House of Representatives

Explanatory Memorandum

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

Chapter 4 - Mechanics of the non-share capital account

Outline of chapter

4.1 This chapter explains the operation of the non-share capital account which records contributions to the company in relation to non-share equity interests that are issued by the company and also records returns made by the company in relation to those contributions.

Detailed explanation of new law

The non-share capital account

4.2 As mentioned in paragraph 2.71, capital raised from the issue of non-share equity interests is recorded in the companys non-share capital account. This allows non-share distributions to be characterised as a non-share dividend or a non-share capital return. [Schedule 1, item 33, section 164-5]

4.3 The non-share capital account is credited with consideration received by the company for the issue of non-share equity interests. Ordinarily the consideration received will be money. However, it may also be property or services, in which case the amount credited to the non-share capital account will be its market value at the time it is provided. [Schedule 1, item 33, section 164-15]

4.4 The crediting occurs at the time the amount is received. Thus, if a partly paid non-share equity interest is issued, the non-share capital account is credited by the amount paid at the time of issue and then, if a call for the unpaid amount is subsequently made, it is credited with the amount called and received at that subsequent time.

4.5 To prevent the same amount being credited to both a non-share capital account and a share capital account, a credit to the former is reduced to the extent of a credit to the latter. For example, if a company credits its share capital account with an amount when it issues a stapled security comprising a share and a note, the non-share capital account will not be credited with the same amount. [Schedule 1, item 33, subsection 164-15(1)]

4.6 The non-share capital account is also credited with capital raised from the issue of non-share equity interests before the commencement of these measures (i.e. 1 July 2001), provided they are still in existence at that date. Some issuers may elect that the new measures not apply to certain non-share equity interests until 1 July 2004 (see paragraphs 2.210 to 2.214). These interests have to be in existence on 1 July 2004 if they are to cause a credit to the non-share capital account. [Schedule 1, item 33, subsection 164-15(2) and subitem 118(9)]

4.7 Credits also can arise if a debt interest becomes an equity interest because of a material change (see paragraphs 2.129 to 2.134). Conversely, a debit arises if an equity interest becomes a debt interest because of a material change. [Schedule 1, item 33, subsections 164-15(2) and 164-20(3)]

4.8 If a company makes a distribution as consideration for the surrender, redemption or cancellation of a non-share equity interest, it may debit its non-share capital account to the extent of the surrender, cancellation or redemption. The company may also debit its non-share capital account to the extent to which a distribution is made in connection with a reduction in the market value of a non-share equity interest and the distribution is equal in amount to that reduction. This will ordinarily result in the distribution being treated as capital in the non-share equity holders hands (see paragraphs 2.75 to 2.78). The total debits to the non-share capital account in respect of a particular equity interest cannot exceed the total credits made in respect of that interest. [Schedule 1, item 33, subsections 164-20(1) and (2)]

4.9 Because the non-share capital account is a construct of the tax law and the only credits that may be made to it are legislatively defined, the rules applying to share capital accounts in relation to their so-called tainting (i.e. the crediting to a share capital account of amounts other than share capital) are not required. [Schedule 1, item 33, subsection 164-10(4)]