Treasury has released draft legislation which proposes to prevent certain distributions that are funded by capital raisings from being frankable.
This measure is intended to address issues raised by the ATO who are concerned that some arrangements are being used by companies for the purpose of, or for purposes which include, releasing franking credits or streaming dividends to shareholders. One immediate purported effect of these arrangements is the release of franking credits that may otherwise have been retained by the company, which may attract the operation of the anti-avoidance rule in section 177EA of the Income Tax Assessment Act 1936 or other anti-avoidance rules.
A distribution by an entity is funded by capital raising if, broadly:
the 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: (i) the principal effect of the issue of any of the equity interests was to directly or indirectly fund some or all of the distribution; or (ii) any entity that issued or facilitated the issue of any of the equity interests did so for a purpose (other than an incidental purpose) of funding the distribution or part of the distribution.
Once enacted, the measure will apply retrospectively with effect from 12:00pm (AEDT) on 19 December 2016.
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