Australia: Final compliance guideline on capital raised for purpose of funding franked distributions

The Australian Taxation Office (ATO) on September 24, 2025, released Practical Compliance Guideline (PCG) 2025/3 "Capital raised for the purpose of funding franked distributions – ATO compliance approach," which sets out ATO's risk assessment framework and compliance approach to considering the application of section 207-159 of the Income Tax Assessment Act 1997 (ITAA 1997).

Under the final PCG, which is broadly in line with the draft version released in December 2024, there are four criteria that must all be satisfied to apply to make a distribution, or part of a distribution, unfrankable. The relevant criteria are:

• The dividend payment is not consistent with established practice.
• There is an issue of equity interests.
• It is reasonable to conclude that:
  • The principal effect of the issue of the equity interests was the direct or indirect funding of a substantial part of the distribution (principal effect test).
  • The issue of the equity interests was done for a purpose (other than an incidental purpose) of funding a substantial part of the relevant distribution (purpose test).
• The issue of the equity interests was not a direct response in order to meet a requirement, direction or recommendation from the Australian Prudential Regulation Authority (APRA) or the Australian Securities and Investments Commission (ASIC).

In respect of the third criteria, the ATO has increased in the final PCG, what it considers to be a "substantial portion" of the distribution from 5% to 20%.

The other key amendments from the draft version of the PCG include:

• New paragraph 23 confirms that a proportion can be treated as unfrankable—i.e., if the principal effect of an equity raise is to fund a substantial part of a distribution, the unfrankable amount of the distribution will be the proportion funded by the equity issue, so there is a possibility for some of the dividends to be franked.
• Additional clarification has been provided on the meaning of an "unusually large" distribution previously declared in the red zone arrangements (red zone / factor 2).
• The ATO has added colour to make it clearer that an unusually large distribution is one that is a significantly higher amount or significantly higher payout ratio or percentage of free cash flow.
• Additional clarification has been provided that the documentation required to substantiate the purpose of capital raising should reflect the substance of the arrangement and conduct of the parties involved.
• An example has been included (example 12) that provides guidance on the documentation relevant to an established practice of distributions affected by economic conditions for a public company.

For more information, contact a KPMG tax professional in Australia:

Stephen Carpenter | scarpenter@kpmg.com.au

Hannah Hesse | hhesse1@kpmg.com.au

Stacey Hannam | shannam@kpmg.com.au

Julia Klarich | jklarich1@kpmg.com.au