Taxation Laws Amendment (Company Law Review) Act 1998 (63 of 1998)

Schedule 2   Tainting rule

Income Tax Assessment Act 1936

7   After Division 7A of Part IIIAA

Insert:

Division 7B - Tainted share capital accounts

Subdivision A - Tainting and untainting accounts, and distributions from tainted accounts

160ARDM Tainted share capital account

(1) A company's share capital account is tainted if the company transfers an amount to its share capital account from any of its other accounts.

Note: Certain distributions from tainted share capital accounts will be unfranked dividends for which no section 46 or 46A rebate is available.

(2) However, subsection (1) does not apply if the amount is a debt transferred under a debt/equity swap (within the meaning of section 63E).

160ARDN Untainting share capital account

A company's share capital account stops being tainted if the company makes an election under section 160ARDR or 160ARDW.

160ARDO Untainting tax does not cause franking credit

The payment of untainting tax as a result of an election under section 160ARDR or 160ARDW does not give rise to a franking credit.

Subdivision B - Companies other than life assurance companies

160ARDP Subdivision applies to companies other than life assurance companies

This Subdivision applies to companies other than life assurance companies.

160ARDQ Consequences of tainting share capital account - automatic franking debit

(1) If a company transfers an amount to its share capital account from any of its other accounts, a class C franking debit of the company arises on the day of the transfer.

(2) The amount of the debit is equal to the amount (if any) that would be calculated under subsection 160AQDB(4) as the class C required franking amount for a frankable dividend if:

(a) the dividend were paid on that day to a shareholder in the company; and

(b) the amount of the dividend were equal to the amount transferred to the share capital account.

160ARDR Election to untaint share capital account

(1) A company with a tainted share capital account may elect in writing to untaint that account. The election can be made at any time but cannot be revoked.

(2) If the company is a company with higher tax shareholders, the election must specify the amount of the franking debit to arise under subsection 160ARDS(2). The maximum amount that may be specified is the tainting amount less the sum of:

(a) the amount of the class C franking debit (if any) that arose under section 160ARDQ when the share capital account most recently became tainted; and

(b) if the company subsequently transferred one or more further amounts to its share capital account from any of its other accounts - the amounts of any class C franking debits that arose under section 160ARDQ when that further amount or those further amounts were transferred.

160ARDS Consequences of election to untaint - franking debit

Company with only lower tax shareholders

(1) If a company with only lower tax shareholders elects to untaint its share capital account under section 160ARDR, a class C franking debit of the company arises on the day of the election equal to the tainting amount less the sum of:

(a) the amount of the class C franking debit (if any) that arose under section 160ARDQ when the share capital account most recently became tainted; and

(b) if the company subsequently transferred one or more further amounts to its share capital account from any of its other accounts - the amounts of any class C franking debits that arose under section 160ARDQ when that further amount or those further amounts were transferred.

Company with higher tax shareholders

(2) If a company with higher tax shareholders elects to untaint its share capital account under section 160ARDR, a class C franking debit of the company arises on the day of the election equal to the amount specified in the election.

160ARDT Consequences of election to untaint - untainting tax for companies with higher tax shareholders

(1) If a company with higher tax shareholders elects to untaint its share capital account under section 160ARDR, the company is liable to pay tax equal to the difference between:

(a) the tax payable by top marginal rate shareholders (see subsection (2)); and

(b) the notional franking amount (see subsection (3)).

(2) In subsection (1), the tax payable by top marginal rate shareholders is the amount calculated in accordance with the formula:

(Tainting amount + Notional franking amount) * (Top marginal rate + Top medicare levy rate)

where:

top marginal rate is the maximum rate specified in column 2 of the table in Part I of Schedule 7 to the Income Tax Rates Act 1986 that applies for the year of income in which the election is made.

top medicare levy rate is 2.5%.

(3) In subsections (1) and (2), the notional franking amount is the amount calculated in accordance with the formula:

Total franking debits * (36 / 64)

where:

total franking debits is the sum of:

(a) the amount of the class C franking debit (if any) that arose under section 160ARDQ when the share capital account most recently became tainted; and

(b) if the company subsequently transferred one or more further amounts to its share capital account from any of its other accounts - the amounts of any class C franking debits that arose under section 160ARDQ when that further amount or those further amounts were transferred; and

(c) the amount of the class C franking debit (if any) specified in the election, that arose under subsection 160ARDS(2) when the election was made.

Subdivision C - Life assurance companies

160ARDU Subdivision applies to life assurance companies

This Subdivision applies to life assurance companies.

160ARDV Consequences of tainting share capital account - automatic franking debit

(1) If a company transfers an amount to its share capital account from any of its other accounts, a class A franking debit and a class C franking debit of the company arise on the day of the transfer.

(2) The amount of:

(a) the class A franking debit is equal to the amount (if any) that would be calculated under subsection 160AQDB(1) as the class A required franking amount for a frankable dividend if the assumptions in subsection (3) were made; and

(b) the class C franking debit is equal to the amount (if any) that would be calculated under subsection 160AQDB(4) as the class C required franking amount for a frankable dividend if the assumptions in subsection (3) were made.

(3) The assumptions for paragraphs (2)(a) and (b) are that:

(a) the dividend was paid on the day of the transfer to a shareholder in the company; and

(b) the amount of the dividend were equal to the amount transferred to the share capital account.

160ARDW Election to untaint share capital account

(1) A company with a tainted share capital account may elect in writing to untaint that account. The election can be made at any time but cannot be revoked.

(2) The election must specify:

(a) the amount of the class A franking debit to arise under paragraph 160ARDX(2)(a); and

(b) the amount of the class C franking debit to arise under paragraph 160ARDX(2)(b).

Company with only lower tax shareholders

(3) For a company with only lower tax shareholders, the sum of the franking debits specified in the election under subsection (2) must equal the tainting amount less the sum of:

(a) the amount of the class A franking debit (if any) that arose under section 160ARDV when the share capital account most recently became tainted; and

(b) if the company subsequently transferred one or more further amounts to its share capital account from any of its other accounts - the amounts of any class A franking debits that arose under section 160ARDV when that further amount or those further amounts were transferred; and

(c) the amount of the class C franking debit (if any) that arose under section 160ARDV when the share capital account most recently became tainted; and

(d) if the company subsequently transferred one or more further amounts to its share capital account from any of its other accounts - the amounts of any class C franking debits that arose under section 160ARDV when that further amount or those further amounts were transferred.

Company with higher tax shareholders

(4) The sum of the franking debits that may be specified under subsection (2) must not exceed the tainting amount less the sum of:

(a) the amount of the class A franking debit (if any) that arose under section 160ARDV when the share capital account most recently became tainted; and

(b) if the company subsequently transferred one or more further amounts to its share capital account from any of its other accounts - the amounts of any class A franking debits that arose under section 160ARDV when that further amount or those further amounts were transferred; and

(c) the amount of the class C franking debit (if any) that arose under section 160ARDV when the share capital account most recently became tainted; and

(d) if the company subsequently transferred one or more further amounts to its share capital account from any of its other accounts - the amounts of any class C franking debits that arose under section 160ARDV when that further amount or those further amounts were transferred.

160ARDX Consequences of election to untaint - franking debit

If a company elects to untaint its share capital account under section 160ARDW:

(a) a class A franking debit of the company arises on the day of the election equal to the amount of the class A franking debit specified in the election; and

(b) a class C franking debit of the company arises on the day of the election equal to the amount of the class C franking debit specified in the election.

160ARDY Consequences of election to untaint - untainting tax for companies with higher tax shareholders

(1) If a company with higher tax shareholders elects to untaint its share capital account under section 160ARDW, the company is liable to pay tax equal to the difference between:

(a) the tax payable by top marginal rate shareholders (see subsection (2)); and

(b) the notional franking amount (see subsection (3)).

(2) In subsection (1), the tax payable by top marginal rate shareholders is the amount calculated in accordance with the formula:

formula:- (Tainting amuont + Notional franking amount) * (Top marginal rate + Top medicare levy rate)

where:

top marginal rate is the maximum rate specified in column 2 of the table in Part I of Schedule 7 to the Income Tax Rates Act 1986 that applies for the year of income in which the election is made.

top medicare levy rate is 2.5%.

(3) In subsections (1) and (2), the notional franking amount is the amount calculated in accordance with the formula:

formula:- (Total class A franking debits * (39 / 61)) + (Total class C franking debits * (36 / 64))

where:

total class A franking debits is the sum of:

(a) the amount of the class A franking debit (if any) that arose under section 160ARDV when the share capital account most recently became tainted; and

(b) if the company subsequently transferred one or more further amounts to its share capital account from any of its other accounts - the amounts of any class A franking debits that arose under section 160ARDV when that further amount or those further amounts were transferred; and

(c) the amount of the class A franking debit (if any) specified in the election, that arose under subsection 160ARDX(2) when the election was made.

total class C franking debits is the sum of:

(a) the amount of the class C franking debit (if any) that arose under section 160ARDV when the share capital account most recently became tainted; and

(b) if the company subsequently transferred one or more further amounts to its share capital account from any of its other accounts - the amounts of any class C franking debits that arose under section 160ARDV when that further amount or those further amounts were transferred; and

(c) the amount of the class C franking debit (if any) specified in the election, that arose under subsection 160ARDX(2) when the election was made.