On 6 December 2023, the Australian Taxation Office (ATO) announced the enactment of a new integrity rule to stop the distribution of franking credits funded by capital raising. The ATO has also initiated a public consultation concerning the legislation.
The new legislation restricts franking credits where capital is raised for the purpose of funding franked distributions. As part of the 2016-17 MYEFO, the government announced changes to prevent franking credits attaching to a distribution where capital is raised for the purpose of funding the distribution.
Section 207-159 of the Income Tax Assessment Act 1997 applies to dividends made on or after 28 November 2023 to prevent a company from attaching franking credits to distributions made to shareholders that are, broadly, outside or additional to the company’s normal dividend cycle, to the extent the distributions are funded directly or indirectly by capital raising activities that result in the issue of new equity interests. This measure is now law.
The changes are intended to discourage artificial or contrived arrangements where capital is raised to fund the early release of franking credits on dividends, with the overall outcome not resulting in any significant change to the financial position of the entity.
