to be issued shares and the shareholder chooses to be issued with shares; and
(b) the company does not credit the share capital account in connection with the issue of those shares.
In the circumstances of this case, the shareholders in the company have a choice to be paid a dividend or to be issued shares. In the circumstances where a shareholder chooses to be issued with shares the company does not credit the share capital account in connection with those shares. Accordingly, the shares are issued by the company in the circumstances mentioned in subsection 6BA(6) of the ITAA 1936 and so are tax-exempt bonus shares pursuant to subsection 204-25(4) of the ITAA 1997.
It is considered that the issue of these tax-exempt bonus shares in substitution for a franked distribution gives rise to a franking debit in the company's franking account.
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