Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 5 - Intercorporate dividend rebate
Outline of chapter
5.1 Schedule 3 to this bill amends subsection 46F(3) of the ITAA 1936 to broaden the eligibility requirements for accessing the ICDR for unfranked dividends paid between members of the same wholly-owned group.
5.2 The proposed amendment broadens the current eligibility requirement, which is restricted to a whole of year requirement, to include a rule based on the company paying the dividend and the company receiving it being part of the same wholly-owned group at all times during the period of 12 months ending on the day on which the dividend was paid.
Context of amendment
What is the current treatment of intercorporate dividends?
5.3 Prior to 1 July 2000 the ICDR was available to all public companies regardless of whether the dividend was franked or not, and to all private companies provided the dividend was franked or paid within the same wholly-owned group.
5.4 However, from 1 July 2000, the tax laws were amended with the effect that the ICDR is now only available in respect of:
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- franked dividends; or
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- unfranked dividends paid within the same wholly-owned group.
5.5 In determining whether a dividend is paid within the same wholly-owned group, the rules require that the company receiving the dividend be a group company in relation to the company paying the dividend in the income year in which the dividend is paid (see subsection 46F(3)). A company is taken to be a group company in relation to another company in an income year if, broadly speaking, one company is a subsidiary of the other during the whole of the income year (see subsection 160AFE(2)).
Why is the current law being changed?
5.6 The current whole of year requirement operates as an integrity measure by requiring companies to be part of the same wholly-owned group for a reasonable period of time in order to access the benefits of grouping.
5.7 However, the rule can be too restrictive in certain circumstances which hampers the efficient disposal of subsidiary companies by holding companies. These circumstances would include where a holding company forfeits entitlement to the ICDR on a dividend as a result of disposing of a wholly-owned subsidiary during the income year even where it held the subsidiary for a reasonable period of time prior to the time the company received the dividend from the subsidiary.
5.8 To address this inflexibility the proposed amendments will provide for an additional eligibility test. As a result, companies will also be able to access the ICDR provided the company paying the dividend and the company receiving it are part of the same wholly-owned group at all times during the period of 12 months ending on the day on which the dividend was paid.
Summary of new law
5.9 The amendment will allow companies to access the ICDR provided the company paying the dividend and the company receiving it are part of the same wholly-owned group at all times during the period of 12 months ending on the day on which the dividend was paid. The current whole of year eligibility test will also be preserved.
5.10 The amendments apply in respect of dividends paid on or after 1 July 2000, the date when the ICDR on unfranked dividends was limited to dividends paid between wholly-owned group companies.
| New law | Current law |
|---|---|
| Companies will be able to access the ICDR on unfranked dividends that they receive under 2 alternative tests:
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For unfranked dividends paid within wholly-owned groups, access to the ICDR is only granted where the companies involved are group companies for the whole of the income year. Where one or both of the companies were not in existence during part of the income year, the wholly-owned rule applies in respect of that part of the income year that the companies were in existence. |
Detailed explanation of new law
5.11 The proposed amendments repeal subsection 46F(3) which contains the current whole of year test and replaces it with a new provision that contains 2 eligibility tests:
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- the first replicates the existing test as it applies to group companies and the whole of year requirement [Schedule 3, item 1, paragraph 46F(3)(a)] ; and
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- the second introduces a new test based on whether the subsidiary paying the dividend was wholly-owned by the company receiving it for the 12 months prior to the dividend being paid [Schedule 3, item 1, paragraph 46F(3)(b)] .
5.12 The second test achieves this outcome by modifying the relationship tests contained in section 160AFE. The current test, which tests ownership over the course of an income year, has been changed to an ownership test measured at a particular time. The new test asks whether the shareholder would have been a group company in relation to the company paying the dividend at all times during the period of 12 months ending on the day on which the dividend was paid. [Schedule 3, item 1, paragraph 46F(3)(b)]
5.13 As a result of the second test being based on a particular time, some of the rules contained in section 160AFE as they apply to the whole of year test are not relevant to the new 12 month test. In particular, the special rule that allows access to the ICDR in respect of newly created companies that have not been wholly-owned for the whole of the income year do not extend to the 12 month rule. Therefore, the second test will never be capable of being satisfied unless the companies involved are wholly-owned group companies for a full 12 month period prior to the dividend being paid.
Example 5.1
Banjo Company is a 30 June balancing company. On 30 March 2001 it receives an unfranked dividend from its wholly-owned subsidiary, Patterson Company, a company that it has wholly-owned continually over a number of years. Banjo Company then disposes of Patterson Company on 1 May 2001.
Although Banjo Company would be denied access to the ICDR on the unfranked dividend under the whole of year test, Banjo would be eligible for the ICDR under the 12 month test because Banjo and Patterson were group companies at all times during the period of 12 months prior to the dividend being paid.
Example 5.2
Burke Company is a 30 June balancing company. The company acquires Wills Company on 1 March 2000 (the companies are now wholly-owned group companies). On 1 August 2000, Burke receives from Wills an unfranked dividend. Burke and Wills remain wholly-owned companies for the remainder of the income year in which the dividend is paid.
Although Burke Company would not be able to access the ICDR on the unfranked dividend under the new 12 month test, Burke would continue to be eligible to the ICDR under the whole of year test because Burke and Wills were group companies for the whole of the income year in which the dividend is paid.
Application provisions
5.14 The amendment made by Schedule 3 applies in respect of dividends paid on or after 1 July 2000. [Schedule 3, item 2]
5.15 To accommodate amendments also being made to subsection 46F(3) of the ITAA 1936 contained in Taxation Laws Amendment Bill (No. 2) 2002, the amendment proposed commences at the earlier of:
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- date of Royal Assent for this bill; and
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- immediately before Schedule 2 of Taxation Laws Amendment Bill (No. 2) 2002 commences.
[Clause 2]