House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 5 - Effect of receiving a franked distribution

Outline of chapter

5.1 Division 207 of the ITAA 1997 sets out the tax effects for an entity that receives a franked distribution, whether the distribution is received directly from a corporate tax entity or indirectly through a partnership or trust.

Summary of new law

Tax offset for direct distributions

5.2 If an entity receives a franked distribution directly, and the distribution is not passed on to another entity, the amount of the franking credit on the distribution will be included in the assessable income of the entity (i.e. the entitys assessable income will be grossed-up) and the entity will be entitled to a tax offset equal to the amount of the franking credit. This will generally be the case where the entity is:

•

an individual;

•

a corporate tax entity;

•

an eligible superannuation fund, approved deposit fund or PST; or

•

an eligible income tax exempt charity or a deductible gift recipient.

Tax offset for indirect distributions

5.3 If a franked distribution is received by a partnership or a trust, the assessable income of the partnership or trust will be grossed-up by the amount of the franking credit. A partner, beneficiary or trustee who is assessed in respect of a share of the franked distribution will be entitled to a tax offset equal to a proportionate share of the franking credit. Where a franked distribution flows through more than one partnership or trust, the ultimate recipients of the distribution will be entitled to a tax offset equal to their share of the franking credit.

Residency requirements for tax offset

5.4 An individual or a corporate tax entity that receives a franked distribution directly must be resident at the time the distribution is paid to be eligible for a franking offset. If the taxpayer was not a resident, the distribution would be exempt from withholding tax because it is franked and therefore exempt from income tax, removing the need for a tax offset. The taxpayers assessable income is not grossed-up in this case. In the case of indirect distributions, adjustments are made to the taxpayers assessable income to ensure that the entitys share of the franking credit is not included in the entitys assessable income.

No tax offset if distribution is exempt income

5.5 An entity will generally not be entitled to a tax offset if the franked distribution or share of a franked distribution is exempt income. In this case, the entitys assessable income will not be grossed-up where the entity receives the distribution directly. If the entity has received a share of the distribution indirectly, a deduction (or reduction) will be allowed to remove the entitys share of the franking credit from the entitys assessable income.

5.6 There are 2 exceptions to the rule that an offset does not arise in respect of a franked distribution that is exempt income:

•

complying superannuation funds, approved deposit funds and PSTs (eligible superannuation entities) and life insurance companies will be entitled to a tax offset in respect of certain exempt income, for example, income derived by a complying superannuation fund from segregated pension assets; and

•

eligible income tax exempt charities and deductible gift recipients will be entitled to a tax offset. Although these bodies are exempt from income tax, they are given an entitlement to an offset to make them eligible for a refund of their share of the franking credit under Division 67 of the ITAA 1997.

No offset if the imputation system has been manipulated

5.7 An entity that directly or indirectly receives a franked distribution will be denied a tax offset in the following circumstances because the imputation system has been manipulated:

•

the entity does not satisfy the holding period rule;

•

the Commissioner has made a determination under paragraph 204-30(3)(b) that no imputation benefit is to arise because a corporate tax entity has streamed distributions in a certain way;

•

the distribution is made as part of a dividend stripping operation;

•

the Commissioner has made a determination under paragraph 177EA(5)(b) that no imputation benefit is to arise because the distribution was paid as part of a scheme to obtain a franking credit benefit; or

•

the entitys share of the distribution is equivalent to the payment of interest on a loan.

5.8 In these cases, the assessable income of an entity that receives the distribution directly will not be grossed-up. An entity that receives the distribution indirectly will be allowed a deduction (or reduction) to ensure that the entitys share of the franking credit is not included in the entitys assessable income.

Detailed explanation of new law

Structure of Division 207

5.9 Subdivision 207-A sets out the consequences for an entity other than a trust or partnership that receives a franked distribution directly.

5.10 Subdivision 207-B sets out the consequences for a trust or partnership that receives a franked distribution directly, and for an entity that receives a share of a franked distribution indirectly.

5.11 Subdivision 207-C sets out rules concerning the residency requirements for individuals and corporate tax entities to receive a tax offset for a direct distribution.

5.12 Subdivision 207-D provides for adjustments to the assessable income of an entity that receives a distribution indirectly that is exempt from income tax because the distribution is exempt from withholding tax.

5.13 Subdivision 207-E sets out the consequences of receiving a franked distribution that is exempt income, including the tax offset for eligible superannuation entities and life insurance companies for certain exempt income and the tax offset for eligible income tax exempt charities and deductible gift recipients.

5.14 Subdivision 207-F sets out the consequences of receiving a franked distribution where the imputation system has been manipulated.

5.15 Subdivision 207-J, which will be inserted by a later bill, will provide rules for calculating the amount of the adjustment to an entitys assessable income that need to be made where an entity is not entitled to a tax offset.

Direct distribution to an entity (other than a partnership or trust)

5.16 The consequences for an entity other than a trust or partnership of receiving a franked distribution directly are set out in Subdivision 207-A.

5.17 If an entity other than a trust or partnership receives a franked distribution directly:

•

an amount equal to the franking credit on the distribution is included in the assessable income of the entity [Schedule 1, item 1, subsection 207-20(1)] ; and

•

the entity is entitled to a tax offset equal to the franking credit on the distribution [Schedule 1, item 1, subsection 207-20(2)] .

5.18 Section 207-20 will apply to the following entities:

•

an individual;

•

a corporate tax entity; and

•

an eligible superannuation fund, an approved deposit fund and a PST.

5.19 The gross-up and tax offset rules under section 207-20 do not apply to a partnership or trust that receives a franked distribution directly. Nor do these rules apply to a partner or beneficiary that receives a share of a franked distribution, or to a trustee that is assessed on a share of a franked distribution, because the distribution flows indirectly to the taxpayer in these cases. This term is defined in section 207-20 and is explained in the commentary on Subdivision 207-B. [Schedule 1, item 1, section 207-15]

5.20 The general gross-up and offset rules are also subject to rules relating to:

•

residency requirements which must be satisfied by individuals and corporate tax entities, set out in Subdivision 207-C (explained in paragraphs 5.38 to 5.41);

•

the treatment of franked distributions which are exempt income or received by certain exempt institutions, set out in Subdivision 207-E (explained in paragraph 5.45); and

•

cases where the imputation system has been manipulated, set out in Subdivision 207-F (explained in paragraphs 5.51 to 5.53).

Example 5.1: Direct distribution to an entity other than a partnership or trust

Company X makes a franked distribution of $7 million to one of its members, Company Y, which is an Australian resident at the time the distribution is made. Company Y also has net income from other sources of $12 million in the same income year.

The consequences for Company Y of receiving a franked distribution directly from Company X are set out below:

Company Y

Other income	$12.0 million
Franked distribution	$ 7.0 million
Franking credit (gross up)	$ 3.0 million
Taxable income	$22.0 million
Tax at company rate (30%)	$ 6.6 million
Less tax offset	$ 3.0 million
Tax payable by Company Y	$ 3.6 million

Direct distribution to a partnership or trust, or an indirect distribution to any entity

5.21 The consequences for a trust or partnership of receiving a franked distribution directly, and for an entity of receiving a share of a franked distribution indirectly, are set out in Subdivision 207-B.

When does a distribution flow indirectly to an entity?

5.22 The key concept in this Subdivision, and in Division 207, is that a franked distribution flows indirectly to an entity. In general terms, a distribution flows indirectly to an entity if the distribution is received indirectly by the entity. A franked distribution may flow indirectly from a partnership to a partner of the partnership. Similarly, it may flow from a trust to a beneficiary of the trust, or to the trustee of the trust where the trustee is assessed on a share of the net income of the trust. [Schedule 1, item 1, section 207-35]

5.23 A franked distribution will be taken to flow indirectly to the partner from a partnership, or to a beneficiary or trustee from a trust, only if:

•

the distribution was made directly to the partnership or the trustee of the trust, or the distribution flowed indirectly to the partnership or the trustee (i.e. from another partnership or trust) [Schedule 1, item 1, paragraphs 207-35(2)(c), (3)(c) and (4)(c)] ;

•

an amount is included in the assessable income of the partnership, or an amount is included in, or allowed as a deduction from, the assessable income of the trust, because the distribution was made directly to, or flowed indirectly to, the partnership or trust [Schedule 1, item 1, paragraphs 207-35(2)(c), (3)(c) and (4)(c)] ;

•

a share of the net income or partnership loss of the partnership is included in, or allowed as a deduction from, the partners assessable income under section 92 of the ITAA 1936, or a share of the net income of the trust is included in the beneficiarys assessable income under section 97, 98A or 100 of the ITAA 1936, or the trustee is assessed on a share of the net income of the trust under section 98, 99 or 99A of the ITAA 1936 [Schedule 1, item 1, paragraphs 207-35(2)(b), (3)(b) and (4)(b)] ; and

•

the whole or part of that share is attributable to an amount included in, or allowed as a deduction from, the assessable income of the partnership or trust because the distribution was made directly to it or flowed indirectly to it [Schedule 1, item 1, paragraphs 207-35(2)(c), (3)(c) and (4)(c)] .

5.24 A distribution can only flow indirectly to an entity through a partnership or trust if an amount attributable to the distribution is included in the assessable income of the partnership or trust. This means, for example, that a distribution cannot flow indirectly to the beneficiary of a trust that is exempt from income tax.

5.25 A distribution can only flow indirectly to an entity if under Division 5 or 6 of Part III of the ITAA 1936 a share of the net income of a partnership or trust is included in the assessable income of the entity, or a share of a partnership loss is allowable as a deduction to the entity, or the entity is assessed on a share of the net income of the trust. This means, for example, that a distribution cannot flow to an individual from an eligible superannuation fund, approved deposit funds or PST.

5.26 Where a number of partnerships and/or trusts are interposed between the corporate tax entity making the franked distribution and the ultimate recipient of the distribution, the distribution will be received directly by the first interposed entity and must then flow indirectly to each of the other interposed entities in order for the distribution to flow indirectly to the ultimate recipient of the distribution.

Example 5.2: How a franked distribution flows indirectly to an entity.

A partnership receives a franked distribution from a corporate tax entity. The partnership has 2 partners with equal individual interests in the partnership, one of which is a resident trust. The trust has one beneficiary, Stephanie, who is a resident individual and presently entitled to the net income of the trust.

Whether the franked distribution flows indirectly to Stephanie is determined as follows:

Step 1: Does the distribution flow indirectly to the beneficiary?

To determine whether the distribution flows indirectly to Stephanie, it is necessary to ask:

•

Is Stephanie a beneficiary of the trust? Yes.

•

Is a share of the net income of the trust included in Stephanies assessable income? Yes, under subsection 97(1) of the ITAA 1936.

•

Is Stephanies share of the net income of the trust attributable to the distribution being included in the assessable income of the trust (i.e. does the distribution flow directly to the trustee of the trust)? No.

•

Is Stephanies share of the net income of the trust attributable to an amount that has flowed indirectly into the assessable income of the trust because of a previous application of section 207-35? See step 2.

Step 2: Does the distribution flow indirectly to the trust?

To determine whether the distribution flows indirectly to the trust, it is necessary to ask:

•

Is the trust a partner in the partnership? Yes.

•

Is a share of the net income of the partnership included in the trusts assessable income under subsection 92(1) of the ITAA 1936? Yes.

•

Is that share of the net income of the partnership attributable to the distribution being included in the assessable income of the partnership (i.e. does the distribution flow directly to the partnership)? Yes.

Conclusion

The distribution flows indirectly to the trust (see step 2). The distribution therefore flows indirectly to Stephanie under subsection 207-35(3).

Gross-up for a partnership or trust that receives a distribution directly

5.27 Where a frankable distribution is made directly to a partnership or a trust, the assessable income of the partnership or the trustee of the trust will be grossed-up by the amount of the franking credit under section 207-40. [Schedule 1, item 1, section 207-40]

5.28 The assessable income of a partnership will be grossed-up only if Division 5 of Part III of the ITAA 1936 (the general partnership provisions) applies to the partnership. This is because of the requirement that the distribution must flow indirectly to a partner. [Schedule 1, item 1, paragraph 207-40(1)(b)]

5.29 The assessable income of a trust will be grossed-up only if Division 6 of Part III of the ITAA 1936 (the general trust provisions) applies to the trust. This is because of the requirement that the distribution must flow indirectly to a beneficiary or the trustee of the trust. [Schedule 1, item 1, paragraph 207-40(2)(b)]

Tax offset for partners, beneficiaries and trustees

5.30 Where a franked distribution flows indirectly to a partner or a beneficiary, or a trustee who is assessed on a share of the net income of the trust, that entity will be entitled to a tax offset under subsection 207-50(1) equal to the entitys share of the franking credit. [Schedule 1, item 1, section 207-50]

5.31 A partner or beneficiary will be entitled to a tax offset in respect of a franked distribution only if the distribution does not flow indirectly to another entity, that is, if the partner or beneficiary is the ultimate recipient of the distribution. The following entities are entitled to a tax offset under subsection 207-50(1):

•

an individual;

•

a corporate tax entity;

•

a trustee who is assessed on a share of the net income of the trust; or

•

an eligible superannuation fund, approved deposit fund or PST.

[Schedule 1, item 1, paragraph 207-50(1)(b)]

What is an entitys share of the franking credit on a franked distribution?

5.32 Where a franked distribution is made to a partnership or a trust and flows indirectly to an entity, that entitys share of the franking credit on the distribution is calculated, in broad terms, by apportioning the franking credit according to the entitys share of the cash amount of the distribution in relation to the total cash amount of the distribution. [Schedule 1, item 1, subsection 207-55(1)]

5.33 If, on the other hand, the distribution flows through more than one partnership or trust, and the distribution flows indirectly from a partnership or trust that received the distribution indirectly (the flow-through entity) to the ultimate recipient of the distribution, the ultimate recipients share of the franking credit is calculated, in broad terms, by apportioning the flow-through entitys share of the franking credit according to the ultimate recipients share of the cash amount of the distribution in relation to the flow-through entitys share of the cash amount of the distribution. [Schedule 1, item 1, subsection 207-55(2)]

Example 5.3: How to calculate an entitys share of the franking credit on a franked distribution

A partnership receives a franked distribution from a corporate tax entity of $140,000. In that income year, the partnership also earns other income of $560,000 and has allowable deductions of $100,000. The partnership has 2 partners, Company A and Company B (both residents), who have equal individual interests in the net income of the partnership.

The net income of the partnership is calculated as follows:

Other income	$560,000
Franked distribution	$140,000
Franking credit (gross up)	$ 60,000
Assessable income	$760,000
Less allowable deductions	$100,000
Net income	$660,000

As both partners have equal individual interests in the net income of the partnership, both Company A and Company B will include an amount of $330,000 in their respective assessable incomes, being an amount which represents so much of their shares of the net income of the partnership.

The partners shares of the franking credit on the franked distribution is calculated using the formula in item 1 of the table in subsection 207-55(1) in this case because the distribution has flowed through only one entity. As both partners have equal individual interests in the net income of the partnership, the calculation will be the same for each partner.

Step 1:

Calculate the numerator.

So much of the individual interest of Company A in the net income or partnership loss of the partnership as is attributable to the distribution:

Share of cash amount of distribution:

$140,000 / 2 = $70,000


Step 2:

Calculate the denominator.

So much of the net income or partnership loss of the partnership as is attributable to the distribution:

$140,000 (total cash amount of the franked distribution)

Step 3:

Calculate the franking credit on the distribution.

$60,000

Step 4:

Apply the formula in item 1 of the table in subsection 207-55(1) to calculate Company As share of the franking credit.

Share of franking credit:

$60,000 * ($70,000 / $140,000) = $30,000


Therefore, Company As share of the franking credit on the franked distribution is $30, 000. Company Bs share is also $30,000.

Adjustment of the amount included in the assessable income of an entity to whom a distribution flows indirectly

5.34 The amount included in a beneficiarys assessable income that is attributable to the franking credit on a franked distribution received by the trust will always be proportionate to the beneficiarys share of the franked distribution. This outcome is ensured by section 207-45. This rule applies similarly where a franked distribution flows indirectly to a partner or to the trustee of a trust. [Schedule 1, item 1, section 207-45]

5.35 A beneficiarys share of the net income of a trust, for example, would generally include an amount attributable to the franking credit on a franked distribution received by the trust, which would be included in the beneficiarys assessable income under section 97, 98A or 100 of the ITAA 1936. The amount included in the beneficiarys assessable income that is attributable to the franking credit on the franked distribution received by the trust should be, and often would be, proportionate to the beneficiarys share of the cash amount of the franked distribution.

5.36 It is possible, however, that the amount attributable to the franking credit is not proportionate. For example, a discrepancy between the beneficiarys share of the distribution and the amount of the franking credit included in the beneficiarys assessable income may occur where the beneficiaries of a trust do not all have an interest in the dividend income of the trust. A share of the franking credit on a franked distribution would generally be included in the share of the net income of the trust of all the beneficiaries, including those beneficiaries who do not have an interest in the dividend.

5.37 In this case, the assessable income of the beneficiaries will be adjusted. The assessable income of the beneficiaries with an interest in the dividend income will include an amount equal to their proportionate share of the franking credit based on their interest in the dividend. The assessable income of the other beneficiaries will not include any amount attributable to the franking credit on the distribution. [Schedule 1, item 1, subsection 207-45(1)]

Residency requirements for tax offsets

5.38 The rules concerning the residency requirements for individuals and corporate tax entities to receive a tax offset for a direct distribution are set out in Subdivision 207-C.

5.39 An individual or a corporate tax entity that receives a franked distribution directly must be a resident at the time the distribution is made to be eligible for a tax offset. [Schedule 1, item 1, section 207-70]

5.40 If the taxpayer was not a resident, the distribution would be exempt from withholding tax because it is franked and therefore exempt from income tax, removing the need for a tax offset. The taxpayers assessable income is not grossed-up in this case because the distribution is exempt income.

5.41 The residency tests for individuals and corporate tax entities are as follows:

•

for individuals, companies and corporate limited partnerships - must be a resident at the time the distribution is made;

•

for a corporate unit trust or public trading trust - must be a resident unit trust for the year of income in which the distribution is made.

[Schedule 1, item 1, section 207-75]

Adjustments for non-residents

5.42 The rules for adjustments to the assessable income of an entity that receives a distribution indirectly that is exempt from income tax because the distribution is exempt from withholding tax are set out in Subdivision 207-D.

5.43 Where an individual or a corporate tax entity receives a franked distribution indirectly, and the individual or corporate tax entity was a non-resident at the time the distribution was made (so that the distribution would be exempt from withholding tax because it is franked and therefore exempt from income tax), the assessable income of the entity will be adjusted to remove the entitys share of the franking credit from the entitys assessable income. This adjustment is necessary because, while the distribution would be exempt from income tax, the entitys share of the franking credit would otherwise be included in the entitys assessable income. The rules for determining the amount of the adjustment will be set out in Subdivision 207-J. [Schedule 1, item 1, section 207-90]

Consequences for gross up and offset if distribution not taxed

5.44 The consequences for an entity of receiving a franked distribution that is exempt income are set out in Subdivision 207-E. An entity will generally not be entitled to a tax offset if the franked distribution is exempt income of the entity. There are 2 exceptions to this rule:

•

eligible superannuation entities and life insurance companies will be eligible for a tax offset for certain exempt income; and

•

eligible income tax exempt charities and deductible gift recipients, which are exempt from income tax, will also be entitled to a tax offset.

5.45 An entity will not be entitled to a tax offset if the franked distribution or share of a franked distribution is exempt income. In this case, the entitys assessable income will not be grossed-up where the entity receives the distribution directly. If the entity has received a share of the distribution indirectly, a deduction (or reduction) will be allowed to remove the entitys share of the franking credit from the entitys assessable income. [Schedule 1, item 1, section 207-110]

Tax offsets for exempt distributions and exempt institutions

5.46 Complying superannuation funds, approved deposit funds and PSTs (eligible superannuation entities) and life insurance companies will be entitled to a tax offset for franked distributions that are covered by certain exemptions, namely:

•

the exemption under sections 282B, 283 and 297B of the ITAA 1936 and paragraph 320-35(1)(b) for income relating to current pensions; and

•

the exemption under subparagraph 320-35(1)(f)(ii) for income of a life insurance company that is a friendly society relating to income bonds, funeral policies and scholarship plans.

[Schedule 1, item 1, section 207-120]

5.47 Eligible income tax exempt charities and deductible gift recipients will be entitled to a tax offset. Although these bodies are exempt from income tax, they are given an entitlement to an offset to make them eligible for a refund of their share of the franking credit under Division 67. [Schedule 1, item 1, section 207-125]

5.48 The eligible income tax exempt charities and deductible gift recipients that are entitled to a tax offset are, in broad terms:

•

charitable institutions that are endorsed as exempt from income tax under Subdivision 50-B, that satisfy the residency requirement set out in section 207-135;

•

deductible gift recipients that are endorsed under paragraph 30-120(a), that satisfy the residency requirement set out in section 207-135;

•

deductible gift recipients that are specified in Subdivision 30-B and have an Australian Business Number and satisfy the residency requirement set out in section 207-135;

•

a public fund declared by the Treasurer to be a relief fund in accordance with subsection 30-85(2) (other than a fund prescribed in the regulations as not being eligible); and

•

any income tax exempt entities prescribed in the regulations as being eligible for the offset.

[Schedule 1, item 1, section 207-130]

5.49 The residency requirements for exempt institutions mentioned in paragraph 5.48 are that the institution has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives in Australia for the whole of the year of income for which the tax offset is being claimed. [Schedule 1, item 1, section 207-135]

Manipulation of imputation system

5.50 The consequences of receiving a franked distribution where the imputation system has been manipulated are set out in Subdivision 207-F.

Direct distributions

5.51 The assessable income of an entity that receives a franked distribution directly will not be grossed-up and the entity will be denied a tax offset in the following circumstances:

•

the entity is not a qualified person because the holding period rule is not satisfied;

•

the Commissioner has made a determination under paragraph 204-30(3)(b) that no imputation benefit is to arise because a corporate tax entity has streamed distributions in a certain way;

•

the distribution is made as part of a dividend stripping operation; or

•

the Commissioner has made a determination under paragraph 177EA(5)(b) that no imputation benefit is to arise because the distribution was paid as part of a scheme to obtain a franking credit benefit.

[Schedule 1, item 1, subsection 207-145(1)]

5.52 If the Commissioner has made a determination under paragraph 177EA(5)(b) that an imputation benefit is not to arise in respect of part of a franked distribution, an entitys entitlement to a tax offset will be reduced proportionately. [Schedule 1, item 1, subsection 207-145(2)]

Indirect distributions

5.53 Where a franked distribution flows indirectly to an entity, a tax offset will be denied in the same circumstances that a tax offset is denied to an entity that receives a franked distribution directly. In addition to these circumstances, an entity that receives a franked distribution indirectly will also be denied a tax offset if the entitys share of the distribution is equivalent to the payment of interest on a loan. The purpose of this rule is to ensure that trust or partnership distributions that consist of dividends, but are effectively in the nature of interest, do not give rise to an entitlement to a tax offset. This rule will apply to taxpayers that hold a debt-like interest in shares indirectly through a trust or partnership; that is, to taxpayers who, under a trust or partnership, are effectively creditors rather than share owners. This rule is intended to replicate the existing law (see, for example, subsections 160AQX(4) to (6) of the ITAA 1936). [Schedule 1, item 1, section 207-160]

5.54 A deduction (or reduction) will be allowed to ensure that the entitys share of the franking credit is not included in the entitys assessable income if the tax offset is denied. The amount of the adjustment will be calculated under Subdivision 207-J. [Schedule 1, item 1, section 207-150]

5.55 If the Commissioner has made a determination under paragraph 177EA(5)(b) that an imputation benefit is not to arise in respect of part of a franked distribution, an entitys entitlement to a tax offset will be reduced proportionately. [Schedule 1, item 1, subsection 207-150(5)]

Distributions made as part of a dividend stripping operation

5.56 A distribution will be regarded as one that is made as part of a dividend stripping operation if the making of the distribution arose out of, or was made in the course of, a scheme that was by way of, or in the nature of, dividend stripping or a scheme that had substantially the effect of such a scheme. This rule is intended to replicate the existing law (see section 160APHA of the ITAA 1936). [Schedule 1, item 1, section 207-155]

5.57 Schemes by way of, or in the nature of, dividend stripping schemes include those where a person purchases for a capital sum the shares in a target company that has accumulated profits, and then draws off the profits by effecting the payment of a dividend by the target company.

5.58 Schemes having substantially the same effect as dividend stripping schemes include those in which the profits of the target company are not stripped from it by a formal dividend payment, but where irrecoverable loans are made to entities that are associates of the dividend stripper or where the profits are used to purchase assets from such entities at greatly inflated prices.

5.59 A scheme would come within the scope of these rules where, with a view to gaining a tax offset in respect of a franked distribution, persons pay amounts to companies in consideration for the issue of shares carrying dividend rights that are substantial in relation to the consideration given. A simple example is where a person enters into an arrangement with a company under which that company issues shares to the person of, for example $1.20, and those shares carry a one-off dividend right of, for example $1.00. Thereafter, the shares effectively carry no further right to participate in profits or capital, or the value of any rights is insignificant in relation to the consideration given.