Corporate Tax Association (CTA) and CA ANZ have lodged a joint submission on the exposure draft legislation (ED) which implements the measure preventing the distribution of franking credits where a distribution to shareholders is funded by particular capital raising activities.

The measure will apply to distributions declared by a company to its shareholders outside or additional to the company’s normal dividend cycle (a special dividend) to the extent it is funded directly or indirectly by capital raising activities which result in the issue of new equity interests.

We are concerned that the ED implementing the franked distributions and capital raising measure is drafted too broadly, capturing franked distributions around ordinary capital management activities rather than being limited to artificial and contrived arrangements entered into to obtain inappropriate access to franking credits held by a company.

Due to the broadness of the draft legislation, we are also concerned with the retrospective application of the provisions. Furthermore, allowing the Commissioner to amend assessments outside the existing period of review to give effect to the retrospectivity of the measure (as long as the amendment is made within 12 months after commencement of the legislation) seems unduly harsh for those shareholders who have no influence over a company’s decision making, e.g. retail individual and superannuation fund investors, who may be caught by this measure.

It is critical that:

• the principal effect and purpose tests in subparagraph 207-159(1)(c) are amended
• the ATO publish a Law Companion Ruling and Practical Compliance Guideline as soon as practicable that provides clear examples of how the rules operate in practice.

Access the ED and explanatory materials for the franked distribution and capital raising measure