Tax Update & Franked Dividend Streaming - The Anti-Avoidance Rules

Transcription

1 Tax Update & Franked Dividend Streaming - The Anti-Avoidance Rules 15 th September 1998 Workshop, South Australian Division Barbie Chiro, BKR Walker Wayland Michael Butler, Partner, Piper Alderman Presented by: Barbie Chiro & Michael Butler Tax ation Institute of Australia 2001 The Tax ation Institute of Australia Website and all the content downloaded (ex cept Third Party Products*) from the Tax ation Institute of Australia website remains the property of the Tax ation Institute of Australia and shall not be reproduced, distributed, displayed or disclosed without the written permission of the Tax ation Institute of Australia. *Copyright of the Third Party product applies

2 Tax Update Barbie Chiro BKR Walker Wayland

3 TAX DETERMINATION ADDENDA TO TD 98/15 & TD 98/16 CHANGE OF ACQ DATE FOR AMP SHARES agreed between AMP & ATO that deemed acquisition date of original allocation of shares in AMP is 20 November 1997 Previously announced as 1 January 1998 indexation of deemed price of $10.43 now earlier

4 TAX DETERMINATION TR 98 / 20 CFCs:LUMP SUM IN LIEU OF INTEREST IS PASSIVE INTEREST Previously released as Draft TD 93/D229 where interest stream assigned in return for L/S pmt - is tainted special income passive income per s446(1) ITAA 1936 retains character of interest assignor would have received under the indebtedness

5 DRAFT TAX DETERMINATION TD 98 / D12 CALC OF CAPITAL GAINS/LOSSES OF CFCs sec 160K(5) applies to convert foreign currency into AUD when determining capital gain/loss on disposal of assets by a CFC CFC required to convert same as any Australian resident

6 DRAFT TAX DETERMINATION TD 98 / D13 MEANING OF ANTIQUE what is antique for purpose of definition of collectable under ITAA 1997 (new CGT rules) generally object of artistic & historical significance of age exceeding 100 years if not at time of acquisition, will be antique if has these characteristics at time of CGT event

7 DRAFT SUPERN CONTRIBUTIONS RULING SCR 98 / D1 ALLOCATED SURPLUS AMOUNTS FOR SUPER SURCHARGE PURPOSES method of calc allocated surplus amounts to be reported to Commissioner for reporting period in which allocation to member occurs Institute of Actuaries finalising Guidance Note for actuaries providing certificates re allocated surplus amounts

8 SALES TAX DETERMINATION STD 98 / 5 PROMOTIONAL REBATES ATO opinion re factors relevent to determine whether promotional rebates can reduce taxable value of goods look at intention of parties in sale contract whether rebate reduces the price or paid for other reasons includes worked examples

9 LEGISLATION - BILLS LAPSED TAXATION LAWS AMEND. BILL (NO 4) 1997 CORPORATE LAW ECONOMIC REFORM BILL 1998 SUPERANNUATION LEGISLN AMENDMENT (CHOICE OF SUPER FUNDS) BILL 1998

10 LEGISLATION - BILLS LAPSED TAXATION LAWS AMEND. BILL (NO 5) 1997 INDUSTRY RESEARCH & DEVELOPMENT AMENDMENT BILL 1998 TAXATION LAWS AMEND. BILL (NO 6) 1997 FILM LICENSED INVESTMENT BILLS

11 CASES AAT CASE 13,165 RE ARDIA & FCT foreign salary earned in PNG exempt income DTA provided salary not taxable in Australia therefore reduced losses on investment property in Australia

12 CASES AAT CASE 13,169 RE CRESTANI & FCT home to work travel expenses allowed transport of bulky tools by aircraft engineer public transport not a viable option no adequate storage place provided by employer home did not need to be base of operations

13 CASES AAT CASES 13,206 AND 13,207 2 more aircraft engineers - transport of bulky tools Tribunal held again TR 95/19 applied - if not would be inclined to disallow per Lunney s case but because no adequate storage space & need to transport bulky equipment, ruling had application

14 APPEALS PRESTIGE MOTORS PTY LTD v FCT High Court has refused the taxpayer special leave to appeal re trust reimbursement agreements s100a taxpayer liable $25m worth distns over 14 yrs MSP NOMINEES P/L v SA COMR STAMPS Taxpayer granted special leave to appeal whether redemption of units dutiable

15 APPEALS Commissioner granted special leave to appeal to High Court Decision of Full Federal Court in MONTGOMERY v FCT lease incentive paid to law firm held to be a capital receipt and not subject to tax

16 OTHER MATTERS ATO INTERNET RELEASE: AREAS OF SPECIAL FOCUS resettlement of trusts accelerator, linked and split loans investment in capital protected equity loan products Div 6C - public trading trust issues tax deductible capital raisings

17 OTHER MATTERS ATO TO LOOK CLOSER AT CONTRACTORS Where involves provision of personal services building industry computing/services industry architecture & engineering services teaching sales & marketing accountants, lawyers, medical practitioners

18 Franked Dividend Streaming - The Anti- Avoidance Rules Michael Butler Partner Piper Alderman

19 1. Background Franking credits useful to: companies superannuation funds, ADFs, PSTs and some life funds high income individuals

20 1. Background (cont...) Franking credits not useful to: non-residents tax-exempts low income individuals

21 2. Existing Rules: s 160AQCB If: unfranked or partly-franked dividend is paid under dividend streaming arrangement then s 160AQCB causes same franking debit to arise as if dividend had been franked to same extent as other franked dividends

22 2. Existing Rules: s 160AQCB (cont...) Dividend streaming arrangement where: shareholder empowered to exercise choice or selection; and exercise of (or failure to exercise) choice or selection has effect of company: paying unfranked/partly franked, rather than fully franked, dividends issuing tax-exempt bonus shares instead of franked dividends dividends being paid on shares in linked companies

23 3. May 1997 Budget Announcements Companies wholly-owned by non-residents/ tax-exempts deny FCs and cancel franking surpluses Tax Laws Amendment Bill (No 4) day holding period deny FCs and dividend rebate draft legislation 31/12/97 Tax Laws Amendment Bill (No. 5) 1998

24 3. May 1997 Budget Announcements (cont...) Longer-term arrangements: shareholder not carrying economic risks and benefits deny FCs and dividend rebate Tax Laws Amendment Bill (No. 5) 1998 General anti-avoidance rule Tax Laws Amendment Act (No 3) 1998 ss 160AQCBA and 177EA

25 4. New Dividend Streaming Rule: s 160AQCBA Applies if company streams dividends to shareholders such that: FC benefit is received by advantaged shareholder who derives greater benefit from FCs than disadvantaged shareholders, and disadvantaged shareholders receive lesser, or no, FC benefits (whether or not they receive other benefits )

26 4. New Dividend Streaming Rule: s 160AQCBA (cont...) If s 160AQCBA applies, Commissioner may determine either that: franking debit arises in respect of each dividend (or other benefit) paid to disadvantaged shareholder, or no FC benefit in respect of dividend paid to advantaged shareholder

27 4. New Dividend Streaming Rule: s 160AQCBA (cont...) Notice in national newspaper Provision of benefits: Bonus shares, return of capital on shares, debt forgiveness, making payment of any kind (including giving of property)

28 4.. New Dividend Streaming Rule: s 160AQCBA (cont...) a greater benefit from franking credits than other shareholders Have regard to whether: other shareholder is non-resident amount of tax payable by other shareholder on dividend is less than franking rebate corporate shareholder unable to pay dividend, and corporate shareholder not entitled to franking credit

29 4.. New Dividend Streaming Rule: s 160AQCBA (cont...) Class of share - same class if same, or substantially the same, rights Explanatory Memorandum: If rights substantially the same but merely a difference in par value or voting rights, will constitute same class Relevance of change not immediately obvious

30 4. New Dividend Streaming Rule: s160aqcba (cont...) What exactly is an advantaged shareholder? Advantaged shareholder must derive a greater benefit from franking credits than disadvantaged shareholders : is it sufficient that some shareholders receive FCs and some do not receive FCs (or receive other benefits)? or must FCs be received by taxpayers who are better able to use FCs?

31 4. New Dividend Streaming Rule: s160aqcba (cont...) Supplementary Explanatory Memorandum:. Any strategy directed to defeating the policy of the law by avoiding wastage of franking credits through directing the flow of franked dividends to those shareholders who can benefit from them to the exclusion of disadvantaged shareholders may amount to dividend streaming.

32 4. New Dividend Streaming Rule: s160aqcba (cont...) Supplementary EM: Examples of dividend streaming: distributions to resident shareholders of nonresident controlled company selective share buy-backs dividend access shares

33 4. New Dividend Streaming Rule: s160aqcba (cont...) Supplementary EM: classes of shares with discretionary rights the distribution of franked and unfranked dividends by a private family company among family members is unlikely to be dividend streaming.

34 4. New Dividend Streaming Rule: s 160AQCBA 160AQCBA (cont...) Example 1 CBA offers to buy-back its $2.00 par value shares off market for $17.00 $10.00 of repurchase price constitutes frankable dividend Shareholders who tender shares will receive franking credit benefit and, presumably, will derive greater benefit from FCs than other shareholders Determination by Commissioner?

35 4. New Dividend Streaming Rule: s 160AQCBA 160AQCBA (cont...) Example 2 FamilyCo has three shareholders, A, B and C FamilyCo purchases C s shares for price exceeding par value and franks deemed dividend Is C an advantaged shareholder?

36 4. New Dividend Streaming Rule: s 160AQCBA 160AQCBA (cont...) Example 3 FamilyCo now has 2 shareholders, and A and B shares have equal rights $100 retained earnings but only $50 of franking credits 30 June 1998: pay $50 franked dividend to A 1 September 1998: pay $50 unfranked dividend to B Is A an advantaged shareholder?

37 4. New Dividend Streaming Rule: s 160AQCBA Example 4 160AQCBA (cont...) D, E and F are employees and shareholders in DEF Pty Ltd D, E and F can choose between receiving: cash salary superannuation contributions, and/or dividends D - $100 cash E - $80 cash and $20 super contribution F - $100 dividend Is F an advantaged shareholder?

38 4. New Dividend Streaming Rule: s 160AQCBA (cont...) Example 5 Shareholders in PublicCo are given choice between receiving: franked cash dividends shares in lieu of cash dividends (Dividend Reinvestment Plan - DRP - at 5% discount to MV), or bonus shares paid out of share premium (Bonus Share Plan - BSP - at 5% discount)

39 5. New General Anti-Avoidance Avoidance Measure: s 177EA Section 177EA applies where: there is a scheme for a disposition of shares in a company franked dividend has or will be paid person would receive FC benefits, and having regard to relevant circumstances of scheme, non-incidental purpose of entering scheme was to obtain FC benefit

40 5. New General Anti-Avoidance Measure: s 177EA (contd.) Commissioner may determine either to: deny FC benefit to shareholder debit company s franking account Notice in national newspaper

41 5. New General Anti-Avoidance Avoidance Measure: s 177EA (cont...) Scheme for a disposition of shares includes: issuing shares or creating interest in shares entering into contract/arrangement that affects legal/equitable ownership of shares substantially altering risks of loss/opportunities for gain involved in holding shares, and shares beginning to be included/ceasing to be included in insurance funds of life assurance company

42 5. New General Anti-Avoidance Avoidance Measure: s 177EA (cont...) Example 6 Security lending arrangements: shareholder lends shares to taxpayer over dividend payment date dividends and attached FCs are paid to borrower Commissioner states that s 177EA would apply because there is scheme for disposal of shares and purpose of scheme is to give borrower a franking credit benefit

43 5. New General Anti-Avoidance Avoidance Measure: s 177EA (cont...) Relevant circumstances of a scheme include: extent and duration of risk of ownership/opportunities for profit/gain whether taxpayer would derive greater benefit from FCs than other shareholders any consideration paid to (or by) taxpayer any associated losses/deductions in connection with payment of dividend equivalence of dividend or distribution to interest, and period of ownership

44 5. New General Anti-Avoidance Avoidance Measure: s 177EA (cont...) Example 7 Examples of relevant circumstances : Taxpayer buys put option on shares to guarantee sale price (thus indifferent to falls in market price of shares) Taxpayer acquires derivative contract whose value varies inversely with value of T s shares

45 5. New General Anti-Avoidance Avoidance Measure: s 177EA (cont...) Example 8 Under securities lending arrangement (SLA), compensation is paid to lender for dividend foregone and franking credit obtained by borrower

46 5. New General Anti-Avoidance Avoidance Measure: s 177EA (cont...) Mere acquisition of shares Purpose of scheme must not be incidental

47 5. New General Anti-Avoidance Avoidance Measure: s 177EA (cont...) Example 9 Smith acquires market traded put option entitling him to sell shares at fixed price Example 10 Financing trust - similar to CapGuard Securities Trust

48 5. New General Anti-Avoidance Avoidance Measure: s 177EA (cont...) General comments on s 177EA

49 6. Company Law Review Act Changes Section 45 Streaming of bonus shares and unfranked dividends Section 45A Streaming of dividends and capital benefits

50 6. Company Law Review Act Changes (cont...) Section 45B Schemes to provide capital benefits Capital benefit = Company provides shares or distributes share capital to shareholders or does something to shares that increases the value of those shares