13999  Cat. No. 97 2938 0  ISBN 0644 519843

1996-97-98

The Parliament of the Commonwealth of Australia

HOUSE OF REPRESENTATIVES

taxation laws amendment (COMPANY LAW REVIEW) bill 1998
INCOME tax (UNTAINTING TAX) bill 1998

Explanatory Memorandum

(Circulated by authority of the
Treasurer, the Hon Peter Costello, MP)

Table of contents
General outline and financial impact	1
Chapter
1.	Company law review	3

General outline and financial impact
Amends the Income Tax Assessment Act 1936 and associated tax laws as a result of changes to the Corporations Law. The amendments will introduce an anti-avoidance provision that applies where:
	a capital benefit is provided under an arrangement where the company or a taxpayer has a purpose, other than an incidental purpose, of conferring or obtaining a tax advantage in connection with the capital benefit as compared to the payment of a dividend having regard to certain listed factors; or 
	capital benefits are streamed to shareholders who gain a tax benefit from the receipt of capital while dividends are paid to those who would not gain such a benefit, or bonus shares are streamed to shareholders in lieu of unfranked dividends.
The amendments will also:
	ensure that existing provisions within the tax laws that are dependent on the concept of par value operate consistently with the policy underlying their operation under the current Corporations Law;
	broadly speaking, treat bonus shares issued under the new Corporations Law in the same way that bonus shares issued from a share premium account are currently treated under the tax law;
	ensure that, consistent with the current tax law, the tax treatment of arrangements involving the issue of shares at a premium is extended to arrangements involving the issue of share capital; and
	introduce a tainting rule that treats distributions from a tainted share capital account as unfrankable and unrebatable dividends unless the company elects to untaint that account.  In this regard the Income Tax (Untainting Tax) Bill 1998 imposes a liability to untainting tax in certain circumstances where a company elects to untaint its share capital account.
Provisions in the Act dependent on the concept of par value will also be amended to ensure that their operation remains consistent with the policy underlying their operation under the current Corporations Law.
Date of effect:  The amendments will apply on a day to be fixed by proclamation. In respect of the anti‑avoidance provision, the provision is to apply to distributions made, or bonus shares issued, after that time, unless made or issued pursuant to a binding commitment entered into before 13 November 1997.
Proposal announced: Treasurer's Press Release of 13 November 1997 (No. 122).
Financial impact:  In the absence of the anti-avoidance provision, the maximum revenue at risk could be substantial.
Compliance cost impact:  Compliance costs are unlikely to be significant. 
SUMMARY OF REGULATION IMPACT STATEMENT
Policy Objective:
To provide an appropriate taxation response to changes to the Corporations Law and, in particular, to ensure that Corporation Law changes do not allow companies and their shareholders to gain an undue tax benefit by distributing profits as preferentially taxed capital rather than dividends.
Impact:	Low
Main points:	
	There is only one option to implement the policy objective – a general anti‑avoidance provision approach.
	Companies' compliance costs will be kept to a minimum because:
-	only those companies entering into capital streaming or 	dividend substitution arrangements will need to 	consider the operation of the anti-avoidance provision; 	and 
-	the legislation implementing the general anti-avoidance 	provision is not complex.

Chapter 1
Company law review
Overview
1.1	As a result of changes to the Corporations Law, the Taxation Laws Amendment (Company Law Review) Bill 1998 (the Bill) will amend the Income Tax Assessment Act 1936 (the Act) and associated tax laws to prevent dividend substitution and capital streaming arrangements, and make various consequential amendments to the tax laws.
1.2	The amendments will introduce an anti-avoidance rule which applies where:
	a capital benefit is provided under an arrangement where a company or a person has a purpose, other than an incidental purpose, of conferring or obtaining a tax advantage in connection with the capital benefit as compared to the payment of a dividend having regard to certain listed factors; or
	capital benefits are streamed to shareholders who gain a tax benefit from the receipt of capital while dividends are paid to those who would not gain such a benefit, or shares are streamed to shareholders in lieu of unfranked dividends.
1.3	Where the anti-avoidance provision applies the capital benefit will be deemed to be an unfranked and unrebatable dividend in the hands of the taxpayer.
1.4	The amendments will also:
	ensure that existing provisions within the tax laws that are dependent on the concept of par value operate consistently with the policy underlying their operation under the current Corporations Law;
	broadly speaking, treat bonus shares issued under the new Corporations Law in the same way that bonus shares issued from a share premium account are currently treated under the tax law;
	ensure that, consistent with the current tax law, the tax treatment of arrangements involving the issue of shares at a premium is extended to arrangements involving the issue of share capital; and
	introduce a tainting rule that treats distributions from a tainted share capital account as unfrankable and unrebatable dividends unless the company elects to untaint that account.  In this regard the Income Tax (Untainting Tax) Bill 1998 imposes a liability to untainting tax in certain circumstances where a company elects to untaint its share capital account.
Summary of amendments
Purpose of amendments
1.5	The purpose of the amendments is:
	to protect the revenue by ensuring that changes to the Corporations Law do not allow companies to distribute profits to shareholders as preferentially taxed capital rather than dividends; and
	ensure that existing provisions within the tax laws dependent on the concept of par value (and associated terms such as share premiums, share premium account, and paid-up capital) continue to operate appropriately.
Date of effect
1.6	The amendments will apply on a day to be fixed by proclamation.  In respect of the anti-avoidance rule, the rule is to apply to distributions made, or bonus shares issued, after that day, unless made or issued pursuant to a binding commitment entered into before 13 November 1997.  [Section 2 and Item 3 of Schedule 1]
Background to the legislation
1.7	The share capital changes in the Company Law Reform Bill 1997 (the Review Bill), together with the changes in relation to share buy-backs made by the First Corporate Law Simplification Act 1995, will make it easier for companies to make distributions of capital to shareholders.  Without an appropriate taxation framework, these changes could result in revenue loss or deferral because of the greater ease with which companies may stream capital to shareholders in circumstances where this will minimise tax.  To combat this, anti-avoidance provisions in the taxation legislation designed to prevent companies distributing profits to shareholders as preferentially taxed capital are to be strengthened.
1.8	The Review Bill will also abolish the concept of par value and with it the associated concepts of share premium, share premium accounts and paid-up capital.  As a result the distinction between share premium and paid-up capital will be removed, effectively creating one share capital account comprising both paid-up capital and share premiums.  This will increase the amount of capital that will be capable of being streamed to shareholders as well as necessitate consequential amendments to the tax laws that are dependent on these concepts.
1.9	The Review Bill will also allow companies to issue bonus shares without transferring amounts between the company's accounts. This will increase the ability of companies to make capital distributions in the form of bonus shares.
Explanation of amendments
Anti-avoidance rules
Streaming of bonus shares in lieu of unfranked dividends
1.10	Schedule 1 of the Bill will insert an anti-avoidance provision into Subdivision D of Division 2 of Part III of the Act.  New section 45 applies in circumstances where a company streams the provision of shares and the payment of minimally franked dividends.  [Item 1 of Schedule 1; new section 45]
1.11	For the purposes of new section 45, shares will be considered to have been provided to a shareholder in lieu of minimally franked dividends if a company:
	issues shares to some shareholders but not all; and [Item 1 of Schedule 1; new paragraph 45(1)(a)]
	either pays or will pay an unfranked dividend or pays or will pay a dividend that is franked to less than ten per cent to shareholders, at least some of whom, do not receive shares. [Item 1 of Schedule 1; new paragraph 45(1)(b)]
1.12	The rule applies irrespective of whether the streaming takes place in the same income year or in different income years. [Item 1 of Schedule 1; new subsection 45(1)]
1.13	Where new section 45 applies, the value of the shares is taken to be an unfranked and unrebatable dividend paid by the company out of its profits to the recipient shareholders. [Item 1 of Schedule 1; new subsections 45(3), 45(4) and 45(5)]
1.14	Unlike new sections 45A and 45B (explained below), the Commissioner will not be required to make a determination that new section 45 applies.  This provision is self-executing.  This is because the arrangements to which it applies are ones where it is clear that the appropriate benefit to be taxed is the whole of the bonus shares.  In more complex cases of streaming, for example where some shareholders receive a partially franked dividend and other shareholders receive bonus shares, or some bonus shares and a smaller dividend (which might be wholly franked), questions arise as to how much of the capital benefit ought to be taxed as a dividend.  These sorts of streaming arrangements are therefore dealt with under new section 45A, where the Commissioner is required to determine how much of a streamed capital benefit should be taxed as a dividend.
1.15	For example, where a company streams a partially franked dividend of $0.86, of which 36c is franked, to one group of shareholders, and a fully franked dividend of 36c and a bonus share worth 50c to another group of shareholders who derive a greater benefit from capital benefits, new section 45 would not apply because this is not a minimally franked dividend.  However, new section 45A could apply: it has the same effect as streaming a 50c unfranked dividend to one group of shareholders and a 50c bonus share to another group, and it may therefore be appropriate to make a determination to tax the whole bonus share as a dividend.  On the other hand, if the shareholders deriving a greater benefit from bonus shares received a bonus share worth 86c, it may be appropriate only to determine to treat part of the capital benefit as a dividend, that is, 50c.
Streaming of capital benefits
1.16	Schedule 1 of the Bill will also insert an anti-avoidance provision into Subdivision D of Division 2 of Part III of the Act which applies in circumstances where capital benefits are streamed to shareholders (advantaged shareholders) who gain a tax benefit from the receipt of capital while dividends are paid to those who would not gain such a benefit (disadvantaged shareholders).  [Item 1 of Schedule 1; new section 45A]
1.17	The rule will apply irrespective of whether a company streams capital benefits within a single income year or between different income years. [Item 1 of Schedule 1; new subsection 45A(1)]
1.18	However, new section 45A does not apply where the capital benefit which is provided to the advantaged shareholders is the provision of shares, and the disadvantaged shareholders receive, or it is reasonable to assume will receive, fully franked dividends.  [Item 1 of Schedule 1; new subsection 45A(5)]
What is a ‘capital benefit’?
1.19	For the purposes of the rule, a company provides a capital benefit to a shareholder where:
	the company provides shares to the shareholder; 
[Item 1 of Schedule 1; new paragraph 45A(3)(a)]
	the company distributes share capital to the shareholder; or 
[Item 1 of Schedule 1; new paragraph 45A(3)(b)]
	the company does something in relation to shares that has the effect of increasing the value of shares held by the shareholder.  [Item 1 of Schedule 1; new paragraph 45A(3)(c)]
1.20	For example, a capital benefit under new paragraph 45A(3)(c) would include circumstances where the rights attaching to some shares are removed that has the effect of increasing the value of other shares held by advantaged shareholders.
When will a shareholder receive a greater benefit from capital benefits?
1.21	In determining whether the anti-avoidance rule applies in new section 45A, an advantaged shareholder derives a greater benefit from capital benefits than a disadvantaged shareholder where the following circumstances exist in respect of the advantaged shareholder but not the disadvantaged shareholder:
	some or all of the shares in the company held by the shareholder are pre-CGT shares; [Item 1 of Schedule 1; new paragraph 45A(4)(a)]
	the shareholder is a non-resident; [Item 1 of Schedule 1; new paragraph 45A(4)(b)]
	the cost base of the relevant share is not substantially less than the capital benefit; [Item 1 of Schedule 1; new paragraph 45A(4)(c)]
	the shareholder has a capital loss for the income year in which the benefit is provided; [Item 1 of Schedule 1; new paragraph 45A(4)(d)]
	the shareholder is a private company who would not be entitled to the intercorporate dividend rebate under section 46F of the Act had the shareholder received the dividend paid to the disadvantaged shareholder; and [Item 1 of Schedule 1; new paragraph 45A(4)(e)]
	the shareholder has income tax losses.  [Item 1 of Schedule 1; new paragraph 45A(4)(f)]
Schemes to confer a tax benefit
1.22	Schedule 1 of the Bill will also insert an anti-avoidance provision into Subdivision D of Division 2 of Part III of the Act to ensure that certain payments that are paid in substitution for dividends are treated as dividends for taxation purposes.  [Item 1 of Schedule 1; new subsection 45B(1)]
1.23	The anti-avoidance provision applies where:
	there is a scheme under which a person is provided with a capital benefit by a company; [Item 1 of Schedule 1; new paragraph 45B(2)(a)]
	under the scheme, a taxpayer, who may or may not be the person provided with the capital benefit, obtains a tax benefit; [Item 1 of Schedule 1; new paragraph 45B(2)(b)]
	having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit.  [Item 1 of Schedule 1; new paragraph 45B(2)(c)]
1.24	For these purposes the term ‘scheme’ takes the same meaning as provided in Part IVA of the Act.
What is the meaning of ‘provided with a capital benefit’?
1.25	In determining whether the rule applies, a person is provided with a capital benefit where:
	shares in a company are issued to the person; 
[Item 1 of Schedule 1; new paragraph 45B(4)(a)]
	there is distribution to the person of share capital; or 
[Item 1 of Schedule 1; new paragraph 45B(4)(b)]
	the company does something in relation to shares that has the effect of increasing the value of shares held by the person.  [Item 1 of Schedule 1; new paragraph 45B(4)(c)]
What is the meaning of ‘obtaining a tax benefit’?
1.26	In determining whether the anti-avoidance rule applies in new section 45B, the relevant taxpayer obtains a tax benefit from capital benefits if the amount of tax payable by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the capital benefit had been a dividend.  [Item 1 of Schedule 1; new subsection 45B(7)]
1.27	For example, obtaining a tax benefit would include circumstances where the amount of tax assessed as being payable by the relevant taxpayer in respect of the capital benefits is substantially the same as would have been the case had the relevant taxpayer received a dividend, but the relevant taxpayer has income tax losses, or the company providing the capital benefits has franking credits, which are preserved for future income years (and therefore reduce tax in those years).
1.28	Obtaining a tax benefit also includes circumstances where the amount of a refund payable to the relevant taxpayer would, but for this section, be increased.
Determining purpose
1.29	The test of purpose under new section 45B is a test of objective purpose.  The question posed by the rule is whether, objectively, it would be concluded that a person who entered into or carried out the scheme, did so for the purpose of obtaining a tax benefit in respect of the capital benefit.  In determining the purpose of the scheme, the purpose of one of the persons who entered into or carried out the scheme (whether or not that person is the person receiving the capital benefit) will be sufficient to attract the rule.
1.30	For example, if a taxpayer enters into a scheme with another taxpayer for the purpose of enabling either of the taxpayers to obtain a tax benefit, the fact that the second taxpayer does not share that purpose will not prevent the rule from applying.  Also, if a taxpayer enters into such a scheme with two or more purposes, neither of which is merely incidental, the fact that one purpose is not that of obtaining a tax benefit relating to a capital benefit will not prevent the section from applying.
1.31	New section 45B requires ‘a purpose (whether or not the dominant purpose but not including an incidental purpose)’ of enabling a taxpayer to obtain a tax benefit.  The words in parentheses are inserted for more abundant caution; a reference to ‘a purpose’ of a scheme is usually understood to include any main or substantial purpose of the scheme, and the words in parentheses clarify that this is the intended meaning here. Thus while new section 45B does not require the purpose of obtaining a tax benefit to be the ruling, most influential or prevailing purpose, neither does it include any purpose which is not a significant purpose of the scheme.
1.32	A purpose is an incidental purpose when it occurs fortuitously or in subordinate conjunction with one of the main or substantial purposes of the scheme, or merely follows that purpose as its natural incident.
Relevant circumstances
1.33	In determining whether it would be concluded that a person entered into or carried out the scheme for a purpose, not being merely an incidental purpose, of enabling a taxpayer to obtain a tax benefit in relation to a capital benefit, regard must be had to relevant circumstances.
1.34	Circumstances which are relevant in determining whether any person has the requisite purpose are the factors listed in new subsection 45B(5).  These factors include the eight factors which are used to determine purpose under the existing section 177D in relation to schemes which omit assessable income or create allowable deductions.  [Item 1 of Schedule 1; new paragraph 45B(5)(k)]
1.35	To give further guidance to the operation of the new measures, other matters more specifically relevant to schemes to obtain a tax benefit from a capital benefit are also included.  These are listed below:
	the extent to which the distribution is attributable to profits of the company or an associate.  For example, if a company makes a profit from a transaction, for example the disposal of business assets, and then returns capital to shareholders equal to the amount of the profit, that would suggest that the distribution of capital is a substituted dividend.  On the other hand, if a company disposed of a substantial part of its business at a profit and distributed an amount of share capital which could reasonably be regarded as the share capital invested in that part of the business, the distribution of capital would not be seen as a substituted dividend because no amount would be attributable to profits; [Item 1 of Schedule 1; new paragraph 45B(5)(a)]
	the pattern of distributions by the company.  For example, if ordinarily dividends of a certain amount are paid, but then the company instead makes proportionate returns of capital; [Item 1 of Schedule 1; new paragraph 45B(5)(b)]
	the tax result that would have occurred if the anti-avoidance rule did not apply.  This would depend on whether:
-	the relevant taxpayer has capital losses to apply to the capital benefit; [Item 1 of Schedule 1; new paragraph 45B(5)(c)]
-	the capital benefit is provided in respect of pre-CGT shares; [Item 1 of Schedule 1; new paragraph 45B(5)(d)]
-	the relevant taxpayer receiving the capital benefit is a non-resident; [Item 1 of Schedule 1; new paragraph 45B(5)(e)]
-	the capital benefit is provided in respect of shares for which the cost base is not substantially less than the capital benefit; [Item 1 of Schedule 1; new paragraph 45B(5)(f)]
	the relevant taxpayer is a private company who would not be entitled to the intercorporate dividend rebate under section 46F of the Act had the taxpayer received an equivalent dividend instead of the capital benefit; [Item 1 of Schedule 1; new paragraph 45B(5)(g)]
	in the case of a scheme involving the distribution to the relevant taxpayer of share capital, whether the interest held by the taxpayer in the company has been affected, or whether that interest remains the same as if a dividend has been paid instead. For example, if the proportionate voting and other interests held by the taxpayer are less than the taxpayer's pre-reduction interest this would suggest a genuine return of capital; [Item 1 of Schedule 1; new paragraph 45B(5)(h)]
	in the case of schemes involving the issue of shares, whether an amount has been obtained in connection with the shares (e.g. sale proceeds from their disposal or a transaction effectively amounting to disposal) which provides the equivalent a cash dividend in a more tax-effective form.  For these purposes, the length of time the shares are held at risk after being issued is relevant; [Item 1 of Schedule 1; new paragraph 45B(5)(i) and subsection 45B(6)]
	in the case of schemes involving a change in the rights of shares, whether an amount has been obtained in connection with the shares which provides the equivalent a cash dividend in a more tax-effective form.  For these purposes, the length of time the shares are held at risk after the rights change is relevant.  [Item 1 of Schedule 1; new paragraph 45B(5)(j) and subsection 45B(6)]
1.36	Having regard to the above factors, bonus share plans offered in the ordinary course of business by public listed companies as an alternative to franked dividends would generally not be subject to the rule, unless the shareholder receiving the bonus share engaged in a course of conduct which provided an equivalent to the cash dividend in a more tax effective form (e.g. if a pre-CGT shareholder consistently sold the bonus shares tax-free after receiving them).
Commissioner's determination
1.37	Where the anti-avoidance rule applies in respect of new sections 45A and 45B, the Commissioner may make, in writing, a determination that new section 45C applies in relation to the whole, or a part, of the capital benefit.  [Item 1 of Schedule 1; new subsections 45A(2) and 45B(3)]
1.38	Where, under new section 45A, the capital benefit which is provided to the advantaged shareholders is the provision of shares and the disadvantaged shareholders receive, or it is reasonable to assume will receive, partly franked dividends, the Commissioner may make a determination under new subsection 45A(2) to so much of the capital benefit which in the opinion of the Commissioner relates to the unfranked part of the dividend.  [Item 1 of Schedule 1; new subsection 45A(6)]
1.39	The determination made by the Commissioner can be revoked or varied and can be made at any time after the streaming has occurred.
1.40	To give effect to the determination, the Commissioner will be required to serve notice of the determination in writing on the taxpayer to which it relates. The notice may be included in a notice of assessment or served separately.  [Item 1 of Schedule 1; new subsection 45D(1)]
1.41	Where the Commissioner makes a determination under new subsection 45A(2) and the determination applies in respect of a capital benefit provided by a listed public company, the Commissioner will be able to satisfy the requirement of serving the notice of determination in writing on the taxpayer by publishing the notice in an Australian national newspaper.  The notice is taken to have been served on the day that it is published.  [Item 1 of Schedule 1; new subsection 45D(2)]
1.42	New subsection 45D(4) enables the machinery provisions of the Act concerning the review of assessments and appeals against decisions of the Commissioner to apply in relation to determinations made by the Commissioner under new subsection 45D(1).  A taxpayer dissatisfied with a determination will have the same rights of review and appeal as if the determination were an assessment. [Item 1 of Schedule 1; new subsection 45D(4)]
1.43	To ensure that a determination carries its own rights of appeal a determination will not form part of an assessment. [Item 1 of Schedule 1; new subsections 45A(2) and 45B(3)]
1.44	New subsection 45D(3) specifies the evidentiary value of certain documents and copies of documents issued or given, or purporting to be issued or given, under the hand of the Commissioner, a Second Commissioner or a Deputy Commissioner.  The production of a notice of a determination or document purporting to be a copy of such a notice is to be conclusive evidence of the due making of the determination and that the determination is correct, except in proceedings relating to an appeal against the determination.  [Item 1 of Schedule 1; new subsection 45D(3)]
What is the effect of a determination made by the Commissioner?
1.45	Where the Commissioner makes a determination under new subsections 45A(2) or 45B(3) in respect of a capital benefit, the amount of the capital benefit is taken to be an unfranked and unrebatable dividend. The dividend will be deemed to have been paid out of profits of the company and therefore fully assessable in the hands of the recipient shareholder or relevant person.  [Item 1 of Schedule 1; new subsections 45C(1) and 45C(2)]
1.46	Where a company enters into a scheme to preserve franking credits, the Commissioner has a further discretion to impose a class C franking debit on the company.  [Item 1 of Schedule 1; new subsection 45C(3)]
1.47	 The franking debit arises on the day on which notice of the determination is served on the company.  [Item 1 of Schedule 1; new paragraph 45C(3)(a)]
1.48	For schemes involving the distribution of share capital, the amount of the franking debit is equal to the franking debit that would have arisen if a dividend equal to the amount debited to the company's share capital account had been fully franked.  [Item 1 of Schedule 1; new paragraph 45C(4)(c)]
1.49	For schemes involving the issue of shares, the amount of the class C franking debit is to be equal to the franking debit that would have arisen if a dividend equal to the value of the shares had been fully franked. [Item 1 of Schedule 1; new paragraph 45C(4)(a)]
1.50	For schemes involving a change in the rights attaching to a share, the amount of the class C franking debit is to be equal to the franking debit that would have arisen if a dividend equal to the increase in the value of the relevant share had been fully franked.  [Item 1 of Schedule 1; new paragraph 45C(4)(b)]
1.51	For the purposes of new subsection 45C(4) and for the definitional amendments explained below, the value of shares is a question of fact which depends on the particular circumstances of each case. Generally, however, the value of shares is their market value, that is, the amount that a willing but not anxious purchaser, acting at arm's length to the seller, would pay for the shares. For example, for shares in a company listed on a stock exchange the value of the shares is the price they fetch on the stock market; for an unlisted company the value of the shares is the price they would fetch in a private, arm's length sale. However in some cases shares cannot be traded or sold, and other methods of valuation must be employed. In these cases established valuation methods are used to determine a fair value, for example, by having regard to the net asset backing of the share and the earnings of the company.
1.52	Where only part of a capital benefit is treated as a dividend by a determination made under new subsection 45B(3) the franking debit is limited to the amount which would have arisen if the amount treated as a dividend had been franked.
1.53	New section 160AQCNQ ensures that a franking debit arising under these circumstances is properly recorded in a company's class C franking account.  [Item 2 of Schedule 1; new section 160AQCNQ]
1.54	To ensure that a company is not inappropriately required to record two franking debits as a result of triggering other streaming rules contained within the Act, a franking debit arising under new subsection 45C(3) is reduced by the amount of any franking debit arising under sections 160AQCB, 160AQCNA or 160AQCNB of the Act.  [Item 1 of Schedule 1; new subsection 45C(5)]
Definitional changes
1.55	Provisions in the Act and associated tax laws dependent on the concept of par value (including share premiums, share premium accounts and paid up capital) will be amended to ensure that they operate consistently with the policy underlying their operation under the current Corporations Law.  These changes are explained in paragraph 1.105 below.
1.56	However, the amendments inserting these definitional changes apply only to companies with no par value shares; for companies which continue to have shares with a par value, the previous law will continue to apply unaltered.  (Note, however, that the anti-avoidance provisions in new sections 45 to 45D may apply to companies with par value shares.)
1.57	However, due to the nature of the Corporations Law changes, definitional amendments are required to certain provisions of the Act and associated tax laws that will effect a substantive change to their current operation.  These amendments relate to the capitalisation of profits, the treatment of bonus shares, and the interaction of existing subsection 6(4) with the treatment of redeemable preference shares.  These amendments are explained below.
Will the company law changes affect the status of pre-CGT shares?
1.58	The changes to Corporations Law will mean that all shares will carry different rights after the commencement of the Review Bill.  This, however, does not mean that new shares are created by the changes; existing shares will continue to exist, but with changed rights.  Nor will the change of rights amount to a disposal of the shares. Accordingly, the gains on the disposal of shares acquired before 20 September 1985 will continue to be exempt from CGT.
Tainting rule
1.59	The current definition of ‘share premium account’ in the Act operates in such a way that the tainting of the account by amounts other than share premiums (e.g. by crediting the account with profits) results in the account ceasing to be a share premium account for tax purposes.
1.60	Under the new Corporations Law, companies will be permitted under section 254S of Schedule 5 of the Review Bill to capitalise profits by transferring an amount from their profit account to their share capital account.  For the same reason that a share premium account is tainted by the transfer of profits into the account, a tainting rule will also apply in respect of a company's share capital account.  [Items 1 to 10 of Schedule 2]
How does the tainting rule operate?
1.61	The rule applies where a company taints its share capital account by transferring an amount (i.e the ‘tainting amount’) to its share capital account from any other account.  [Item 8 of Schedule 2; new section 160ARDM]
1.62	An exception to the rule is where a company transfers an amount standing to the credit of its share premium account or capital redemption reserve to its share capital account in accordance with the requirements set out in section 1446 of Schedule 5 of the Review Bill. Such a transfer will not result in a company tainting its share capital account.  [Item 10 of Schedule 2]
1.63	If a company's share capital account is tainted, distributions debited to that account are treated as (unfrankable and unrebatable) dividends.  This outcome is achieved by ensuring that the definition of ‘share capital account’ in subsection 6(1) of the Act excludes a tainted share capital account and, as a result, does not fall within the exception to a dividend in paragraph 6(1)(d) of the definition of that term.  [Item 4 of Schedule 5; amends subsection 6(1)]
1.64	To ensure that the dividend is fully assessed in the hands of the recipient shareholder an amendment is also made to subsection 44(1B) of the Act.  [Item 7 of Schedule 5; amends subsection 44(1B)]
1.65	Furthermore, distributions from a tainted share capital account will not be capable of being franked nor qualify for the intercorporate dividend rebate under section 46 or 46A of the Act.  This is achieved by deeming a tainted share capital account to be a disqualifying account for the purposes of section 46G of the Act.  [Item 4 of Schedule 5; amends subsection 6(1)]
What happens when a company taints its share capital account?
1.66	If a company transfers an amount (i.e. the tainting amount) to its share capital account, a franking debit may arise in the company's franking account on the day of the transfer. [Items 7 and 8 of Schedule 2; new sections 160AQCNR and 160ARDQ]
1.67	The amount of the franking debit is calculated by applying the required franking amount rules contained in section 160AQDB of the Act to the tainting amount as though it were a frankable dividend paid on that day to a shareholder.  [Item 8 of Schedule 2; new subsection 160ARDQ(2)]
How does a company untaint its share capital account?
1.68	A company can untaint its share capital account by making a written election to this effect.  The election can be made at any time but cannot be revoked.  [Item 8 of Schedule 2; new section 160ARDQ and subsection 160ARDR(1)]
What happens if a company elects to untaint its share capital account?
1.69	The consequences for a company electing to untaint its share capital account will depend on whether the company is:
	‘a company with only lower tax shareholders’; or
	‘a company with higher tax shareholders’.
1.70	‘A company with only lower tax shareholders’ is a company that is wholly-owned by other companies (other than life assurance companies or registered organisations), non‑residents, or a combination of both companies and non-residents, from the time it taints its share capital account to the time it elects to untaint its share capital account.  [Item 3 of Schedule 2; amends section 160APA]
1.71	‘A company with higher tax shareholders’ is a company that is not ‘a company with only lower tax shareholders’. [Item 2 of Schedule 2; amends section 160APA]
Companies with only lower tax shareholders
1.72	For companies with only lower tax shareholders the consequences of an election to untaint their share capital account will depend on whether the franking debit arising under new section 160ARDQ was equal to the tainting amount.  Where the franking debit was equal to the tainting amount the election to untaint will automatically untaint the company's share capital account.  [Item 8 of Schedule 2; new subsection 160ARDR(1)]
1.73	However, where the franking debit arising under new section 160ARDQ is less than the tainting amount, the election by a company to untaint its share capital account will generate an additional franking debit. [Item 8 of Schedule 2; new section 160ARDS(1)]
1.74	The additional franking debit is equal to the tainting amount less the franking debit arising under new section 160ARDQ, if any. The debit arises on the day the company elects to untaint its share capital account.  [Item 8 of Schedule 2; new subsection 160ARDS(1)]
1.75	For example, take the situation where a company with only lower tax shareholders transfers $500 of profits to its share capital account at a time when it has a class C franking surplus of $100.  If the company elects to untaint its share capital account a class C franking debit of $400 arises on the day of the election (on the assumption that a class C franking debit of $100 arises under new section 160ARDQ on the day of the transfer).
Companies with higher tax shareholders 
1.76	For companies with higher tax shareholders the election to untaint their share capital account has two consequences.
1.77	Firstly, in circumstances where the franking debit arising under new section 160ARDQ was equal to the tainting amount, the election by a company to untaint its share capital account will just generate a liability to untainting tax.  [Item 8 of Schedule 2; new section 160ARDT]
1.78	The imposition of untainting tax is made by new section 3 of the Income Tax (Untainting Tax) Bill 1998.  The amount of untainting tax payable is the tax payable by a taxpayer on the top marginal rate (including Medicare levy and Medicare levy surcharge) on the tainting amount less the notional franking amount.  [Item 8 of Schedule 2; new subsection 160ARDT(1)]
1.79	For example, take the situation where a company with higher tax shareholders transfers $100 of profits to its share capital account and a franking debit arises under new section 160ARDQ equal to the tainting amount (i.e. a class C franking debit of $100).  As a result of making an election to untaint its share capital account the company has a liability to pay $21.09 untainting tax calculated as follows:
=	(($100 + ($100 × 36/64)) × (47% + 2.5%) – (100 × 36/64)
=	$21.09
1.80	The payment of untainting tax does not give rise to franking credits.  [Item 8 of Schedule 2; new section 160ARDO]
1.81	Secondly, in circumstances where the franking debit arising under new section 160ARDQ was less than the tainting amount, the election by a company to untaint its share capital account will also generate a liability to untainting tax.  [Item 8 of Schedule 2; new section 160ARDS]
1.82	In these circumstances the amount of the liability to untainting tax will depend on the extent to which the company makes a further election to record an additional franking debit under new section 160ARDR.  [Item 8 of Schedule 2; new sections 160ARDR and 160ARDS]
1.83	If a company elects to record an additional franking debit under new subsection 160ARDR(2) so that the sum of this franking debit and the franking debit recorded under new section 160ARDQ is equal to the tainting amount, the liability to untainting tax is calculated in the same way explained in above.
1.84	However, where the company:
	elects not to record an additional franking debit under new subsection 160ARDR(2); or
	elects to record an additional debit under new subsection 160ARDR(2) but the sum of this franking debit and the franking debit arising under new section 160ARDQ remains less than the tainting amount;
the liability to untainting tax is calculated as the additional tax payable on the tainting amount on the assumption that the tainting amount were a dividend franked to the extent of the franking debits arising under new section 160ARDQ (if any) and new subsection 160ARDR(2) and paid to a shareholder on the highest personal tax rate plus Medicare levy (including Medicare levy surcharge).
1.85	For example, take the situation where a company with higher tax shareholders transfers $100 of profits to its share capital account and a $10 class C franking debit arises under new section 160ARDQ on that day.  The company elects to untaint its share capital account and further elects to record an additional class C franking debit of, say, $10 (under new section 160ARDR).  As a result the company has a liability to pay $43.82 untainting tax calculated as follows:
=	(($100 + ($20 × 36/64)) × (47% + 2.5%) – ($20 × 36/64)
=	$43.82
Life assurance companies
1.86	New Subdivision C of Schedule 2 extends the tainting rule to life assurance companies who may maintain both class A and class C franking accounts.  [Item 8 of Schedule 2; new Subdivision C]
Bonus issues
1.87	Bonus shares are shares which are issued free to shareholders; they are not usually understood to include shares issued under dividend reinvestment plans.  Under the current Corporations Law, bonus shares can be paid from a share premium account or from profits.  If paid from a share premium account the current tax effect, broadly speaking, is to spread the cost of the original shares across the original shares and the bonus shares but not to trigger an immediate taxing event.  If fully paid bonus shares from a share premium account are issued on pre-CGT shares, then the bonus shares are treated as if they too are pre-CGT shares.  On the other hand, where profits are applied to pay up the par value of bonus shares, the Act treats the paid-up value of the bonus share as a dividend.
1.88	Under the new Corporations Law, a company will be able to issue bonus shares for which no consideration is payable.  Furthermore, on the issue of a bonus share there need not be any increase in the company's share capital (subsection 254A(1) of Schedule 5 of the Review Bill).
1.89	As a result of these changes, the amendments will ensure that bonus issues made on post‑CGT shares have the same tax treatment as currently provided by the Act for bonus issues funded from a company's share premium account.  [Schedule 4 and Part 1 of Schedule 7]
1.90	Therefore, bonus shares issued on post-CGT shares will not, other than for the exception explained below, be taxed as a dividend; rather the tax treatment will be a spreading of the cost base of the original shares across the original shares and the bonus shares.
1.91	Bonus shares issued on pre-CGT shares will also be treated as pre-CGT shares unless the shareholder is liable to pay an amount (i.e. pay a call on a partly paid share) to the company in respect of their issue, in which case, the bonus shares (but not the original shares) are to be deemed to have been acquired at the time the liability to pay arises.
1.92	The amendments will make clarificatory amendments to sections 6BA of the Act and section 130-20 of the Income Tax Assessment Act 1997 (ITAA97) to ensure that the tax treatment for bonus shares described above is achieved.  [Items 1, 2, and 3 of Schedule 4 and Items 1, 2, 3, and 4 of Part 1 of Schedule 7; amend section 6BA and 130-20 of the ITAA97]
1.93	As a result, the CGT treatment of shares issued for no consideration which have no par value will be determined under section 130-20 of the ITAA97 (or under Division 8 of Part IIIA of the Act, depending on the proclamation date of this Bill).  This includes bonus shares issued where a company credits its share capital account with:
	profits in connection with the issue of the shares; or
	the amount of any dividend to a shareholder and the shareholder does not have choice whether to be paid the dividend or to be issued with the bonus shares.  [Item 3 of Schedule 4; amends section 6BA]
1.94	If a company credits its share capital account with profits when issuing bonus shares its share capital account, if not already tainted, becomes a tainted share capital account.  [Item 3 of Schedule 4; amends section 6BA]
1.95	However, by way of exception to the foregoing rules, an amount will be treated as part of the cost of bonus shares where that amount is taken to be a dividend by reason of the anti-avoidance provisions contained in new sections 45, 45A, or 45B.  In these cases the dividend is taken to be consideration for the acquisition of the shares for the purposes of the Act and will form part of their cost base.  Where only part of a bonus share is treated as a dividend, an appropriate portion of the cost base of the original equities is spread over the remaining part of the bonus share.  [Item 3 of Schedule 4 and Part 1 of Schedule 6; amend sections 6BA and 130-20]
1.96	In the case of dividend re-investment plans where a shareholder has a choice whether to be paid a dividend or to be issued shares, and chooses to be issued with shares:
	the dividend is taken to be credited to the shareholder under paragraph 6(1)(b) of the definition of ‘dividend’;
	so much of the dividend credited to the shareholder which is included in assessable income and credited to the share capital account is taken to be consideration for the acquisition of the shares for the purposes of the Act; and
	the share capital account, provided it is not already a tainted share capital account, does not become a tainted share capital account because of the operation this subsection.  [Item 3 of Schedule 4; amends section 6BA]
1.97	However, if a choice is offered to the shareholders of listed public companies whether to receive shares or franked dividends (other than minimally franked dividends, which are effectively unfranked dividends), the taxation treatment of the shares will depend on whether the company credits its share capital account in connection with the issue of shares.  If it credits its share capital account with profits, the treatment will be the same as for other companies; if, however, it does not credit its capital account the shares will be treated as if they are bonus shares, and, subject to the anti-avoidance rules, they will not be taxed as a dividend. This will mean that listed public companies will still be able to offer to shareholders a choice of bonus shares or franked dividends. Generally speaking, shareholders with pre-CGT shares will prefer to receive bonus shares rather than a dividend.  Therefore, provided such shareholders do not effectively turn the shares into a dividend by selling them (which would attract the operation of new section  45B), such shareholders will continue to enjoy the benefits of exemption from CGT in respect of such shares.  (However, if the arrangement is designed to stream franking credits, section 160AQCB or 160AQCBA will apply to deny the benefits of franking to such shareholders.)  [Item 3 of Schedule 4; amends section 6BA]
Redeemable preference shares
1.98	Subsection 6(4) of the Act, an anti-avoidance rule, provides that the exclusion to the definition of a ‘dividend’ in subsection 6(1) does not apply where, pursuant to an agreement or an arrangement, a company issues shares at a premium and then distributes those premiums to shareholders in the company.  The rule prevents companies substituting profit distributions with preferentially-taxed share premiums.
1.99	As a result of the Corporations Law changes that abolish the concept of share premiums and associated terms, the amendments introduce an equivalent rule to subsection 6(4) that applies to the share capital account.  The rule will prevent companies entering into arrangements where a company raises share capital from certain shareholders and then makes a tax-preferred capital distribution to other shareholders.  [Item 7 of Schedule 3; amends subsection 6(4)]
1.100	Where appropriate, the amendments will also replace references to the share premium account and paid up capital with references to share capital accounts.
1.101	As a result, where currently a particular distribution made in a return of capital is deemed to be a dividend to the extent it exceeds the sum of the amount to which the share is paid up and debits to a share premium account, under the new Corporations Law the distribution will, subject to the anti-avoidance rules and the treatment of redeemable preference shares, be a dividend only to the extent it exceeds the amount debited to the share capital account.  [Item 5 of Schedule 3; amends subsection 6(1)]
1.102	Under section 254J of the Review Bill, companies will be able to redeem redeemable preference shares.  Consistent with the current tax treatment of redeemable preference shares, the redemption of redeemable preference shares will not be a dividend to the extent that the redemption is returns the amount paid-up on the share.  Amounts returned in excess of the amount paid-up on the redeemable preference share will continue to be a dividend.  [Items 5 and 6 of Schedule 3; amend subsection 6(1)] 
1.103	For example, if the amount paid-up on a redeemable preference share is $10 and, a company redeems the share for $15, $5 will be taken to be a dividend.  This will be the case even if a company funds the redemption entirely from its share capital account.
1.104	In determining whether an amount exceeds the amount paid-up on a redeemable preference share, companies will be required to provide a notice to the holder of the redeemable preference shares setting out the amount paid-up on a share.  [Item 6 of Schedule 3; amends subsection 6(1)]
1.105	Redemptions of shares out of profits will continue to be treated as a dividend in accordance with the definition of ‘dividend’ provided in subsection 6(1) of the Act.
Definitional amendments
1.106	The amendments will also ensure that existing provisions within the tax laws that are dependent on the concept of par value operate consistently with the policy underlying their operation under the current Corporations Law. These amendments are listed in the table below:

Amendment	Provision	
Items 1 to 5 of Schedule 5	amend subsection 6(1) of the Act	
Item 6 of Schedule 5	amends subsection 6(5) of the Act	
Items 7 and 8 of Schedule 5	amend subsection 44(1B) of the Act	
Items 9 and 10 of Schedule 5	amend section 46H of the Act	
Items 11 and 12 of Schedule 5	amend subsection 46J(2) of the Act	
Items 13 and 14 of Schedule 5	amend section 47 of the Act	
Item 15 of Schedule 5	amends subsection 52A(8) of the Act	
Items 16 and 17 of Schedule 5	amend section 82L of the Act	
Item 18 of Schedule 5	amends subsection 82Q(1) of the Act	
Item 19 of Schedule 5	amends subparagraph 82S(1)(d)(xiii) of the Act	
Item 20 of Schedule 5	amends subparagraph 82SA(1)(d)(xi) of the Act	
Items 21 and 22 of Schedule 5	amend section 103A of the Act	
Item 23 of Schedule 5	amends paragraph 109Y(2) of the Act	
Item 24 of Schedule 5	amends subsection 120(1) of the Act	
Item 25 of Schedule 5	amends section 121EC of the Act	
Item 26 of Schedule 5	amends subparagraph 128J(3)(a)(i) of the Act	
Item 27 of Schedule 5	amends paragraph 128K(2)(a) of the Act	
Items 28 and 29 of Schedule 5	amend subsection 128TC(3) of the Act	
Item 30 of Schedule 5	amends subsection 128TG(3) of the Act	
Item 31 of Schedule 5	amends paragraph 128TJ(c) of the Act	
Item 32 of Schedule 5	amends paragraph 139FB(2)(a) of the Act	
Item 33 of Schedule 5	amends section 159GZA of the Act	
Items 34 to 46 of Schedule 5	amend section 159GZG of the Act	
Items 47, 48, and 49 of Schedule 5	amend subsection 159GZZZP(1) of the Act	
Items 50, 51, and 52 of Schedule 5	amend section 159GZZZQ of the Act	
Item 53 of Schedule 5	amends section 160APA of the Act	
Items 54, 55, and 56 of Schedule 5	amend section 160AQCBA of the Act	
Item 57 of Schedule 5	amends paragraph 160T(1)(d) of the Act	
Item 58 and 59 of Schedule 5	amend subsection 160ZA(7A) of the Act	
Item 60 of Schedule 5	amends paragraph 160ZZPA(9)(b) of the Act	
Item 61 of Schedule 5	amends paragraph 160ZZPB(9)(b) of the Act	
Item 62 of Schedule 5	amends paragraph 273(2)(a) of the Act	
Item 5 of Part 2 of Schedule 7	amends subsection 995-1(1) of the Income Tax Assessment Act 1997 	
Item 6 of Part 2 of Schedule 7	amends paragraph 118-20(6)(b) of the Income Tax Assessment Act 1997 	
Item 7 of Part 2 of Schedule 7	amends paragraph 124-240(e) of the Income Tax Assessment Act 1997 	
Item 8 of Part 2 of Schedule 7	amends section 136-25 of the Income Tax Assessment Act 1997 	
Item 9 of Part 2 of Schedule 7	amends subsection 272-10(2) of the Income Tax Assessment Act 1997 	
Item 10 of Part 2 of Schedule 7	amends paragraph 272-50(2)(a) of the Income Tax Assessment Act 1997 	
Item 11 of Part 2 of Schedule 7	amends paragraph 272-90(10)(d) of the Income Tax Assessment Act 1997 	
Regulation Impact Statement
Specification of policy objective
1.107	To provide an appropriate taxation response to changes to the Corporations Law and, in particular, to ensure that Corporation Law changes do not allow companies and their shareholders to gain an undue tax benefit by distributing profits as preferentially taxed capital rather than dividends.
Identification of implementation options
Background
1.108	The Income Tax Assessment Act 1936 (the Act) draws a distinction between distributions of profit and capital to shareholders. Distributions of capital are generally treated more favourably in shareholders' hands than are distributions of unfranked profits.  Some shareholders will also be tax advantaged by receiving capital instead of franked dividends (e.g. shareholders on high marginal income tax rates with pre-CGT shares, or accumulated capital losses).
1.109	The changes to the Corporations Law proposed by the Company Law Reform Bill will make it easier to exploit existing tax weaknesses by removing:
	the requirement for court approval for returns of share premium and paid-up capital; and
	the concept of ‘par-value’ and the ‘share premium account’.
1.110	The effect of these changes will be to give more flexibility to companies to return capital to selected shareholders instead of paying dividends. It will also increase the share capital pool available for distribution to those shareholders.
1.111	There is only one option to implement the policy objective – a general anti‑avoidance provision approach.
General anti-avoidance provision approach
1.112	The introduction of a anti-avoidance provision will apply to treat as dividends capital which is:
	returned under an arrangement, one of the purposes of which (not being an incidental purpose) is to confer a tax advantage on the shareholder from the distribution of capital by a company rather than the payment of a dividend, having regard to certain factors; or
	streamed to shareholders who gain a tax benefit from the receipt of share capital while dividends are paid to those who would not gain such a benefit.
Assessment of impacts (costs and benefits) of the implementation option
Impact group identification
1.113	The proposed anti-avoidance provision approach will only impact on those companies entering into capital streaming arrangements or arrangements for the purpose - being more than an incidental purpose - of conferring a tax advantage on shareholder(s) by distributing capital instead of profits (i.e. dividends) to some or all of them.  It follows that only those companies that enter into such arrangements will need to consider the operation of the anti-avoidance provision.
Analysis of the costs and benefits associated with the implementation option
1.114	The advantage of the anti-avoidance provision approach is that the legislation implementing it will not be complex.  Furthermore, the approach will affect few companies because only those companies that enter into capital substitution arrangements will need to consider the operation of the provision.  These two advantages will ensure that companies' compliance costs are kept to a minimum.
1.115	The anti-avoidance provision approach also has advantages in that marketing/educational costs will be low.  Furthermore, because the approach is flexible, there will be less scope for inappropriate outcomes to occur.
1.116	A disadvantage of the anti-avoidance provision approach is that there could be less certainty for companies because of the need to determine purpose, albeit on the basis of objective criteria.  This may also have a further undesired outcome of increasing ATO administration costs because of the requirement to apply the provision on a case by case basis. However, this uncertainty will diminish over time as companies become more familiar with the provision and as a result of ATO rulings.
Taxation revenue
1.117	It is not possible to provide a reliable estimate of the increase in capital distributions following the introduction of the proposed Corporations Law changes.  To the extent that returns of capital are provided as a substitute for dividends, where this suits the tax preference of shareholders, there will be a revenue cost.  The amount by which this revenue cost would be reduced by the anti‑avoidance provision approach is not quantifiable.
Consultation
1.118	A Treasury/ATO Discussion Paper released in July 1996 initially proposed the introduction of a ‘profits-first’ rule.  This meant that company returns to shareholders would be treated as dividends until profits were exhausted, unless covered by one of a broad range of exemptions.
1.119	This proposal met with strong opposition from business, both to the tax principle underlying the ‘profits-first’ rule and on the basis that the proposal would add complexity to the tax law while the Corporations Law was being simplified.
1.120	During the consultative process the introduction of an anti‑avoidance rule was canvassed, but details of the rule were not provided and the possibility of having the rule as an alternative to the ‘profits first’ rule was not addressed.
Conclusion
1.121	The anti-avoidance provision approach achieves the objective of ensuring that companies and their shareholders gain no undue tax benefit by distributing profits as preferentially taxed capital rather than dividends.  This approach does not impose high compliance costs on taxpayers or high administrative costs on ATO.
1.122	The ATO will closely monitor developments to detect any emerging possibility of significant revenue loss/deferral or unreasonable compliance costs arising with the anti‑avoidance provision approach.  In addition the ATO has consultative arrangements in place to obtain feedback from professional and small business associations and through other taxpayer consultation forums.