The SMSF Association has welcomed the recommendation of the Senate Economics Legislation Committee to review proposed legislative amendments aimed at curbing franked distributions funded by capital raisings.
According to SMSF Association chief executive Peter Burgess, further review is necessary to ensure Schedule 5 of the Treasury Laws Amendment (2023 Measures No 1) Bill 2023 does not impact “normal and legitimate” business operations.
“This is a positive outcome, recognising what we argued in our submission – that the proposed amendments needed to be much more targeted,” Burgess said.
“The Senate committee’s decision now gives the government the opportunity to clarify the amendments to ensure they appropriately target the identified behaviour and not create a situation where legitimate business behaviour is unfairly penalised.”
The association previously expressed concerns in its submission about the ‘established practice’ test in the amendment, which it believes is too broad and could unfairly disadvantage small growth companies.
Burgess further explained the ‘established practice’ requirement would not be met in some legitimate business situations, such as new companies raising capital for reinvestment or companies undergoing restructuring.
“As we argued in our submission, there are many legitimate situations where the dividend paid by a company would not pass the proposed established practice test and as a result would be ineligible for franking,” he noted.
“Examples could include newly established companies that have no established record of paying dividends and companies operating in volatile industries where dividends may only be paid irregularly.”
He emphasised companies commonly raise capital to generate funds for shareholder dividends and limiting franking in such cases could significantly disrupt the normal cash-flow activities of those businesses.
“The association also argued that raising debt may not be possible or desirable for companies and that an equity raising was often the preferred option as it freed up cash from previously earned reinvested profits and enabled the company to avoid the costly and undesirable need to sell assets,” he stated.
“We therefore recommended that the amendments in Schedule 5 should not apply in situations where a company had legitimately earned profits and sought to distribute those profits to its shareholders – a point specifically identified in the Senate’s report.
“We look forward to working with the government to ensure the amendments in Schedule 5 are fit for purpose by preventing tax avoidance via the inappropriate release of franking credits while not hurting normal commercial activity.”