Distributions funded by capital raisings may soon be unfrankable

The Federal Government is seeking to introduce new measures to prevent companies from applying franking credits to shareholder distributions where the distribution is at least partially funded by a capital raising.

On 16 February 2023, the Treasury Laws Amendment (2023 Measures No 1) Bill 2023 (Bill), containing this proposed measure, was introduced in Parliament. It is now under consideration by the Senate Economic Legislation Committee.

Consistent with the Government’s practice of legislating tax reform by press release, the measure is drafted to apply retrospectively from 15 September 2022 (the day after it was announced). The broad language of the amendment may give the new rules significant scope, and it may make some distributions 100% unfrankable if they are funded by a mix of profits and raised capital. Companies should therefore look to carefully manage their dividend cycles and capital raisings as a result.

Tristram Feder

Why is the Commissioner of Taxation concerned?

Dating back to the ATO's 2015 tax alert TA 2015/2, the Commissioner is concerned that the integrity of the imputation system is at risk. While the tax law defines frankable distributions as distributions equivalent to realised profits, the Commissioner has noted cases where companies have made frankable distributions funded by capital raisings, typically outside the usual dividend cycle.

The Bills Explanatory Memorandum describes such arrangements as artificial and contrived with no genuine commercial purpose. These distributions accelerate the deployment of a company's franking credits, while leaving its net financial position relatively unchanged. Shareholders are benefiting from cash injections into the company sourced from financing arrangements, and not from the company's genuinely realised profits

What is the measures key features?

The amendment would make distributions to shareholders made in the following circumstances unfrankable:

  • the distribution is not in a manner consistent with the company's established practices of making distributions;
  • the company has also issued equity interests in itself or another entity; and
  • it is reasonable to conclude having regard to all relevant circumstances that:
    • the principal effect of the issue of any of the equity interests was to directly or indirectly fund all or part of the distribution; and
    • any entity that issued or facilitated the issue of any of the equity interests did so for a purpose (other than an incidental purpose) of funding the distribution or part of the distribution.

Distribution is not consistent with established practice

Regard must be had to the timing, amount and nature of past distributions, and explanations for them. The requirement can be satisfied either if the company has no distribution history, or if it does, the distribution is made at a time or in a manner that does not accord with that practice. Consistent distribution cycles may be more difficult to show for private companies, which tend to not make distributions on a regular basis.

Issued equity interests in itself or another entity

This requirement is very broad.Equity interests includes all kinds of capital raising (including debt and equity financing), and may occur before or after the relevant distribution. Furthermore, the equity interests do not have to be issued by the company making the distribution. For example, entity A can issue the equity interest, funnel the funds to company B, which can then make the distribution.

Principal effect

In order for the distribution to be unfrankable, it also must be reasonable to conclude that the ‘principal effect’ of the capital raising was to directly or indirectly fund the distribution (as opposed to other end uses of the raised capital).

A purpose that is not merely incidental

If ‘a purpose’ (among potentially many purposes) of the capital raising was to fund a distribution, then that distribution may not be frankable. Importantly, if a distribution is found to have been funded from both profits and raised capital, then the entire distribution may be unfrankable.

Under the measure, purpose is informed by the timing, amount, nature and reasons for the distribution relative to past distributions; for example, the Explanatory Memorandum suggests the following may indicate a purpose to fund a distribution from capital rather than profits:

  • if the distribution is made outside of the company's usual dividend cycle and is unusually large, but its profits are relatively consistent or low;
  • the capital raising and distribution are close in time;
  • whether there is correspondence between the party or parties gaining an equity interest and the shareholders;
  • if the company underwrites it’s capital raisings (and if that accords with the amount of the distribution); and
  • there is no clear commercial reasoning – the Explanatory Memorandum gives meeting regulatory capital requirements and distributing funds to shareholders originally raised for an acquisition that was unsuccessful as examples.

How to navigate the measure?

The broad language of the Bill creates a significant risk for companies making distributions and shareholders receiving dividends as they may no longer be frankable.

As the measure will apply retrospectively from 15 September 2022, anyone concerned should:

  • keep a close eye on the status of the Bill;
  • plan and manage their dividend distributions to create clear distribution patterns;
  • make the commercial purpose of capital raisings and distributions clear in both internal documentation and public messaging (such as press releases); and
  • consider applying for a private ruling application to the ATO if in doubt about a particular arrangement.


More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Commercial team.

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Last revised on : 27-04-2023

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Julia Tonkin
Julia Tonkin
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Qualifications: BA, LLB, University of Melbourne

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