The Senate Economics Legislation Committee (Committee) has published a report (Report) setting out its findings on its inquiry into the Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 (Cth) (Bill).
In particular, the Report contains recommendations in respect of the measures regarding off-market share buy-backs and franked distributions funded by capital raisings.
Key takeaways
- The Report provides some hope that more appropriate capital management reforms will be introduced and passed
- It is likely the measure relating to off-market share buy-backs will be passed shortly
- More work is needed in relation to the measure regarding franked distributions funded by capital raisings to ensure the gateway for the measure to apply is sufficiently clear and appropriate to the integrity concerns sought to be addressed
Key concerns
As currently drafted, the measures regarding off-market share buy-backs and franked distributions funded by capital raisings raise potentially significant consequences for corporations and shareholders.
We attended and presented evidence on the measures before the Committee at the Committee’s public hearing on the Bill. Details of our submission to the Committee and an extract of the hearing evidence, which outline some of the key concerns of the measures for corporations and shareholders, may be found here.
For more detail on the concerns surrounding the proposed measures under the Bill, see our previous article here.
Report Recommendations
In relation to the capital management measures contained in the Bill, the report recommends:
- Schedule 4 (off-market share buy-backs): the measure should be passed unamended;
- Schedule 5 (franked distributions funded by capital raisings): the Federal Government should consider opportunities to clarify the measure to ensure it targets the particular mischief sought to be addressed.
We will continue to track the progress of the above measures, and look forward to appropriate guidance and amendments as contemplated by the Report to ensure that the proposed measures do not have significant unintended consequences for corporations and shareholders.
Observations
Schedule 5 (Franked distributions funded by capital raisings)
Key concerns
- The Report has recognised that there is a level of misunderstanding about the rationale and application of the measures.
- Significantly, the Committee has recommended that the Federal Government consider opportunities to review and clarify the scope of the legislation to ensure it more appropriately deals with the integrity concerns sought to be addressed.
- The measure, in its current form, could have significant unintended application to arrangements outside the expressed integrity concern raised by Taxpayer Alert TA 2015/2, in particular to many dividend reinvestment plans.
How can the drafting be improved?
We continue to believe that the drafting of the measure needs significant improvement. This is independent from more general policy considerations in relation to the scope of the measure as a matter of tax policy.
The ‘gateway’ requirement
We consider that the ‘gateway’ to applying the measure, as currently expressed, is too broad and will encompass and penalise arrangements in an unintended way.
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Current Scope
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Suggested Scope
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Outcome of Suggested Amendment
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Established Practice
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Where an entity has an established practice of making distributions of a particular kind on a regular basis, the measure applies to all distributions falling outside of that practice. |
The drafting should be amended such that the measure only applies to dividends which are materially outside an existing dividend policy. |
A ‘materiality’ test would remove the current uncertainty for entities paying dividends. |
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Principal Effect and Purpose Tests
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The ‘principal effect’ and ‘purpose’ tests are only required to be satisfied in respect of a part of the capital raising and a part of the relevant distribution. |
The principal effect and purpose tests should be assessed by reference to the purpose and effect of the whole of the capital raising and the whole of the dividend. |
This would significantly reduce any unintended applications of the measure to ostensibly normal commercial transactions. |
The ‘penalty’
There should also be appropriate amendments to the consequence of applying the measure. This issue is exacerbated by the current ‘gateway’ requirements of the measure being drafted too broadly.
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Current Scope
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Concern
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Suggested Scope
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The whole of the distribution becomes unfrankable when the gateway requirements are satisfied, even if the principal effect and purpose tests are satisfied only in relation to part of the capital raised, or part of the distribution. |
If a large special dividend is paid, and a non-underwritten DRP is in operation, the mere participation of a single shareholder in the DRP may cause the whole dividend to be unfrankable. We consider this would not be a sensible outcome. |
If the principal effect and purpose tests still apply to only part of the capital raising or part of the distribution, the measure should only apply to make unfrankable so much of the distribution funded by the capital raising. |
We are hopeful that with appropriate amendments, the scope of the measures could be more accurately described so as to not impede on normal commercial arrangements.
Schedule 4 (Off-market share buy-backs)
- It is disappointing that the recommendation does not take into account the impact of an effective prohibition on the use of off-market share buy-backs by listed companies.
- Encouragingly, the Report has recognised the significance and need for appropriate Australian Taxation Office guidance in relation to the operation of the proposed measure.
- We look forward to being involved in that process and assisting in the development of an effective and appropriate guidance regime.
