The Tax Institute welcomes the opportunity to make a submission to the Treasury in relation to the Treasury Laws Amendment (Measures for a later sitting) Bill 2022: Franked distributions funded by capital raisings exposure draft legislation (exposure draft) and explanatory materials.
In the development of this submission, we have closely consulted with our National Small and Medium Enterprise Technical Committee and our National Large Business and International Technical Committee to prepare a considered response that represents the views of the broader membership of The Tax Institute.
The Tax Institute broadly supports the policy intention of the exposure draft and explanatory materials, to ensure that entities cannot receive franking credit benefits where there is a contrived arrangement to derive franking credits from unfrankable distributions. However, we consider that the exposure draft and explanatory materials extend well beyond the initial scope of the Mid-Year Economic and Fiscal Outlook 2016-17 (MYEFO announcement), and does not address the matters contemplated by Taxpayer Alert TA 2015/2 Franked distributions funded by raising capital to release franking credits to shareholders (TA 2015/2) in an appropriately targeted manner.
The exposure draft and explanatory material are intended to implement an integrity measure to deter particular contrived arrangements. However, the measure appears to inadvertently capture a number of transactions and taxpayers, that may be unfairly penalised. We have proposed a number of recommendations to ensure that the proposed measure appropriately targets only those cases contrived to inappropriately benefit from franking credits.
We consider that the exposure draft should be amended to ensure it appropriately targets the intended mischief. To achieve this, we recommend that the scope and operation of the principal effect and purpose tests be narrowed from the current broad application, with guidance in the explanatory material outlining the specific circumstances in which the tests will be satisfied. Further, both tests should be required to be met before the proposed measure will apply. Without these changes, the proposed measure will inadvertently encompass ordinary commercial dealings and low-risk arrangements.
The Tax Institute also has significant concerns regarding the retrospective nature of the exposure draft and is of the view that it should only apply to arrangements entered into after the legislation receives royal assent.
The measure has broad implications across the tax community, that may cost the tax system more to administer than the $10 million revenue it is expected to generate. Many businesses, ranging from small private groups to large publicly listed groups, may be caught by these provisions and subject to the onerous task of identifying and analysing historical transactions in circumstances where there has been no artificial arrangement to receive a franking credit benefit but the provisions are nonetheless satisfied.
As a broader implication, the proposed measure may deter businesses from undertaking corporate restructures, implementing succession planning strategies, and potentially other low-risk activities that are commercial in nature.