Proposed franking credit amendments to deny certain credits

Earlier this month, Treasury commenced public consultation on proposed amendments to Subdivision 207-F of the Income Tax Assessment Act 1997, the broad effect of which would be to render distributions to shareholders as “unfrankable”, where those distributions are funded by particular capital raising activities.

The proposed amendments represent the unexpected revival of a proposal made by Scott Morrison as Treasurer in late 2016 in response to Taxpayer Alert TA 2015/2 Franked distributions funded by raising capital to release franking credits to shareholders.

If enacted, the proposed amendments will deny the distribution of franking credits where:

• The underlying distribution is not consistent with an established practice of the entity of making distributions of that kind on a regular basis;
• There has been an issue of equity interests in the entity or another entity; and
• It is reasonable to conclude in the circumstances that either:

• The principal effect of the issue of any of the equity interests was to directly or indirectly fund some or all of the underlying distribution; or
• An entity that issued or facilitated the issue of the interests did so for a purpose of funding all or part of the underlying distribution.

Treasury has described the proposed amendments as “an integrity measure”, asserting that “they [will] prevent entities from manipulating the imputation system to obtain inappropriate access to franking credits”.

Although Federal Treasurer Jim Chalmers described the proposed amendments as a “very minor change”, and indeed the 2016-17 Mid-Year Economic and Fiscal Outlook forecasted a relatively meagre resulting annual cash collection of $10m, there is concern that the proposed amendments will have a far broader reach, particularly for ‘mum and dad’ investors, with WAM Capital estimating there are $43 billion of franking credits available on ASX 200 company balance sheets.

Significantly, the proposed amendments would have retroactive application to distributions made from 12pm (AEDT) on 19 December 2016, resulting in material compliance and financial costs for impacted investors.  

Additionally, there is debate as to whether the raising of cash to access ‘trapped’ franking credits amounts to a ‘manipulation’ of the imputation system and, therefore, whether the proposed legislation effectively targets the issue of concern.

For example, cash attributable to realised taxed profits may have been reinvested in a business rather than being paid out to shareholders, in which case entering into an arrangement to access the otherwise ‘trapped’ franking credits does not, on the face of it, appear egregious.

The consultation will run until 5 October 2022, and interested parties are invited to comment thereon.

Should you wish to discuss the proposed amendments, please contact your nearest RSM Office or [email protected].