The Share Capital Tainting Rules are designed to prevent a company transferring amounts to the share capital account and subsequently making capital distributions to shareholders who may be taxed more favourably than dividends. Under the proposed new rules, a company's share capital account becomes "tainted" if it transfers certain amounts to it. When a company's share capital account becomes tainted a franking d3ebit arises in the company's franking account and an additional franking debit may arise if the company chooses to "untaint" the account. The company may then be liable for untainting tax.

These new Share Capital Tainting Rules are important for companies considering capital returns and those making accounting entries to equity accounts arising from the introduction of the Australian Equivalent of the International Financial Reporting Standards ("AIFRS").

These new rules will generally take effect in relation to transfers made into the company's share capital account after 25 May 2006. However, as the former rules ceased to apply from 1 July 2002, amounts transferred to a company's share capital account between 1 July 2002 and 25 May 2006 will not trigger the share capital tainting rules. Also, any transfers to a company's share capital account that occurred as an immediate result of the adopting of AIFRS will not cause the share capital accounts to be tainted.

Companies will need to consider the impact of the new rules for corporate accounting policies where amounts are to be transferred to equity accounts. This will be relevant in relation to the current year's financial statements which may involve significant transfers to equity accounts arising from the transition to AIFRS.

There are transitional rules to enable the untainting of accounts that become tainted under the former rules which had not been untainted before 1 July 2002. Companies that will benefit from the retrospective adjustments to the former rules should consider applying for a refund of untainting tax paid and a reversal of franking debit entries.