Senate

Explanatory Memorandum

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

General outline and financial impact

Amends the Income Tax Assessment Act 1936 and associated tax laws as a result of changes to the Corporations Law. The amendments will introduce an anti-avoidance provision that applies where:

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a capital benefit is provided under an arrangement where the company or a taxpayer has a purpose, other than an incidental purpose, of conferring or obtaining a tax advantage in connection with the capital benefit as compared to the payment of a dividend having regard to certain listed factors; or

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capital benefits are streamed to shareholders who gain a tax benefit from the receipt of capital while dividends are paid to those who would not gain such a benefit, or bonus shares are streamed to shareholders in lieu of unfranked dividends.

The amendments will also:

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ensure that existing provisions within the tax laws that are dependent on the concept of par value operate consistently with the policy underlying their operation under the current Corporations Law;

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broadly speaking, treat bonus shares issued under the new Corporations Law in the same way that bonus shares issued from a share premium account are currently treated under the tax law;

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ensure that, consistently with the current tax law, the tax treatment of arrangements involving the issue of shares at a premium is extended to arrangements involving the issue of share capital; and

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introduce a share capital tainting rule to prevent companies disguising a profit distribution (i.e. a dividend) as a tax-preferred capital distribution from the share capital account by first transferring profits into that account and then distributing from it.

Date of effect: The amendments will apply on a day to be fixed by proclamation. In respect of the anti-avoidance provision, the provision is to apply to distributions made, or bonus shares issued, after that time, unless made or issued pursuant to a binding commitment entered into before 13 November 1997.

Proposal announced: Treasurers Press Release of 13 November 1997 (No. 122).

Financial impact: In the absence of the anti-avoidance provision, the maximum revenue at risk could be substantial.

Compliance cost impact: Compliance costs are unlikely to be significant.

SUMMARY OF REGULATION IMPACT STATEMENT

Policy Objective:

To provide an appropriate taxation response to changes to the Corporations Law and, in particular, to ensure that Corporation Law changes do not allow companies and their shareholders to gain an undue tax benefit by distributing profits as preferentially taxed capital rather than dividends.

Impact: Low

Main points:

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There is only one option to implement the policy objective a general anti-avoidance provision approach.

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Companies compliance costs will be kept to a minimum because:

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only those companies entering into capital streaming or dividend substitution arrangements will need to consider the operation of the anti-avoidance provision; and

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the legislation implementing the general anti-avoidance provision is not complex.