Review of franking credit amendment a ‘positive outcome’: SMSFA

The SMSF Association has welcomed the Senate Economics Legislation Committee’s decision for the Government to revisit legislative amendments that target franked distributions funded by capital raisings.

The amendment, Schedule 5 of the Treasury Laws Amendment (2023 Measures No.1) Bill 2023, aimed to exclude certain distributions funded by capital raisings being eligible for franking credits.

Among other proposals, the reforms would prevent certain distributions funded by capital raisings from being frankable, in a bid to ensure arrangements cannot be put in place to release franking credits that would “otherwise remain unused where they do not significantly change the financial position of the entity”, per the government’s statement.

However, the SMSFA was of the opinion it would affect legitimate commercial activity and competitively disadvantage profitable and growing companies.

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“[The review] is a positive outcome, recognising what we argued in our submission – that the proposed amendments needed to be much more targeted,” said Peter Burgess, SMSFA chief executive.

“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.

In the SMSFA’s submission, it argued there were 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.

Burgess explained: “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.

“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.”

The SMSFA, which comprised some 1.1 million SMSF members and financial professionals, believed a broader list of matters was required to determine whether a distribution satisfied the requirements of being funded by a capital raising.

Its recommendation was 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. 

“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,” Burgess said.