Senate

Supplementary Explanatory Memorandum

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

Chapter 1 - Amendments to franking credit trading measures

Overview

1.1 The amendments will make several changes to the franking credit trading measures set out in Schedules 4 and 7 to this Bill. The amendments to the related payments rule will:

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exclude related payments under contracts for the sale of Share Price Index (SPI) futures from the related payments rule until 2July 1998; and

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make a correction to the rules for determining a taxpayers position in relation to shares.

1.2 Also, distributions in respect of interests in trusts and partnerships acquired before 2July 1998 will be excluded from the operation of the changes to section 45Z of the Income Tax Assessment Act 1936 (ITAA 1936).

Background

1.3 The franking credit trading measures included in this Bill are the final instalment of the franking credit trading and dividend streaming measures announced in the 1997-98 Budget.

1.4 These changes either address concerns raised by taxpayers or remove deficiencies in the provisions to ensure that the measures operate as intended.

Date of effect

1.5 The correction to the rules for determining a taxpayers position in relation to shares for the related payments rule will take effect from the day this Bill receives Royal Assent. The other changes will apply from the commencement of the relevant measures.

Explanation of the amendments

Amendment 1: correction to the rules for determining a taxpayers position in relation to shares for the related payments rule

1.6 The related payments rule requires taxpayers who are under an obligation to make a related payment with respect to a dividend to hold shares at risk for at least 45days to be eligible for franking benefits. A taxpayer is taken to have materially diminished the risks of loss or opportunities for gain in respect of shares or an interest in shares on a particular day if the taxpayers net position on that day is less than 30%. Net position is calculated using the concept of delta.

1.7 Amendment 1 amends new subsection 160APHJ(10) so that, for the purpose of the related payments rule, positions held by a taxpayer in relation to shares or interests in shares will be taken to have the deltas that they have on the first day of the secondary qualification period for dividends after the first dividend. If the taxpayer subsequently enters into further positions in relation to the shares or interests, then the positions will still be taken to have the deltas the taxpayer had on the day of entering into the positions.

1.8 This change is a refinement of the rule for determining a taxpayers position in relation to shares to ensure that the rule gives an appropriate and consistent outcome for the purpose of the related payments rule. If this change was not made, the rule would produce an arbitrary outcome that would work to the taxpayers advantage in some cases and to the taxpayers detriment in others.

Amendment 2: exclude SPI futures from related payments rule until 2 July 1998

1.9 Amendment 2 will amend subitem 25(9) in Schedule 4 to this Bill so that the related payments rule will not apply to a related payment under an arrangement for the sale of the derivatives known as SPI futures entered into before 2 July 1998, when the measure was introduced into the Parliament in Taxation Laws Amendment Bill (No. 4) 1998.

1.10 Apart from this exception, the related payments rule will continue to apply to related payments in respect of a dividend or distribution under an arrangement entered into after 7.30 pm on 13May 1997, when the measure was announced.

Amendment 3: application of new section 45ZA to interests acquired before 2July 1998

1.11 New section 45ZA in Item 2 to Schedule 7 denies franking benefits and the intercorporate dividend rebate for distributions attributable to dividends to beneficiaries and partners that are equivalent to interest on a loan.

1.12 Amendment 3 will amend new paragraph 45ZA(1)(c) so that the changes to section45Z of ITAA 1936 will not apply to distributions attributable to an interest in a trust or partnership acquired before 2July 1998, when the measure was introduced into the Parliament in Taxation Laws Amendment Bill (No. 4) 1998. The changes to section 45Z will apply to distributions attributable to interests in trusts or partnerships acquired on or after 2 July 1998, and to distributions attributable to interests in trusts or partnerships created or extended after 7.30 pm on 13 May 1997.