House of Representatives

Explanatory Memorandum

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

Chapter 2 - Film licensed investment companies

Overview

2.1 Schedule 2 to this Bill amends the Film Licensed Investment Company Act 1998 (FLICA 1998) , Income Tax Assessment Act 1936 (ITAA 1936) , and the Income Tax Assessment Act 1997 (ITAA 1997). The purpose of these amendments is to allow a Film Licensed Investment Company (FLIC) to make returns of concessional capital as frankable dividends. There are also a number of technical amendments that will improve the clarity of the law governing FLICs.

Summary of amendments

2.2 The amendments have the following broad features, they will:

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insert new section 375-872 which :

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allows distributions of concessional capital by a FLIC to be taken as a dividend paid out of profits from sources in Australia [new subsection 375-872(1)] ;

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ensures that the distributions of this type made by the FLIC are only taken to be dividends paid out of profits to the extent of the deduction available under section 375-855 of the ITAA 1997 [new subsection 375-872(2)] ;

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requires that any dividends paid by a FLIC complies with the Corporations Law rules about declaring and paying dividends [new subsection 375-872(3)] ; and

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ensures that the intercorporate dividend rebate is not denied by sections 46G to 46M in respect of concessional capital distributions made by a FLIC [new subsection 375-872(4)] ;

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amend section 160APA of the ITAA 1936 to include a dividend under section 375-872 of the ITAA 1997 as a frankable dividend [item 2 of Schedule 2] ;

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include a dividend, under section 375-872 in the definition of dividend in subsection 995-1(1) ITAA 1997 [item 4 of Schedule 2] ; and

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remove the reference to memorandum and articles of association provide in paragraph 15(e) of the FLICA 1998 [item 1 of Schedule 2] .

Background to amendments

2.3 On 10 November 1997, the Government announced that it would introduce a pilot Film Licensed Investment Company (FLIC) scheme for a 2 year period, to run alongside Division 10BA of the ITAA 1936. Under the trial scheme, investors will receive a 100% deduction for shares purchased in a FLIC when payment and delivery of shares occurs during its concessional capital licence period. The level of concessional share capital which the FLICs can raise is capped at $20 million for the 1998-1999 financial year and $40 million over the 2-year period ending 30 June 2000.

The pilot FLIC scheme was enacted in the FLICA 1998 which commenced on 7 December 1998.

Purpose of amendments

2.4 The concessional capital that is invested in a FLIC is immediately deductible in the hands of the investing shareholders, and any expenditure sourced from that concessional capital will not be deductible, except for reasonable administrative expenses. Correspondingly, all income a FLIC derives from investment of this capital is taxable minus its administrative expenses.

2.5 If a FLIC decides to make a return of concessional capital, this return will effectively be taxed twice; firstly in the hands of the FLIC and then as a return of capital in the hands of the shareholder. The shareholders will be taxed on the whole returned amount as the cost base for their shares will be zero. The amendments will ensure the return of capital is only taxed once.

2.6 The purpose of the technical amendments is to maintain the clarity of the law.

Date of effect

2.7 The amendments will apply from 7 December 1998.

Detailed explanation of amendments

Part 1 - FLIC distributions deemed as dividends

Distribution of FLIC concessional capital is taken to be a dividend

2.8 Under new subsection 375-872(1) , a return of concessional capital by a FLIC will be taken to be a dividend in the hands of the investors. The return can be made as a consequence of liquidation, a share buyback or other capital return. A return of concessional capital taken to be a dividend under new section 375-872 can only be permitted if the requirements of the Corporations Law for a reduction of capital and a declaration of dividend are complied with. [New subsection 375-872(3)]

2.9 The existing definition of dividend in subsection 995-1(1) of the ITAA 1997 does not take into account the operation of the FLIC scheme in respect of the proposed treatment of FLIC distributions. This definition will be amended to incorporate a reference to section 375-872 of ITAA 1997 (which relates to the FLIC scheme). [Item 4]

Dividend cannot exceed the amount of deductions

2.10 As a dividend under new subsection 375-872 (1) is deemed to be paid out of profits from sources in Australia, it will be taken as a dividend to which imputation credits will be attached. This will apply to the original investor and subsequent holders of concessional capital shares. However, a concessional capital distribution will not be a frankable dividend to the extent that the distribution made by the company exceeds the deduction claimed under section 375-855 of ITAA 1997. [New subsection 375-872(2)]

Intercorporate dividend rebate not denied

2.11 Under the existing income tax law, sections 46G to 46M of the ITAA 1936 apply to any payment from the share capital account of a FLIC. Any payment made to this account will taint the share capital account and this will deny FLIC corporate shareholders access to the section 46 intercorporate rebate. Under the amendments, sections 46G to 46M do not apply to payments taken to be dividends under 375-872 of ITAA 1997 and hence the intercorporate dividend rebate may be claimed. [New subsection 375-872(4)]

Part 2 Other amendments

Film Licensed Investment Company Act 1998

2.12 The amendment to paragraph 15(e) of the FLICA 1998 proposes to align the FLICA 1998 with the Company Law Review Act 1998 by omitting the reference to memorandum and articles of association provide and substituting that reference with constitution provides. [Item 1]

Income Tax Assessment Act 1936

2.13 As a consequence of deeming returns of concessional capital as frankable dividends under new section 375-872 of the ITAA 1997, the definition of frankable dividend in section 160APA of the ITAA 1936 is being updated to include new section 375-872 dividends. [Item 2]