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45 Day Rule - Franking Credit and Intercorporate Dividend Rebate Amounts

45 Day Rule - Franking Credit and Intercorporate Dividend Rebate Amounts


by Michael Clough, Mallesons Stephen Jaques

Released March 1998

Package of Rules Announced on 13 May 1997

The purpose of this paper is to discuss the proposed 45 day rule which was released by the Government in draft bill form ("draft Bill") on 31 December 1997. In broad terms, it is proposed that this rule must be satisfied in order for a taxpayer to be entitled to franking credits (and franking rebates) and the intercorporate dividend rebate in respect of dividends.

The proposed 45 day rule was announced by the Treasurer on 13 May 1997 (in the 1997/98 Federal Budget) as part of a package of proposed changes to the franking rebate rules and the intercorporate dividend rebate rules.

The other elements to the package were:

  • A proposed "related payments rule";

  • The introduction of new general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 ("Tax Act") in respect of "franking credit schemes"; and

  • The introduction of further anti-dividend streaming provisions in the franking rules.

In addition to the above rules, the Government announced that certain franking account balances of companies that are effectively wholly owned by non-resident shareholders or tax exempt entities would be converted to exempting account balances. It is not proposed to discuss these changes in this paper.

The above rules are intended to operate on a separate and discrete basis. However, the interrelationship of the rules may be important in determining their application.

Stated Purpose of Proposed Rules

In the 13 May 1997 announcement, the Treasurer stated that the purpose of the introduction of the above rules was to address the underlying principles of the imputation system. The Treasurer stated:

"The underlying principles of the imputation system as introduced in 1987, and as reflected in its affordability, include: first, that tax paid at the company level is in broad terms imputed to shareholders proportionally to their shareholdings; and second, that the benefits of imputation would be available only to the true economic owners of shares, and only to the extent that those taxpayers were able to use the franking credits themselves.

The Treasurer continued:

The amendments to address trading in franking credits and misuse of the intercorporate dividend rebate are designed to restore the second underlying principle of the imputation system and address schemes in which shareholders are able to fully access franking credits without bearing the economic risk of share ownership ...

Arrangements that allow franking credits to be transferred, by separating legal ownership from the economic risks of share ownership, undermine this principle by allowing the full value of franking credits to be accessed without bearing the economic risk. To allow such arrangements to continue would bring into question the affordability of the imputation system as originally designed."

Accordingly, the Treasurer's concern is that franking credits should only be available to the economic owners of shares. This is the principle that purportedly underlies the 45 day rule and the related payments rule.

(The new anti-dividend streaming provisions are designed to address schemes which "undermine the first underlying principle" as referred to above).

In relation to the 45 day rule, this policy objective was repeated by the Treasurer in a Press Release dated 8 August 1997 ("Budget Measures to Prevent Trading in Franking Credits: Outcome of Consultations"). The policy objective was elaborated upon in the draft Explanatory Memorandum that accompanied the draft Bill setting out the proposed 45 day rule. It states at paragraph 1.2:

"The purpose of the amendments is to protect the revenue by introducing a holding period rule for shares to curb the unintended usage of franking credits and misuse of the intercorporate dividend rebate by persons who are not effectively owners of shares or who are only very briefly owners of shares. This will counter certain tax avoidance schemes under which franking credits or the intercorporate dividend rebate are made available to such persons" (emphasis added).

Accordingly, the measures are not limited in their application to persons who are not the true economic owners of the shares (or an interest in shares). They will also apply to persons who are the economic owners of shares albeit for a "brief" period of time.

The above statement also appears to imply that the rules are designed to counter "tax avoidance schemes". This suggestion is also apparent in paragraph 1.5 of the draft Explanatory Memorandum where it is stated:

"In substance, the owner of shares is the person who is exposed to the risks of loss and opportunities for gain in respect of the shares. However, franking credit schemes allow persons who are not exposed, or who are only very briefly exposed, to the risks and opportunities of share ownership to obtain access to the full value of franking credits, which often, but for the scheme, would not have been used at all, or would have not have been fully used. They therefore undermine an underlying principle of imputation" (emphasis added).

Despite the above suggestion that the rules are aimed at "tax avoidance schemes", it is clear from the discussion below that the operation of the rules will not be confined to such schemes. Indeed, the rules may apply even if a taxpayer (actually) holds shares at risk for the required 45 day period. For example, the rules may apply to deny the dividend rebates in respect of dividends paid on shares held by a corporate taxpayer where a company that is in the same group as the taxpayer disposes of shares (in the same company) prior to the expiration of the 45 day holding period in respect of the shares held by the taxpayer. This may be the case even if the disposal is not made under an arrangement.

PROPOSED 45 DAY RULE: GENERAL ISSUES

Effect of New Rules

In broad terms, if the new rules are not satisfied, the taxpayer will not be entitled to a franking credit (and franking rebate) or the intercorporate dividend rebate in relation to a particular dividend or a trust or partnership distribution which is attributable to the dividend.

The denial of the intercorporate dividend rebate may apply to any resident corporate shareholder. It is not limited to private company shareholders to which Section 46F of the Tax Act may apply.

Transitional Measures

Generally, the new rules will apply in respect of shares and interests in shares which are acquired by the taxpayer on or after 1 July 1997. However, the rules should not apply if the shares or interests were acquired under a contract made before 7.30pm on 13 May 1997.

The specific rules in relation to the position of a beneficiary under a trust set out in proposed section 160APHJ takes effect on 31 December 1997 and applies to:

1. all trusts (other than widely held public share trading trusts) that receive dividends from shares, or distributions in respect of interests in shares, where the shares or interests were acquired after that time; and

2. widely held public share trading trusts established after that time.

TAXPAYER MUST BE A "QUALIFIED PERSON" TO QUALIFY FOR FRANKING REBATE AND INTERCORPORATE DIVIDEND REBATE

Generally

Generally, the rules should not operate to deny a franking rebate or an intercorporate dividend rebate to a taxpayer in respect of a dividend or a distribution attributable to a dividend if the taxpayer is a "qualified person" within the meaning of the new rules. (In the case of a share or interest in a share held by trustee, it will also generally be necessary for the trustee to be a "qualified person" in order for the beneficiary taxpayer to obtain the benefit of a franking rebate and intercorporate dividend rebate - see discussion on Trusts below).

1.  Methods of Being a "Qualified Person"

There are five alternative methods that a taxpayer (including, in some cases, a trustee) may be a "qualified person" for the purposes of the new rules. They are:

1. The taxpayer holds shares or interest in shares for the prescribed number of days during a "qualification period" ("the holding period rule") (Section 160APHL);

2. The taxpayer holds an interest in shares as a beneficiary of a widely held trust for the prescribed number of days during a "qualification period" (Section 160APHM);

3. The taxpayer holds shares or interest in shares where the shares were issued in connection with a winding-up of a company (Section 160APHN);

4. A taxpayer qualifies to elect to have franking credit ceilings and franking rebate ceilings applied by reference to franking credits or rebates on a benchmark portfolio of shares (Section 160APHO); and

5. The taxpayer is an individual who elects to have a franking rebate ceiling applied (the $2,000 small shareholder exemption) (Section 160APHP).

Some taxpayers may be capable of being a "qualified person" under two or more of the above methods. For example, an individual shareholder may qualify under method (a) (holding shares at risk for 45 days or more) or method (e) (the small shareholder exemption).

The discussion below will principally focus on method (a): The holding period rule.

QUALIFIED PERSON: METHOD (A): HOLDING SHARES - INTERESTS IN SHARES AT RISK FOR REQUIRED PERIOD

Generally

Under this method, a taxpayer should generally be a "qualified person" if, during the "qualification period" (as defined in the rules) in relation to shares or an interest in shares, the taxpayer held the shares or interest (whichever is applicable) for a continuous period (not counting the day on which the taxpayer acquired the shares or interest or, if the taxpayer has disposed of the shares or interest, the day on which the disposal occurred) of not less than 45 days in the case of shares generally, or 90 days in the case of "preference shares" (as defined in the rules).

The "qualification period" during which to determine whether this requirement has been satisfied is generally the period beginning on the day after the day on which the taxpayer acquired the shares or interest and ending on the 45th day after the day on which the shares or interest became ex-dividend (or the 90th day in the case of preference shares).

(For simplicity, the discussion below assumes the shares (or interest) are not "preference shares").

In determining whether this requirement has been satisfied, the following observations may be made:

  • The test is a "once and for all" test. It sets an initial threshold which only has to be crossed once. Once the test is satisfied in relation to particular shares or interest, the taxpayer may generally enter into arrangements which limit their risk in relation to those shares. (However, a disposal of these shares or interest may affect whether other shares or interest satisfy method (a) - see below).

  • Taxpayers are not required to hold the shares or an interest for more than 45 days before the dividend is paid. Days after the payment of dividend can also be counted. However, the days after the dividend will affect, that is limit, the "qualification period" described above.

  • In certain cases, where a taxpayer initially holds an interest in shares and subsequently acquires the underlying shares, the taxpayer will be deemed to have acquired the shares when the interest was acquired (see Section 160APHE). This is on the basis that the receipt of the shares by the taxpayer is proportional to their interest. This rule will be important to investors who acquired Instalment Receipts under the recent Telstra Public Share Offer.

In addition to the above, there are two important rules to consider in determining whether the taxpayer held the shares or interest for the requisite period. First, certain disposals of other shares or interest in shares in the relevant company or other "substantially identical securities" (as defined in the rules) may be deemed to be disposals of the shares/or interest in question. Accordingly, the shares or interest may not be considered to have been held for the required 45 day period if other shares or interest or other substantially identical securities are disposed of during this period.

Secondly, any days on which the taxpayer "has materially diminished risks of loss and opportunities for gain" in respect of the shares or interest are excluded from the calculation of the 45 day period. (However, such days will not break the continuity of the period for which the shares or interest are held).

Each of these two rules is discussed in more detail below.

2.  Disposals of Other Securities in Company

The determination of whether the 45 day holding period is satisfied should generally be undertaken on a share by share basis (or interest by interest basis, as the case may be). In determining whether particular shares or interests are held for the 45 day holding period, the taxpayer may be deemed to have disposed of such shares or interests (and hence not satisfy the 45 day holding period in relation to them) if other shares in the company or other substantially identical securities are disposed of (not necessarily be the taxpayer) during this time. (For certain disposals, for example, a disposal by the taxpayer, other requirements must be satisfied for the deemed disposal to occur). In effect, this rule means that the 45 day rule operates on a "last in, first out (LIFO basis)".

The draft Explanatory Memorandum provides the following example:

"If on 1 July 1997 a taxpayer acquires 100 ordinary shares in a company and on 1 August 1997 disposes of 50 ordinary shares in the same company, irrespective of whether the shares disposed of are the shares acquired in July, the taxpayer will be taken to have disposed of 50 of the July shares."

(This example appears to ignore the other requirements in Section 160APHH(1) that need to be satisfied for the deemed disposal to arise).

Importantly, the disposal of shares is not limited to disposals by the taxpayer. It includes certain disposals by "associates" of the taxpayer under an arrangement.

It also includes disposals by a company that is in the same wholly owned group as the taxpayer of substantially identical securities to those held by the taxpayer. The disposals by related companies will be taken into account irrespective of whether or not the disposal is under an arrangement. Further, in relation to these deemed disposals, fewer requirements need to be satisfied for the deemed disposal to occur compared to deemed disposals by the taxpayer or an associate.

3.  Materially Diminished Risks of Loss and Opportunity for Gain

A taxpayer is taken to have materially diminished risk of loss and opportunities for gain on a particular day in respect of shares held by the taxpayer, or in respect of an interest held by the taxpayer in shares, if the taxpayer's "net position" on that day in relation to the shares or interest is less than 30% of those risks and opportunities.

In essence, this aspect of the rule is intended to apply to arrangements where a high level of "both upside and downside equity risk is removed" (refer to Treasurer's Press Release dated 8 August 1997).

To determine whether the taxpayer has a materially diminished risk of loss and opportunities for gain in relation to shares or an interest, the "net position" of the taxpayer in relation to the shares or interest must be determined.

The relevant rules for determining the "net position" are set out in Section 160APHI. Broadly, the net position is calculated by adding taxpayers "long positions" in the shares or interest (calculated on the basis of their deltas) and the "short positions" in the shares or interest (also calculated on the basis of the deltas).

The expressions "long position" and "short position" are defined. These definitions in turn depend on the definition of "position" and whether the position has a negative delta (a short position) or a positive delta (a long position).

A "position" in relation to shares or an interest in shares is anything that has a "delta" and includes, for example, a sale of shares or property that is substantially similar to, or related to the shares, an option to buy or sell the shares or interest, an option to buy or sell property that is substantially similar to, or related to, the shares or interest, a non-recourse loan made to acquire the shares or interest, and an indemnity or guarantee in respect of the shares or interest. Other examples of a position are set out in the rules.

In relation to each "position" in relation to a share or interest, it is necessary to calculate the delta of the position.

The regulations may determine how a delta of a position is calculated and may also prescribe what is a "position", a "short position", a "long position" or a "net position". Regulations are yet to be issued in draft or final form.

The draft Explanatory Memorandum provides the following example:

"For example, a taxpayer who holds 1,000 shares in a company and writes a call option with a delta of 0.6 in respect of those shares will not have materially diminished risk with respect to the shares because the net position of the taxpayer in relation to the shares would be in excess of 0.3. To determine the net position, the delta of the sold call option is taken away (because it is a short position) from the delta of the shares (the delta of a share against which the delta of an option or other derivative is calculated is by definition "1"). Accordingly, the net position of the taxpayer in relation to the shares is:

((1,000 x 1) - (1,000 x 0.6))/ 1,000 = 0.4

By contrast a taxpayer who holds 1,000 and writes a call-option with a delta of 0.9 will have materially diminished risk with respect to the shares because the net position of a taxpayer in relation to the shares is 0.1."

There are special rules for determining whether a beneficiary of a trust hold their interest in shares at "risk" as described above. These are described below under the heading "Trusts".

4.  Trusts: Special Rules

The operation of the 45 day rule in relation to trustees and beneficiaries is particularly complex. There are a number of issues that need to be addressed in determining whether a beneficiary obtains a franking rebate (or an intercorporate dividend rebate) in respect of shares held on trust.

The first issue to determine is whether the trustee is a "qualified person" within the meaning of the new rules. If the trustee seeks to be a "qualified person" on the basis of method (a), this will require a determination of whether the trustee holds the shares (or interest) at risk for the required 45 day period. The considerations discussed above will be relevant in this regard.

Assuming that the trustee is a qualified person, the next issue is whether the beneficiary is a "qualified person" in respect of its interest in the share. In this regard, the general considerations discussed above in relation to the 45 day holding period will also apply to the beneficiary. In addition, there are two further considerations specific to beneficiaries that should be addressed. They are:

  • The "discretionary trust" measures. These measures may apply to deem the beneficiary to hold their interest at no risk or a lesser risk. If this deeming provision operates, then the beneficiary will generally not be considered to hold their interest in the shares for the required 45 day period. Accordingly, they will generally not be entitled to a franking benefit in respect of dividends paid on the share held by the trustee; and

  • The imputed positions of the trustee. In certain cases, a "position" of the trustee may be imputed to the beneficiary for the purposes of determining whether the beneficiary holds their interest for the required 45 day period.

Each measure is considered below.

5.  Discretionary Trust Measure

The interest of a beneficiary is deemed to be a notional interest in the holding of the trustee, determined as a notional proportion of the shares or interests in shares held by the trustee based on the proportion of the dividend income of the trust to which the beneficiary is entitled. The draft Explanatory Memorandum states that the beneficiary must "be exposed to 30% of the risks and opportunities on this part of the trustee's holding" (paragraph 1.47).

The draft Explanatory Memorandum states that "this provision prevents taxpayers from circumventing the rules regarding material diminution of risk by acquiring risk-free holdings under a trust, such as a discretionary trust". However, the rule does not apply to "family trusts" within the meaning of Schedule 2F or deceased estates.

To determine whether the beneficiary's risk has been reduced materially (except under a family trust or deceased estate), the beneficiary is deemed to be "short" the notional interest, and "long its actual fixed interest in corpus consisting of shares". An interest is fixed if it is "vested and indefeasible" (see Section 160APHJ(3) and ).

In broad terms, this means that if a beneficiary does not have "vested and indefeasible" interest in the trustee's holdings, then their interest in the shares will be considered to be "risk free" and hence the dividend rebates will not be available to that beneficiary.

The Explanatory Memorandum (at paragraph 1.51) provides the following example:

"Thus assuming the trustee's holding is 2,000 shares and that the beneficiary is entitled to half the dividends from those shares, the notional interest of the beneficiary in the shares will be 50% of the trustee's holding, or 1,000 shares. If the beneficiary has a fixed interest of 30% or greater in those shares (i.e. the equivalent of 300 shares), it will not have materially diminished risk in respect of those shares. On the other hand, if the beneficiary has a lesser fixed interest, or no fixed interest, in corpus (eg because it only a discretionary object of the trust), there would be a material diminution of risk."

(This paragraph is slightly misleading because, as is subsequently pointed out in paragraph 1.52, in working out whether there is a material diminution of risk, the beneficiary's other long and short positions are also counted, including any position imputed to the beneficiary (see below)).

In light of the above, a beneficiary of a discretionary trust who is a mere object, does not appear to be capable of being a "qualified person under method (a). Accordingly, if a trust distribution which is attributable to dividends is made to that beneficiary, the beneficiary would not be entitled to the attached franking rebate.

As a consequence of the above, the trustee (which itself is a qualified person), should carefully consider whether to make a distribution of dividend to such a discretionary object of the trust.

6.  Imputed Positions of Trustee

As stated, in determining whether a beneficiary is at "risk" in respect of its interest in shares for the required period, the trustee's position in relation to shares (or interest in shares) may be imputed to the beneficiary (see Section 160APHK(3)). Such imputation may occur in relation to "closely held fixed trusts" and non-fixed trusts.

In this case, where a trustee of such a trust enters into a position with respect to shares or an interest in shares (relevant shares) which form the property of the trust, all beneficiaries of a trust are deemed to have entered into a proportionate position with respect to their interests in the relevant shares at the time the trustee entered into the position, or at the time that the beneficiary acquires the interest in the trust (whichever is the later).

This provision may be particularly important where the trustee acquired shares (or an interest) prior 1 July 1997 and enters into a position in relation to those shares at a subsequent time if a beneficiary acquires an interest after that time. It may also be relevant in determining whether, when coupled with the beneficiary's own positions, the beneficiary's interest in the shares is held at risk for the purposes of the rules.

OTHER METHODS TO BE A "QUALIFIED PERSON"

Method (b): Beneficiaries Under Widely Held Trust

A taxpayer who holds an interest in shares as a beneficiary of a "widely held trust" (as defined in the rules), is a "qualified person" in relation to any dividend paid on the shares to which the distribution from the trust is attributable, if, during the qualification period the taxpayer has held the interest in the shares (excluding the day of acquisition or disposal) for 45 days. Again, days on which there is a material diminution of risk are not taken into account (see Section 160APHM).

For these purposes, a "widely held trust" is defined as a trust that is neither a closely held fixed trust or a non-fixed trust.

Any position taken by the trustee should not be imputed to the beneficiary under Section 160APHK (refer above).

6.  Method (c): Where Shares Are Issued in Connection to the Winding-Up

A taxpayer is "qualified person" in relation to a dividend paid on shares in a company if:

1. the taxpayer held, or held an interest in, the shares;

2. the shares were issued in connection with a proposed winding-up the company; and

3. the shares or interest was not disposed of by the taxpayer before the commencement of the winding-up (see Section 160APHN).

7.  Method (d): Franking Credit Ceilings and Franking Rebate Ceilings for Certain Taxpayers

Certain eligible taxpayers may elect to have franking credit or franking rebate ceilings applied in accordance with the formula. The eligible taxpayers are:

  • Trustees for complying superannuation funds, other than excluded superannuation funds;

  • Trustees of funds which are complying approved deposit funds other than excluded ADFs;

  • Trustees of unit trusts which are pooled superannuation trusts;

  • Life assurance companies (as defined in Division 8 of Part III of the Tax Act); and

  • Any other taxpayers who are declared by regulations to be eligible for these purposes.

Under the rules, the maximum franking credits a taxpayer is entitled to from dividends or distributions paid on shares (and interest in shares) held (directly or indirectly) by the taxpayer, which are managed by the taxpayer, or on the taxpayer's behalf, as a discrete fund, is not to exceed the ceiling amount in relation to that fund.

The new rules provide a method of calculating the relevant ceiling amount in the absence of regulations. The ceiling amount will be based on the total amount of franking credits the taxpayer would be entitled to in respect of dividends paid on a bench-mark portfolio of shares.

8.  Method (e): Small Shareholder Exemption

A taxpayer who is an individual may be a qualified person under the small shareholder exemption if they make an election.

If a taxpayer makes an election under these rules, the taxpayer is a "qualified person" in relation to every dividend paid during the year of income specified in the election on shares that the taxpayer held or in which the taxpayer held interest.

In broad terms, if this rule applies, the rebates of tax to which the taxpayer is entitled under the franking credit rules in respect of dividends paid or distributions made during the year of income may not exceed the "applicable amount" specified in Section 160AQZG(2). This amount is calculated by adding all franking rebates to which the taxpayer would have been entitled to if the taxpayer was a "qualified person" in relation to all dividends and trust and partnership distributions received in the relevant income year and subtracting $4 for every $1 of such franking rebate in excess of $2,000.

Examples

  • If a taxpayer's total franking rebates equal $1,900 (assuming they are a qualified person) then the applicable amount will also be $1,900. In this case, the taxpayer would be entitled to the full franking rebate.

  • A taxpayer with a franking rebate of $2,001 (assuming they are a qualified person) would not be entitled to a rebate in excess of $2,000 and will also have the remaining rebate reduced by $4, leaving an entitlement to a rebate of $1,996 (see paragraph 1.80 of the Explanatory Memorandum).

Taxpayers may elect to apply the threshold in relation to a particular year.

The taxpayer will be entitled to a deduction for the gross-up amount of a dividend included in their assessable income (for example, under Section 160AQT) for which the taxpayer is denied a franking rebate.

EMPLOYEE SHARE PLANS

On 8 August 1997, the Treasurer announced that employee share schemes would, broadly speaking, be exempt from the "risk diminution aspect of the 45 day rule and the related payments rule". The Treasurer further stated that:

"Dividends paid on shares issued to employees under employee share schemes (ESS) that satisfy the eligibility criterion explained below will not be denied franking or the intercorporate dividend rebate solely by virtue of the fact that:

  • ...

  • the terms of the scheme attract the related payments rule or the risk diminution aspect of the 45 day rule because the employee is repaying a non-recourse loan in relation to shares." (emphasis added)

The Press Release set out the criterion for an eligible ESS.

The proposed exemption for employee share schemes was not included in the draft Bill released on 31 December 1997. At this stage, it is unclear whether this exemption will be included in the final rules despite the Press Release.

Perhaps an explanation for this omission is that the employee may not have a materially diminished risk of loss and opportunities for gain in relation to shares or interests in shares held under an ESS if the employee is simply repaying a non-recourse loan in respect of the acquisition of that share or interest. In other words, this would not be an arrangement "where a high level of both upside and downside equity risk is removed".

Nevertheless, the possible application of other parts of the rules to the employee's interest will need to be considered. For example, the possible application of Section 160APHJ would need to be considered if the ESS is operated through a trust and the employee does not have a "vested and indefeasible" interest in the shares held on their behalf (for example, because there is a forfeiture provision in the ESS).

OTHER 13 MAY 1997 MEASURES

"Related Payments Rule"

The introduction of a "related payments" rule was also announced by the Treasurer on 13 May 1997. It is intended that it will apply to arrangements entered into after that time.

This measure has not yet been released in draft bill form or bill form. Accordingly, its scope can not yet be determined.

The Treasurer stated that this measure will operate to deny franking credits (and therefore any franking rebate) and the intercorporate dividend rebate on dividends paid on shares, and on distributions paid on an interest in shares "where the taxpayer effectively has no interest in the dividend or distribution because of an obligation to pass it (or an equivalent payment) to another taxpayer".

The stated policy underlying this measure is that shareholders should not have access to franking credits without bearing the economic risk of share ownership.

As stated above, the Treasurer announced on 8 August 1997 that employee share plans should be exempt from this measure. However, whether or not this will be the case remains to be seen.

9.  Part IVA: Franking Credit Schemes

The Treasurer also announced on 13 May 1997 that new measures would be introduced into the general anti-avoidance provisions in Part IVA of the Tax Act in relation to "franking credit schemes". These measures are contained in Taxation Laws Amendment Bill (No 7) 1997 ("Bill No 7"). This Bill has not yet been passed by Parliament and accordingly is not yet law. It is possible that the measures will be amended prior to their enactment.

Generally, it is proposed that the general anti-avoidance provisions will apply to dividends paid or distributions made after 7.30pm on 13 May 1997 (including dividends paid, or distributions made, pursuant to a scheme entered into before that time).

However, the amendments should not apply where the dividends are paid by a listed public company after that time where the dividends were declared before 7.30pm on 13 May 1997.

In broad terms, if the rules apply, the Commissioner may determine that if the company is party to the scheme a franking debit arises to the dividend paying company in respect of each dividend paid to the relevant taxpayer or, alternatively, determine that no franking credit benefit arises in respect of a dividend or part of a dividend paid to the relevant taxpayer.

In the case of a private company shareholder, if a determination is made by the Commissioner to deny a franking credit benefit, then the dividend will be considered unfranked for the purposes of Section 46F. Accordingly, Section 46F may operate to deny an intercorporate dividend rebate to the taxpayer if the requirements in that section are otherwise satisfied.

Proposed Section 177EA(3) sets out the criteria that must be satisfied in order for the Part to operate.

The rules may apply if, among other things, having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a "franking credit benefit" (as defined in Section 177EA(18)).

Accordingly, the "purpose" requirement is a very low threshold that taxpayers and advisers should consider carefully in determining whether the rules apply to a particular (proposed) transaction.

10.  New Anti-Dividend Streaming Rules

Bill No 7 also sets out new anti-dividends streaming provisions. These provisions are intended to apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most in preference to others.

The anti-streaming rules will operate from the same time as the general anti-avoidance rules. Generally, the rules will apply to dividends paid or distributions made after 7.30pm on 13 May 1997.

If these provisions apply, the Commissioner may make a determination that no franking credit benefit arises in respect of any streamed dividends paid to a shareholder or that a franking debit be posted to the streaming company's franking account. If the franking credit benefit is denied, Section 46F may operate in the same manner discussed above under 7.2.

Finally, Bill No 7 also amends the definition of "class of shares" for the purposes of the imputation rules. Under the rule, the definition of what constitutes a class of shares is amended so that a class includes shares having substantially the same rights.

CONCLUSION

The above rules represent substantial and possibly far-reaching changes to both the dividend imputation system and the intercorporate dividend rebate rules. They are intended to represent a curtailment to the (intended) benefits arising under the imputation system. This intention is reflected in the Treasurer's concern as to the "affordability" of the system. Whether this is the case remains to be seen.

The precise scope of the rules can not be ascertained until they are enacted. Prior to this time, which hopefully will not be in the too distant future, taxpayers and advisers should be particularly conscious of the possible (but uncertain) application of the rules.

20 February 1998