Off market share buyback and capital raisings franking legislation introduced

After a long period of consultation, the Federal Government introduced the Treasury Laws Amendment (2023 Measures No.1) Bill 2023 into parliament on Thursday 16 February 2023.

The bill contains separate measures which will restrict the ability of companies to distribute franking credits to shareholders as part of listed company off-market share buyback/cancellations and capital raisings to fund franked distributions.

Our previous alert on the Exposure Draft for the share buy-back and selective capital reduction measures can be located here.

The relevant rules in this Bill are as follows:

1. As anticipated in the Exposure Draft, the off-market share buy-back and selective capital reduction franking rules will be amended so that listed public companies will no longer be able to frank any part of an off-market share buy-back proceeds (new section 159GZZZPA) while still incurring a franking debit that would have otherwise applied under the pre-existing off-market share buy-back rules. These measures will apply to buy-backs and selective share cancellations undertaken by listed public companies that are first announced to the market after 7:30pm AEST on 25 October 2022.
2. The franking provisions will be amended to introduce specific integrity measures first announced in 2016 to treat as unfrankable, certain otherwise frankable distributions funded by capital raisings which apply to a relevant distribution that is made on or after 15 September 2022 (a sensible and much requested delay to the original proposed start date of 19 December 2016). These rules contain a complex series of anti-avoidance style prescribed circumstances to determine when these provisions apply.

Of course, these rules do not prevent companies from undertaking off-market buybacks, selective share cancellations or capital raisings to fund dividends. However, they impose severe restrictions on a company’s ability to frank distributions under long accepted capital management tools, and thus prevent franking credits from reaching shareholders. These measures will impose a substantial new cost on shareholder returns which will be borne mainly by Australian individual and superannuation fund shareholders, and will make equity investments relatively less attractive compared to debt investments which is further compounded by rising interest rates and volatile equity markets.

Listed companies in particular should carefully consider alternative capital management strategies that will attract less punitive franking outcomes.

Please contact your Grant Thornton adviser if you wish to discuss these measures further.