The Assistant Treasurer, Senator Rod Kemp, released today a draft of proposed amendments to the Income Tax Assessment Act 1936. These amendments will introduce a holding period rule as a condition of obtaining the benefits of franking credits or the franking rebate and, in the case of companies, the inter-corporate dividend rebate. For most shares the holding period will be more than 45 days; for certain preference shares it will be more than 90 days. The holding period is reduced by any day on which the taxpayer did not have at least 30% of the risks of loss and opportunities for gain associated with the share.
Shares held through trusts
Under the draft legislation released today, in order to prevent franking credit trading schemes under which taxpayers access franking credit benefits or the intercorporate dividend rebate through trusts without being exposed to the risks and opportunities associated with share ownership, taxpayers who hold interests in shares under a trust, other than a family trust (as defined in the trust loss provisions) or deceased estate, will be required to have a sufficient interest in the corpus of the trust to expose them to at least 30% of the risks of loss and opportunities for gain in respect of the shares included in the trust estate. This will place risk reduction arrangements using trusts in the same position as risk reduction arrangements using derivatives. The extension of the holding period rule in this way is necessary to ensure that the new measures are not circumvented by the use of discretionary trusts, or other trust arrangements which do not expose beneficiaries to the risks and opportunities of share ownership. The small shareholder exemption will, however, continue to apply to natural person beneficiaries who elect to have a total franking rebate ceiling of $2000 applied to them.
This modification of the holding period rule will apply to distributions in respect of shares or interests in shares acquired after 3pm today by trusts, other than widely held public share-trading trusts (as defined in the trust loss provisions), and to distributions in respect of shares or interests in shares held by widely held public share-trading trusts established after 3pm today.
These amendments form part of a package of measures announced in the 1997-98 Budget targeting franking credit trading and dividend streaming, and will be introduced into Parliament in the next available taxation laws amendment bill. A general anti-avoidance rule and anti-streaming measures were introduced in Taxation Laws Amendment Bill (No 7) 1997 and the remaining measures will be introduced as soon as possible.
Special provisions for superannuation funds etc
The amendments also contain a special set of rules for certain low-risk taxpayers, such as superannuation funds, which would incur high compliance costs in meeting the new holding period rule. These taxpayers will be able to elect to use another rule which sets a ceiling on franking based on an appropriate benchmark; this ceiling will then apply instead of the holding period rule. The draft legislation specifies some of the types of taxpayers eligible to elect to have this ceiling applied to them, and also specifies the All Ordinaries Index as one benchmark. Under the draft legislation regulations may be made allowing additional taxpayers may be eligible to elect to have these rules to apply to them, and to determine additional benchmarks. Other details of the rules may also be specified by the regulations.
The Australian Taxation Office has received submissions from interested parties on who should be eligible for these special rules, and what benchmarks should be employed. The submissions are being considered and will be taken into account in making the regulations.
The draft provisions, with an explanatory statement, are available by phoning (02) 6216 1036 or by accessing the ATO's World Wide Web page on http://www.ato.gov.au.
CANBERRA
31 December 1997
Contact: Richard King - 0419 683 586