Unfrankable dividends sourced from a capital raise
Last month the Federal Government published exposure draft legislation, to ultimately legislate that dividends sourced from a capital raise cannot be franked (see here).
Critically, the exposure draft provides for the retrospective amendment of the legislation, such that any transaction dating back to 19 December 2016 will be caught, and the franking credit must be removed. As drafted, it will be irrelevant whether the recipient taxpayer has lodged their income tax return in the intervening period, and the two- or four-year amendment period has expired.
In short, the draft legislation provides for the amendment of Divisions 202 and 207 ITAA97 such that a dividend will be an unfrankable distribution where:
- A distribution is made that does not accord with the regular basis on which distributions are made, or where the entity does not have a practice of making distributions on a regular basis;
- An equity interest in the company is issued before, at or after the time that the distribution is made; and
- It is reasonable to conclude that the principal effect of the equity issue was to either directly or indirectly fund the distribution, or an entity issued (or facilitated the issue) of the interest for a purpose (other than an incidental purpose) of funding the distribution.
As drafted, the provision is very broad, and will apply to both public and private companies. For example, it may apply in simple cases where additional shares are issued in a company to facilitate buying out one or more pre-existing shareholders.
Regardless of the fact that this idea has been floated in the past and was strongly criticised, the proposed retrospective nature of the legislation is particularly concerning. The consultation period with respect to the draft legislation closed on Wednesday, 5 October 2022, and from there a bill may be introduced into Parliament.
With the Labor Budget scheduled for 25 October 2022, there may be a rather swift declaration of the new Government’s intentions over the coming three years.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.