Corporate Tax Issues

• Reduce franking credits to prevent the streaming of franking credits to resident shareholders;
• Deny notional losses to all shareholders where a listed company undertakes an off-market share buyback;
• Provide certainty as to when the tax law integrity measures apply to tender style share buybacks by listed companies; and
• Provide a method of determining the capital dividend split, generally adopting the average capital per share method.

In announcing the changes, the Government has adopted all of the recommendations of the Board of Taxation.  The Government considers that these amendments will provide more certainty and flexibility for companies undertaking share buybacks.  A summary of the Board of Taxation's recommendations are as follows:

1. The Australian Taxation Office (ATO) is to be asked to remove its administrative cap on the level of discount when determining the market value of a listed company share as per Taxation determination 2004/22 and PS LA 2007/9.
2. There will be a specific debit to the franking account to reflect the streaming of franking credits from non-resident shareholders to resident shareholders.  Currently there can be a debit to the franking account in these circumstances but it relies on the general anti franking credit streaming and integrity provisions.
3. The market value uplift rule should not apply to off-market share buybacks by listed companies.  This means losses created by uplifting the deemed purchase price to market value will no longer be available for shareholders of listed companies that conduct off-market share buybacks.  The market value uplift rule will continue to apply to unlisted off-market share buybacks.
4. Provision for companies to use average capital per share when determining the capital/dividend split for the share buyback and to give the Commissioner of Taxation discretion to allow other methods to be used, such as the slice method or embedded value method.  It is also proposed to confirm that sections 45A, 45B and sec 177EA (5)(b) will not apply to treat the capital portion of the buyback as a dividend where the buyback is by a listed company and the average capital per share method is used.
5. The share buyback provisions should apply equally to listed and unlisted companies except for sections 45A, 45B and 177EA(3)(b).  It is assumed recommendation 3, mentioned above, would also be an exception but it is not mentioned in the Government's budget documents.
6. The share buyback provisions to be rewritten into the 1997 Act.

These changes will be effective from the date of Royal Assent of the amending legislation.

International Tax
The foreign sourced income accruals regime will be substantially reformed to reduce compliance costs.  The changes are summarised as follows:

The Controlled Foreign Company (CFC) rules will be modernised and rewritten into the 1997 Act.  The changes will include:

• Modernising and updating the definitions of active and passive asset,  including the removal of the 'base company income rules' (e.g. income from dealings with associates);
• Additional exemptions for complying superannuation entities;
• A choice of attribution method similar to the current Foreign Investment Fund (FIF) provisions (e.g. branch equivalent, market value and deemed rate of return); and
• The CFC rules will be rewritten into the 1997 Act.

The FIF rules will be repealed and replaced with specific narrowly defined anti avoidance rules.

The deemed present entitlement rules for foreign trusts will be repealed.

The transfer or trusts rules will be amended to enhance their effectiveness.

The Government states that these changes are designed to make Australia a leading financial centre by improving the competitiveness of Australian business.  There is no implementation date for these changes as yet and the Government will consult with interested parties before implementation.