Appendix - Australian anti-streaming rules
Australia has four anti-streaming rules contained in the Income Tax Assessment Act 1997. The rules are:
- A franking debit is generated if the exercise or non-exercise of a choice by a member (in broad terms, a shareholder) of one corporate entity results in a linked distribution being made by another corporate entity in substitution for a distribution by the first entity.
- A franking debit is generated if the exercise or non-exercise of a choice by a member of the entity determines (to any extent) that the entity issues tax exempt bonus issues (as defined) to the member or another member in substitution for imputed dividends.
- A rule that applies where a member who is better able to benefit from imputation credits receives one or more imputation benefits. An imputation benefit is:
- an entitlement to a tax offset or, if the member is a corporate tax entity, a franking credit;
- an amount that would be included in the member’s assessable income as a result of the distribution; or
- an exemption from withholding tax (relevant if the member is a non-resident).
The recipient must derive a greater benefit from imputation credits than another member who misses out on an imputation benefit. Relevant factors in determining whether the recipient derives a greater benefit from imputation credits than another member includes, amongst a number of factors, the residency of the members. A difference in shareholders’ marginal tax rates does not, by itself, indicate that some members derive a greater benefit from imputation credits than others.
If the elements of this streaming rule are present, the Commissioner may make a determination that:
- the streaming entity will incur an additional franking debit in respect of each distribution made or other benefit received by a member; and/or
- no imputation benefit is to arise in respect of any streamed distributions paid to a member.
The following examples are adapted from the explanatory memorandum that accompanied the legislation in order to illustrate the type of arrangements that this rule intends to target:
Single distribution streaming by a non-resident controlled company
A non-resident controlled company with resident minority shareholders adopts a strategy of distributing all its franking credits to the minority shareholders while retaining the share of profits belonging to the controlling shareholder in the company. It does this with a view to ultimately paying an unfranked dividend, or paying some other benefit to the majority shareholder, or someone else, in lieu of a dividend (which would include realising accumulated profits as a capital amount on the sale of shares).
Share buy-back – limited imputation credit surplus
A company has members with differing abilities to benefit from franking credits and a limited supply of credits. It makes a fully franked distribution by buying back off-market the shares owned by taxable residents to stream the limited credits available to those who can most benefit from them.
Share buy-back – excess credits
A company has more franking credits than it is reasonably likely to use to frank its ordinary distributions. It buys back shares off-market predominantly from members most able to benefit from franking credits because the terms of the buy-back are not attractive to the other members. As a result of the buy-back it uses profits it would not normally distribute, thereby directing a large franked distribution predominantly to those who benefit most from franking credits.
Dividend access share
A company group contains an operating subsidiary which is owned by a company that has tax losses. The members of the loss company can, because they are not in tax loss, derive a greater benefit from franking credits than the loss company. The members are issued with a dividend access share to stream dividends directly to them. (Broadly speaking, a dividend access share is one that confers no rights and is issued only to enable a shareholder to get a distribution from the company.)
- A rule requiring disclosure to the Commissioner where an entity's benchmark ratio varies significantly between imputation periods.
Exempting credit rules
The exempting credit rules are designed to prevent imputation streaming by companies that are effectively owned (up to 95%) by non-residents or tax-exempt entities. Franking credits held by companies subject to these rules can only be used to relieve dividend payments to non-residents from NRWT.
These rules apply to an Australian resident company (the exempting entity) that is effectively owned (directly or indirectly) by a tax exempt or non-resident shareholder (though there is an exception to the rules where the company has New Zealand owners). The exempting entity would be subject to the ordinary imputation rules except that franking credits attached to dividends paid by it would be restricted solely to providing an exemption for NRWT on dividends to non-resident members. None of the franking credits would be attached to dividends paid to resident shareholders, with the credits being cancelled.
If all the shares in the exempting entity were sold to Australian residents, its franking credit account would be converted to an “exempting account”. The exempting credits attached to these dividends would continue only to be eligible to reduce non-resident withholding tax where relevant. They otherwise would have no value.
Holding period rule
This rule requires resident taxpayers to hold shares for a minimum period of at least 45 days to be eligible to use franking credits from dividends paid on those shares as a credit against their tax liability. There are several exceptions to the rule, including an exemption threshold for certain small shareholders.
Furthermore, even if the shares are held for the minimum period, the franking credit is denied if the resident taxpayer has eliminated a substantial part of the risks of their ownership in the shares by other financial transactions during that period. Hence the rule also specifies a 30 percent minimum level of ownership risk.