Australia's Federal Budget

Transcription

1 Australia's Federal Budget The Australian Federal Budget (the Budget) was introduced on 14 May 2013 by the Treasurer, Wayne Swan. Importantly, the Treasurer announced a budgeted deficit for of $18 billion and not the surplus previously expected. Unsurprisingly therefore, this has prompted additional revenue measures to raise some $4 billion over the forward estimates period, including some of the measures discussed below. In addition to these new measures, there are a raft of previously announced measures which have not yet been legislated. Whilst these announced reforms remain outstanding, there is significant market uncertainty for corporate Australia. The government does not intend to legislate any of the significant changes announced in the Budget prior to the election, other than legislation to implement DisabilityCare (formerly the NDIS). Many of the Budget measures (including measures from previous Budgets) will not be passed before the September 2013 election and accordingly will need to be introduced by a new government (which the polls predict is likely to be a Coalition government), adding further to the uncertainty. The Opposition's Budget reply speech on 16 May 2013 confirmed that while business can expect to see some of the changes which were announced in last week's Budget, not all of those changes will ultimately be implemented, either as announced or at all, and some may be delayed indefinitely, assuming a change of government in September. While this may create a level of uncertainty leading up to the election, it also provides an opportunity for business to seek to ensure that the changes ultimately made are appropriately targeted, and do not give rise to unintended consequences. In this Budget brief, we have discussed the government's Budget proposals as they impact on relevant industry sectors, and have included details of the Opposition's views (if any) on each proposal.

2 Company Issues Proposed changes to the thin capitalisation regime and interest deductibility Will impact: Will apply from: Forecast Revenue or (Cost)* Multinational entities (impact on both inbound and outbound investment) including: banks and financial entities such as brokers, securities dealers some private equity investment resources entities and infrastructure entities with offshore investors or investments 1 July 2014 $1.5 billion (over 4 year forward estimates) [combined with and 23AJ] *over the forward estimates period Introduction The Budget proposes significant changes to the thin capitalisation regime, which will affect both inbound and outbound investment. Changes are also proposed to a significant interest deductibility provision affecting outbound investment. The Proposals Paper issued by Treasury can be found here and has a closing date for submissions of 13 July The changes are proposed to be effective from 1 July 2014, supposedly to provide affected entities with enough time to rearrange their existing funding arrangements. The proposed changes to the thin capitalisation regime The thin capitalisation regime is designed to limit the level of debt that Australian entities can deduct where they are either: foreign controlled or a controller of a foreign entity. Multinational groups with Australian operations have some flexibility to determine where the profits of a multinational group will arise, and may shift profits out of Australia by 'loading up' debt funding for their Australian operations. Subject to de minimis exclusions and other exceptions, the thin capitalisation regime affects the ability of multinational entities to obtain tax deductions for interest and other debt related costs in Australia to the extent that those entities have debt in excess of prescribed maximum thresholds. The thin capitalisation regime is also affected by comprehensive debt/equity rules which apply for tax purposes to determine what is 'debt', and which include within the concept of 'debt' instruments that might otherwise be treated as equity at law. The rules provide a number of ways that the maximum debt threshold for Australian operations are determined, and specifies detailed rules for entities to value relevant assets, liabilities and equity. Generally the maximum debt threshold is the greater of the amounts calculated under the following tests: The 'safe harbour' debt amount for general (non-bank/non-financial) entities is to be reduced from 75% (3:1 debt to equity) to 60% (1.5:1 debt to equity). The 'safe harbour' debt amount for non-bank financial entities (for instance securities dealers) is to be reduced from 20:1 debt to equity to 15:1 debt to equity. The proposals are stated to be in accordance with Basel III. The 'safe harbour' minimum capital amount for banks is be increased from 4% to 6%. The 'safe harbour' for banks takes into account the business of a bank which by its nature involving debt, and requires a capital to risk weighted assets threshold. The proposals are stated to be in accordance with Basel III.

3 The 'worldwide gearing ratio' amount for all (general, bank, non-bank financial) entities is to be reduced from 120% to 100%. This ratio currently only applies to outbound investment (ie Australian entities owning entities offshore) and compares the gearing of the Australian entities to that of the non-australian entities in the group. Currently it allows debt gearing in Australia to be equal to 120% of the group's global gearing. This will be reduced to 100%. This test is also to be extended to both inbound and outbound investment. The 'arm's length debt amount' which is calculated by taking into account specified factors and assumptions to ensure that borrowings are comparable to independent commercial arrangements may support higher gearing than the safe harbour and worldwide ratio. The Budget proposes to retain this test, but it is stated that the test will be referred to the Board of Taxation for review to make it 'more effective' 'having regard to the policy objective of the thin capitalisation rules'. This leads to a degree of uncertainty about the application of this test. It is also proposed that one of the rules providing an exemption to the thin capitalisation regime, the de minimis threshold, be increased from $250,000 to $2 million. Comment on the impact of the thin capitalisation proposals The change to the de minimis threshold is likely to be of limited impact (it is intended to assist small business only). The other changes to the thin capitalisation regime will reduce the ability for all multinational entities to debt fund Australian operations: The reduction of the safe harbour ratio from 3:1 to 1.5:1 will mean that companies will need to investigate the alternatives (the worldwide gearing test and arm's length test) more closely. The changes impacting on banks will have lesser impact, as banks have been compliant with Basel III since January 2013 in any event. The changes will particularly impact resources and infrastructure entities which generally carry a large level of debt funding. Those entities will need to consider their balance sheets, consider asset revaluations, and may need to restructure current financing arrangements (which will, of course, itself give rise to tax issues). Foreign investors in resource and infrastructure projects will expect a particular level of return which may be affected by the impact of these changes on the balance sheet. The changes will also affect highly leveraged mergers and acquisitions which may therefore require revaluation (subject to when the acquisition took place) and refinancing. The retention of the 'arm's length amount' test is of assistance, but uncertainty is injected into the scope of that test because of the proposed review by the Board of Taxation. It is also notable that the Budget refers to a review of the debt/equity rules by the Board of Taxation this too will potentially impact on the thin capitalisation regime. The changes will also potentially impact on the ability to attract new foreign investment in resource and infrastructure projects, and the cost of such funding. Although having foreign controlled investors in a project could cause the project to be subject to thin capitalisation rules, having domestic 'outbound' investors in a project may equally trigger the debt limits[so these limitations are not purely a question of the source of funding]. It is notable that since there is no grandfathering of these changes, it will require affected entities to act swiftly, prior to 1 July It is unlikely that we will see legislation enacted before the September election (there are only 19 sitting days of Parliament remaining). The Coalition are reserving their position but given the large and somewhat volatile deficit position and given the long signalled nature of proposed changes to the thin capitalisation regime, it will take some cogent persuasion from business to pare these measures back. Affected entities would be prudent to start taking advice and consider the impact of these proposals on the balance sheet and make plans for adjustments where necessary.

4 Abolition of deductions for interest on borrowings to fund certain foreign investment Will impact: Will apply from: Forecast Revenue or (Cost)* Australian entities using debt to acquire non-portfolio share interests in a foreign company 1 July 2014 $1.5bn - along with the proposals to amend thin capitalisation rules and amend section 23AJ of the ITAA 1936 *over the forward estimates period Currently, a deduction is available for interest on borrowings (including dividends on shares which qualify as debt interests) used to acquire non-portfolio shares (i.e. where at least 10% of the voting interest is controlled) in overseas companies, subject to the operation of the transfer pricing and thin capitalisation provisions. This is the case even where the dividends received from the overseas subsidiary are not taxable in Australia under the exemption for non-portfolio foreign dividends. For example, a company which issues redeemable preference shares to fund an acquisition of shares in a foreign subsidiary can claim a deduction for dividends paid (or, in certain circumstances, dividends declared but not paid) being debt deductions but not pay any tax on dividends received from the foreign subsidiary. The proposed change is that Australian entities will no longer be able to deduct interest or dividends paid to fund foreign investment to the extent the dividends received from the acquired overseas subsidiary are not taxable in Australia, even if the arrangement otherwise meets thin capitalisation and transfer pricing requirements. The implementation of this proposal would mean that: where a company receives non-taxable dividends it will need to trace the source of funding which was used to acquire the shares on which the dividends are paid in order to ensure a deduction is available (a complex and costly exercise); and for future investments, entities may have to consider using equity to fund the acquisition of offshore subsidiaries. We note that the current proposal is to be effected by an abolition of section of the ITAA Such an abolition would remove the protection for double taxation afforded by section (the section also allows deductions for expenses incurred in deriving dividends which are not taxable because they have previously been taxed under either the controlled foreign company regime or the former foreign investment fund regime). For this reason, we consider the section should be amended rather than abolished. We will raise this issue in the course of the consultation.

5 Mining, Energy & Resources Immediate write off for exploration assets to be limited to 'initial' exploration activity Will impact: Will apply from: Forecast Revenue or (Cost)* Mergers and acquisitions of mining, oil & gas and quarrying entities This measure will apply to mining rights or information which a taxpayer starts to hold after the time of announcement, (7:30 pm 14 May 2013) unless the taxpayer has committed to the acquisition of the right or information (either directly or through the acquisition of an entity holding the asset) before the announcement or unless they are taken by tax law to already hold the right or information before the announcement. $1.1 billion 1 *over the forward estimates period Under the current rules it is possible to obtain an immediate deduction for the 'purchase price' of mining rights and information acquired, including after natural resources have effectively been discovered. The rules will be amended to limit the immediate deduction for expenditure on those assets which are created as part of the 'initial' exploration activity. Mining rights and information that are effectively acquired (and that would currently benefit from the immediate deduction) will instead be depreciated over 15 years or their effective life, whichever is the shorter period. Where the effective life cannot be determined, the rights and information will be depreciated over 15 years. The effective life of a mining right and mining information will be the life of the mine that they lead to. This creates obvious difficulties in estimating the appropriate life of a mine in the circumstances. The government will consult on options to make it easier to identify the life of a future mine. Where it is established that exploration is unsuccessful, any remaining (unamortised) value will be immediately deductible. The government will consult on the methodologies that could be available to demonstrate that the effective life of the mining right has come to an end. An immediate deduction will continue to be available for: the costs of mining rights acquired directly from the Commonwealth, State or Territory governments; the costs of mining information acquired directly from the Commonwealth, State or Territory governments; the costs incurred by the taxpayer in generating new information or improving existing information, and the non-cash costs incurred by a farminee under a recognised 'farm-in, farm-out' arrangement. The government will also consult with Industry to: codify 'farm-in, farm-out' arrangements, in line with the outcomes delivered by the current ATO rulings (MT 2012/1 and MT 2012/2), with a view to supporting genuine exploration activity; identify any circumstances in which an interest acquired through an exchange of mining rights should receive concessional tax treatment because the transaction does not give rise to integrity concerns; design and implement the measures. A proposal paper has been released and is available here. Minter Ellison will be actively involved in the consultation process.

6 Proposed amendments to Australia's tax consolidation regime Will impact: Will apply from: Forecast Revenue (Cost) Tax consolidated groups and investors in Australian tax consolidated groups 14 May 2013 $540 million The government announced that it would amend the tax law as it relates to tax consolidated groups to close what the announcement describes as 'loopholes'. The following announcements are intended to apply to joining transactions that take place from 14 May 2013: (a) (b) Modification of the tax cost setting rules Consolidated groups will no longer be able to access double benefits by transferring the value of an existing asset to another subsidiary member (eg by encumbering the asset), disposing of the principal asset at a reduced value then disposing of the asset side of the encumbrance which obtained a market value cost base at the time the encumbered asset was disposed of. The modification is intended to limit the cost base of the asset side of the encumbrance to the cost of creating the encumbrance; Limitation on resetting tax cost of assets on transfer of subsidiary Where a membership interest in any Australian resident entity that is not Taxable Australian Property (TAP) is transferred to a consolidated group or a MEC group (such that the entity becomes a subsidiary member), the tax cost of the underlying assets will only be reset in circumstances where the transfer resulted in a change in majority ownership or the membership interests in the Australian resident entity transferred were acquired by the foreign resident within 12 months of the transfer. This ensures that the relevant Australian entity cannot benefit from an internally generated step-up in tax cost of its underlying assets where the non-resident holder is not effectively taxed on the internally generated capital gain. But for the announced change, the Commissioner would need to have relied on Part IVA. We note that it would appear that the government will adopt a 'stick' approach, rather than for example providing an automatic rollover of cost base in the shares. There is a risk that the latter could have materially disadvantaged the transferee group where, for example, there is a significant amount of internally generated goodwill in which case cost base is shifted from depreciating assets to goodwill. If, for example, a foreign entity acquired an Australian target and 13 months later decided it would be commercially beneficial to interpose a new Australian holding company at a time when the membership interest was not taxable Australian property and then consolidate, it would appear that the tax costs would not be reset in these circumstances. Such a decision would therefore need to be taken within 12 months of acquisition if a resetting of tax cost was sought; (c) (d) In circumstances where a joining entity has non-tofa liabilities which would give rise to future deductions (eg accrued annual leave / long service leave), the step 2 liability (usually 70% of the liability in a joining case) will be included in assessable income over a 12 month period (in the case of current liabilities) or 48 months in the case of non-current liabilities. The policy intent is to negate an assumed double deduction to the joined group. The position under the existing law assumes that the purchase price of the membership interests in the entity were increased by 30% of deductible liabilities. Under existing law there was the possibility of double tax in respect of the step 2 amount in that the step 2 amount gives rise to cost base; and The tax treatment of intra-group assets and liabilities which become recognised under TOFA on the exit of a subsidiary member will be amended to ensure that only net income and losses are recognised for tax purposes. For example, the principal component of a intra-group loan will not be assessable as income. This is a correction of a potential anomaly.

7 Proposed amendments in relation to MEC Group rules The government announced that it would address inconsistencies between the treatment of multiple entry consolidated (MEC) groups and ordinary consolidated groups to ensure that MEC groups cannot access benefits not otherwise available to ordinary consolidated groups. The government also indicated that it reserves the right to make retrospective amendments if it becomes aware of aggressive tax minimisation practices over the course of the tripartite review. Additional proposed amendments to Australia's international tax regime Will impact: Will apply from: Forecast Revenue (Cost) Australian investors with offshore holdings 14 May 2013 Not separately provided The government made a number of key announcements in relation to measures that will be relevant to Australian individuals and entities with offshore controlled entities. Controlled Foreign Company (CFC) rewrite placed on hold The rewrite of the CFC rules has been placed on hold pending finalisation of the OECD's analysis of base erosion and profit shifting techniques that is currently under way. The rewrite was announced in the Budget as part of the reform of the foreign accruals taxation system, but to date, the only headline amendment that has been passed is the repeal of the former foreign investment fund (FIF) rules. Exemption regarding foreign non portfolio dividends The Assistant Treasurer has announced amendments to the exemption for foreign non portfolio dividend income. Currently, an Australian company that receives foreign non portfolio dividend income is able to treat that income as non assessable and non exempt (NANE). The government has identified a number of concerns with the current exemption, including: (1) the exemption is currently available even where the foreign share is a 'debt interest' under Australia's tax law; and (2) the ATO's interpretation of the current law does not allow a company to rely on the concession if the dividend flows through an Australian partnership or trust to the company. The proposed amendments are intended to address these concerns by: (1) denying an exemption where the instrument held by the Australian investor is a debt interest for Australian tax purposes; and (2) allowing an exemption where an Australian company receives foreign non portfolio dividend income through an investment in a partnership or trust. These amendments appear to be related to structures where an Australian company subscribes for redeemable preference shares in an offshore entity which are debt for Australian tax purposes. Under the current law, the return is treated as NANE in Australia, provided the Australian company holds a non portfolio (10% or more) interest in the issuer. There may be an opportunity for the distribution to be treated as deductible in a foreign jurisdiction as well. The proposed amendments will ensure that dividends on RPS which are debt for Australian tax purposes will not be exempt from Australian income tax on receipt, although the Australian company may be entitled to a foreign tax offset for any foreign withholding tax paid on the distribution.

8 Changes to the Research & Development concessions Will impact: Will apply from: Forecast Revenue or (Cost)* Companies undertaking research & development 1 July 2013 $1.1 billion *over the forward estimates period The research and development tax incentive is a non-refundable tax offset of 40% or a refundable tax offset of 45% for companies with aggregated turnover of A$20 million or less. In accordance with announcements made on 17 February 2013, the Budget confirms the intention that the research and development tax incentive would be available only to company groups with aggregated assessable income of A$20 billion or less, and confirmed that for companies with aggregated turnover of A$20 million or less, the ability to access the refundable research and development tax offset of 45% would be quarterly. Offshore Banking Units Will impact: Will apply from: Forecast Revenue or (Cost)* Australian banks 1 July 2013 $320 million *over the forward estimates period The offshore banking unit (OBU) regime was first established to allow designated entities not to pay Australian interest withholding tax on funds borrowed from offshore and lent offshore. Removing the withholding tax obligation on these nonresident to non-resident transactions allowed banks not to be prejudiced in competing with overseas banks in funding loans to non-residents. The limited success of this concession in promoting offshore banking activity by Australian banks led to certain activities being allowed to be attributed to the OBU and have the OBU income from these activities taxed at the concessional rate of 10% (rather than the corporate rate of 30%). With the expansion of the use of OBUs by banks and other entities, there has been some uncertainty as to what activities qualify, and should qualify, for this concession and also some concern from treasury that arrangements were being entered into which resulted in profits being shifted from the full taxpaying entity to the OBU and/or losses shifted the other way. As a result the government has proposed the following changes: treat dealings with related parties, including the transfer of transactions between the OBU and a related domestic bank, as ineligible for the OBU treatment; treat transactions between OBUs, including between unrelated OBUs, as ineligible for OBU treatment; ensure that other provisions of the income tax law (including, presumably, Part IVA) interact appropriately with the OBU provisions; and tighten the current list of OBU activities. The government will consult with industry before implementation.

9 Investor Issues Changes to the capital gains tax rules for taxing non-residents on the sale of their interests in Australian mining (and property) companies and trusts Will impact: Will apply from: Forecast Revenue (Cost) Non resident investors with non-portfolio holdings in property and mining entities 7.30pm (AEST) 14 May 2013 $230 million (together with non-resident withholding measures) Australia does not typically seek to tax a non-resident on capital gains unless the gain is made on Taxable Australian Property (TAP). TAP includes relevantly: (a) (b) Taxable Australian Real Property (TARP) which is real property in Australia and mining, quarrying or prospecting rights if the minerals, petroleum or quarry materials are in Australia; and an indirect interest in TARP being shares or units where both the principal asset test and the non-portfolio test are satisfied. The non-portfolio test requires that the 'taxpayer' holds a membership interest of 10% or more in an entity. The principal asset test requires that the sum of the market values of 'underlying' assets that are TARP exceeds the sum of the market values of its 'underlying' assets that are not TARP (effectively the entity is 'land rich'). Two changes will be made to the operation of the 'principal asset test'. In particular, the amendments will: value mining, quarrying or prospecting information and goodwill together with the mining rights to which they relate. That is, the value of the TARP assets of the entity will be amended to expressly include intangible assets connected to the rights to mine, quarry or prospect for natural resources (notably mining, quarrying or prospecting information, rights to such information and goodwill); and remove the ability to use transactions between members of the same consolidated group to create and duplicate assets. Effectively intercompany dealings between entities in the same tax consolidated group will not form part of the principal asset test calculations. This is intended to ensure that assets cannot in effect be counted multiple times thereby diluting the true TARP asset value of the group. A requirement to include a value of 'goodwill' in these calculations raises many 'vexed' questions including fundamentally what is the 'goodwill' component, is it an asset of the company, how to value this 'asset' and why it should be an asset relating the mining right where it more appropriately reflects the 'value' created from the manner of carrying on the business. The first amendment appears to be in direct response to a recent decision (26 April 2013) of the Federal Court in Resource Capital Fund III LP v Commissioner of Taxation [2013] FCA 363. In that case, the Court clarified that the value of mining information, goodwill and market premium must be valued separately in applying the TARP test. Specifically, the court noted (at paragraphs 95 and 96) that the 'principal asset test' requires the separate determination of the market value of each of the entity s assets; not the determination of the market value of all its TARP assets as a class and the determination of the market value of all its non-tarp assets as a class and certainly not the determination of the market value of all its assets on a going concern basis. Accordingly the court found that any 'goodwill' valuation is not required and if separately required, does not represent TARP assets. The court also noted that it could be argued that any 'market premium' (being the difference between the value of shareholders interests in a 'mining' company derived by the use of the market capitalisation method and the value of shareholders interests in that 'mining' company derived by the use of the discounted cash flow method) is not an asset of the company at all and would therefore be excluded from the assessment of the ratio of TARP to non-tarp assets (the 'TARP ratio'). Alternatively, if it is an asset of the company, it was held to be a non-tarp asset. Both measures will result in more non-resident transactions being subject to Australia's capital gains tax.

10 Foreign investors contemplating a disposal of interests in a potentially 'land rich' company clearly have a difficult and expensive task to confirm whether their shareholding represents TARP. Non resident investors should: (a) (c) (d) (e) engage with the Australian mining company to ascertain the possibility of accessing information to substantiate whether its shareholding qualifies as TARP and enable the investor to ascertain the market values of 'land' and 'nonland' assets; assume that the ATO will be aware of the transaction and contact advisors about the possibility of liaising with the ATO prior to entering into it; understand that the Federal Court may make a freezing order if it thinks a debt will be unsatisfied because the assets of the debtor (or another person) will either be removed from Australia or disposed of, dealt with or diminished in value; and be aware that the ATO may therefore establish a debt by issuing an assessment well before any payment liability would ordinarily arise in order to obtain an order to freeze assets in Australia. The introduction of the 10% nonresident withholding tax (refer below) may also result in tax collection upfront - before an assessment from the ATO. Australian companies with non-portfolio shareholders (10% or more) should also be aware that there is a possibility that tax litigation will potentially expose their assets and 'confidential information' to a valuation process by 'valuation experts'. As always, this will require that the company develop strategies to manage confidential material and privileged information, in the context of their legal obligations. A withholding tax regime for foreign residents disposing of assets that give rise to an Australian tax liability Will impact: Will apply from: Forecast Revenue (Cost) Non resident vendors of Taxable Australian Property 1 July 2016 $230 million From 1 July 2016, sales of 'certain taxable Australian property' by non-residents will be subject to a new 10% non-final withholding tax. Purchasers will be required to withhold and remit to the ATO 10% of the proceeds from the sale of such property. Withholding will be required even if there is ultimately no taxable Australian gain. Non-resident vendors will have to apply to the ATO for the return of any excess tax withheld. Because the tax is not a final withholding tax, the nonresident would need to lodge an Australian income tax return to assess the actual tax payable (if any) and the withholding tax deducted would be credited against the assessment. The property covered by this regime will at least: include disposals by non-residents of Australian real property assets (including indirect interests in Australian real property) that are likely to generate gains on revenue account or capital account; and exclude disposals of residential property where the value of the transaction is less than $2.5 million. This proposed change is particularly important in light of the Budget proposal to incorporate the value of intangible mining rights in the principal asset test for indirect Australian real property interests (discussed above). Although the commencement of the proposed regime is three years away, clients may need to consider including clauses dealing with this new withholding tax in agreements for the sale of shares and assets by non-residents particularly where an earn out is contemplated. It is not yet clear whether the withholding obligation will apply to CGT events occurring from 1 July 2016, or consideration paid or payable from 1 July A discussion paper on the proposed new withholding tax regime is scheduled to be released by the end of 2013.

11 It seems to us that the most obvious difficulty will be determining whether a membership interest (ie shares or units) is an indirect real property interest as market valuations are always subjective and indeed, the parties may not have access to sufficient information to be able to determine whether the membership interest satisfies the principal asset test. A conservative approach will be required where any personal liability or penalty attaches to a failure to withhold, which is likely to mean that the matter will be dealt with under the assessment regime. There are obvious enforceability issues for the withholding tax, as it can apply where both the purchaser and vendor are non-residents, with the transaction involving a sale of a membership interest in a foreign entity. Under existing law, in order to achieve effective withholding, the Commissioner must issue a garnishee notice. This in turn requires that the Commissioner is aware of the transaction (before the monies has been paid over). The introduction of a withholding tax regime puts the onus on the purchaser. Dividend Washing Will impact: Will apply from: Forecast Revenue (Cost) Investors in securities listed on the ASX 1 July 2013 $60 million In recent times there has been publicity in relation to the high trading volumes of certain listed shares at the time the shares go ex-dividends. It has been suggested that these volumes are in part attributable to sophisticated investors being involved in 'dividend washing' in order to double dip on franking credits. The arrangement can involve a taxpayer which owns listed stock buying the same shares cum dividend in the first two days of the ex dividend period. This is possible as the ASX allows stock to be traded cum dividend for two days after it goes ex dividend. The taxpayer can at that time sell an equivalent number of the same shares ex dividend. Therefore, although the taxpayer has continued to have the same exposure to the original holding of shares, the arbitrage is that it has obtained the benefits of the franking on the dividend twice being the cum dividend purchase and the ex dividend sale (provided it holds the purchased shares for a 45 day period). Despite there being various provisions designed to combat franking credit trading, the government has announced that it will introduce specific provisions dealing with this transaction. In particular, they will make amendments to the holding rules to ensure that such benefits are not available to investors (other than those who have franking credit tax offset entitlements in excess of $5000). The government will consult with industry before implementation.

12 Australian Tax Contacts Sydney Karen Payne T karen.payne@minterellison.com Paul King T paul.king@minterellison.com Garry Beath T garry.beath@minterellison.com Michael Ward T michael.ward@minterellison.com Rhys Guild (GST) T rhys.guild@minterellison.com Nathan Deveson (Stamp Duty) T nathan.deveson@minterellison.com David Pratley T david. pratley@minterellison.com Melbourne Adrian Varrasso T adrian.varrasso@minterellison.com Joanne Dunne T joanne.dunne@minterellison.com Alan Kenworthy T alan.kenworthy@minterellison.com Mark Green T mark.green@minterellison.com Peter Capodistrias T peter.capodistrias@minterellison.com Brisbane William Thompson T william.thompson@minterellison.com Craig Bowie T craig.bowie@minterellison.com Sally Newman T sally.newman@minterellison.com