CORPORATE TAX UPDATE - JULY 2006
NEW SHARE CAPITAL TAINTING RULES
OVERVIEW
The Share Capital Tainting Rules are designed to
prevent a company transferring amounts to the share
capital account and subsequently making capital
distributions to shareholders who may be taxed more
favourably than dividends. Under the proposed new
rules, a company's share capital account becomes
"tainted" if it transfers certain amounts to it. When a
company's share capital account becomes tainted a
franking debit arises in the company's franking
account and an additional franking debit may arise if
the company chooses to "untaint" the account. The
company may then be liable for untainting tax.
These new Share Capital Tainting Rules are important
for companies considering capital returns and those
making accounting entries to equity accounts arising
from the introduction of the Australian Equivalent of
the International Financial Reporting Standards
("AIFRS").
When do the rules apply?
These new rules will generally take effect in relation to
transfers made into the company's share capital account
after 25 May 2006. However, as the former rules ceased
to apply from 1 July 2002, amounts transferred to a
company's share capital account between 1 July 2002
and 25 May 2006 will not trigger the share capital
tainting rules. Also, any transfers to a company's share
capital account that occurred as an immediate result of
the adopting of AIFRS will not cause the share capital
accounts to be tainted.
Action required
Companies will need to consider the impact of the new
rules for corporate accounting policies where amounts
are to be transferred to equity accounts. This will be
relevant in relation to the current year's financial
statements which may involve significant transfers to
equity accounts arising from the transition to AIFRS.
There are transitional rules to enable the untainting of
accounts that become tainted under the former rules
which had not been untainted before 1 July 2002.
Companies that will benefit from the retrospective
adjustments to the former rules should consider
applying for a refund of untainting tax paid and a
reversal of franking debit entries.
Points to Note
1.
Timing of a franking debit
the former rules. This will enable taxpayers to redress the
adverse consequences of having previously tainted their
share capital account.
3.
Debt-equity swap
For amounts transferred under a debt-equity swap
arrangement, the new share capital tainting rules will
not be triggered where the amount transferred does
not exceed the market value of the debt being
extinguished. If the amount transferred exceeds the
market value of the extinguished debt, the share
capital account is tainted only to the extent of an
amount equal to the excess.
A transfer of an amount to the company's share capital
account will cause a franking debit to arise in the
company's franking account at the end of the franking
period in which the tainting occurs and not on the day of
the transfer (this is a change to the former rules).
The old rules would, prima facie, have applied to the
whole of the transferred amount. However, the old
share capital tainting rules have also been amended
with effect from 1 July 1998 to ensure a similar
outcome as the new rules.
A company may therefore make a distribution before the
end of the franking period in order to set the benchmark
franking percentage for that period. That percentage will
then apply to determine the amount of the franking debit
that arises from the tainting. If no distribution is made by
the end of the franking period, however, a default franking
percentage of 100% will apply to determine the franking
debit that arises from the tainting.
4.
2.
Transfers from option premium reserves
An additional exclusion under the new rules is that they
will no longer apply to the transfer of an amount from an
option premium reserve if the transfer is related to the
exercise of options to acquire shares in the company.
However, this exclusion will not apply if the transfer was
made in the event the option lapsed without being
exercised.
We note that the former rules have been amended so that
the additional exclusion will also apply for the purpose of
Impact of new rules on consolidated groups
The share capital tainting rules will have an impact on
consolidated or Multiple Entry Consolidated groups. For
instance, the transfer of an amount by a subsidiary
member to its share capital account will only taint the
subsidiary's account and not the share capital account of
the head company. Franking debits arising at the time of
the tainting and untainting will, however, arise in the
franking account of the head company of the group. If a
subsidiary member with a tainted share capital account
joins another consolidated group, no further franking
debits will arise in the franking account of the new group
as a result of the above transfer to the subsidiary's share
capital account.
For further guidance or information on these new share
tainting rules, please contact our office on 9261 7704.
Level 3, 267 St George’s Terrace, Perth WA 6000
t 08 9261 7704 f 08 9261 7700
enquiries@cooperpartners.com.au
www.cooperpartners.com.au
This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.