We wrote about the uncertainty on the availability of franking credits on special dividends that was created by Treasury Laws Amendment (2023 Measures No 1) Bill 2023 (Bill) when it was introduced into Parliament on 16 February 2023.
After intense criticism, scrutiny by the Senate and submissions by industry bodies, including Gilbert + Tobin, the Bill passed both houses of Parliament last week on 16 November 2023 with some positive amendments. The amended Bill now awaits royal assent.
The Commissioner’s concerns and legislative response
As we wrote previously, the Commissioner of Taxation (Commissioner) had long raised concerns in relation to franked distributions funded by capital raisings (see "Taxpayer Alert TA 2015/2: Franked distributions funded by raising capital to release credits to shareholders"). In response, the Bill aims to prevent the use of franking credits where special dividends are funded by equity raisings.
What’s in the Bill beyond the franking credit measures
Apart from the franking credit measures, the Bill also contains measures relating to:
- Non-tax-related changes to the Corporations Act and other Acts;
- Changes relating to tax practitioners and the Tax Practitioners Board; and
- Off-market share buy-backs, which we discussed in more detail in this article. The application of related selective share cancellation measures has now been deferred to cancellations announced to the market on or after 18 November 2022.
The rest of this article discusses the franking credit measures only.
Relief for Boards and shareholders: application and apportionment clarity
In a positive change, the recent amendments ensure that the franking credit measures will only apply prospectively to distributions made after royal assent. In an earlier iteration of these measures, they could have applied retrospectively to December 2016.
Additionally, a sensible tweak ensures that the measures will apply to only the part of a dividend funded by equity raisings. Incredibly, the previous drafting would have prevented the ability to use franking credits on the whole of a dividend, even if just $1 of the dividend had been funded by an equity raising.
Despite the positive changes, there is a catch for shareholders – the onus is on them to establish the apportionment of funding for dividends. One would hope public companies will provide this level of information, but there is no obligation to do so, leaving shareholders in a challenging position.
Equity raisings’ substantial role
Also positively, the equity raising must now have the principal effect of funding a substantial part of the dividend.
However, this seems a little misleading as the modified application of the measures to part of a dividend means the relevant test is whether the principal effect of the equity raising was funding that part of the dividend, which one would presume is always going to be yes. Companies and practitioners should carefully consider the implications of this drafting.
Other concerns remain
Despite the positive changes above, significant concerns remain with the breadth of the franking credit measures. Practical concerns raised during consultations seem unacknowledged.
Nonetheless, one overarching positive has emerged from the amendments to the Bill: the prospective application of the franking credit measures means special dividends can be paid confidently with a ruling from the Commissioner on the availability of the franking credits attached to those dividends (even if with some caveats about future events).