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Income Tax Assessment Act 1997

Authoritative Version
  • - C2019C00148
  • In force - Superseded Version
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Act No. 38 of 1997 as amended, taking into account amendments up to Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019
An Act about income tax and related matters
Administered by: Treasury
General Comments: Division 40, Subdivision 40-D, Section 40-340, Subdivision 328-G and Sections 328-430 and 328-450 of this Act have been modified by the operation of the Commissioner’s Remedial Power, click here to see the modification
Registered 18 Apr 2019
Start Date 01 Apr 2019
End Date 05 Apr 2019

Commonwealth Coat of Arms of Australia

Income Tax Assessment Act 1997

No. 38, 1997

Compilation No. 192

Compilation date:                              1 April 2019

Includes amendments up to:            Act No. 16, 2019

Registered:                                         18 April 2019

This compilation is in 12 volumes

Volume 1:       sections 1‑1 to 36‑55

Volume 2:       sections 40‑1 to 67‑30

Volume 3:       sections 70‑1 to 121‑35

Volume 4:       sections 122‑1 to 197‑85

Volume 5:       sections 200‑1 to 253‑15

Volume 6:       sections 275‑1 to 313‑85

Volume 7:       sections 315‑1 to 420‑70

Volume 8:       sections 615‑1 to 721‑40

Volume 9:       sections 723‑1 to 855‑55

Volume 10:     sections 900‑1 to 995‑1

Volume 11:     Endnotes 1 to 3

Volume 12:     Endnotes 4 and 5

Each volume has its own contents

This compilation includes commenced amendments made by Act No. 7, 2019, Act No. 8, 2019 and Act No. 15, 2019

About this compilation

This compilation

This is a compilation of the Income Tax Assessment Act 1997 that shows the text of the law as amended and in force on 1 April 2019 (the compilation date).

The notes at the end of this compilation (the endnotes) include information about amending laws and the amendment history of provisions of the compiled law.

Uncommenced amendments

The effect of uncommenced amendments is not shown in the text of the compiled law. Any uncommenced amendments affecting the law are accessible on the Legislation Register (www.legislation.gov.au). The details of amendments made up to, but not commenced at, the compilation date are underlined in the endnotes. For more information on any uncommenced amendments, see the series page on the Legislation Register for the compiled law.

Application, saving and transitional provisions for provisions and amendments

If the operation of a provision or amendment of the compiled law is affected by an application, saving or transitional provision that is not included in this compilation, details are included in the endnotes.

Editorial changes

For more information about any editorial changes made in this compilation, see the endnotes.

Modifications

If the compiled law is modified by another law, the compiled law operates as modified but the modification does not amend the text of the law. Accordingly, this compilation does not show the text of the compiled law as modified. For more information on any modifications, see the series page on the Legislation Register for the compiled law.

Self‑repealing provisions

If a provision of the compiled law has been repealed in accordance with a provision of the law, details are included in the endnotes.

  

  

  


Contents

Chapter 3—Specialist liability rules                                                           1

Part 3‑6—The imputation system                                                                                 1

Division 200—Guide to Part 3‑6                                                                            1

Guide to Division 200                                                                                                1

200‑1..................... What this Division is about................................................. 1

200‑5..................... The imputation system........................................................ 1

200‑10................... Franking a distribution........................................................ 2

200‑15................... The franking account.......................................................... 2

200‑20................... How a distribution is franked............................................. 2

200‑25................... A corporate tax entity must not give its members credit for more tax than the entity has paid  3

200‑30................... Benchmark rule................................................................... 3

200‑35................... Effect of receiving a franked distribution............................ 3

200‑40................... An Australian corporate tax entity can pass the benefit of having received a franked distribution on to its members............................................................................. 4

200‑45................... Special rules for franking by some entities......................... 4

Division 201—Objects and application of Part 3‑6                                      5

201‑1..................... Objects................................................................................ 5

201‑5..................... Application of this Part....................................................... 5

Division 202Franking a distribution                                                                6

Subdivision 202‑A—Franking a distribution                                                      6

Guide to Subdivision 202‑A                                                                                     6

202‑1..................... What this Subdivision is about........................................... 6

Operative provisions                                                                                                 6

202‑5..................... Franking a distribution........................................................ 6

Subdivision 202‑B—Who can frank a distribution?                                         7

Guide to Subdivision 202‑B                                                                                     7

202‑10................... What this Subdivision is about........................................... 7

Operative provisions                                                                                                 7

202‑15................... Franking entities................................................................. 7

202‑20................... Residency requirement when making a distribution............ 8

Subdivision 202‑C—Which distributions can be franked?                              8

Guide to Subdivision 202‑C                                                                                     8

202‑25................... What this Subdivision is about........................................... 8

202‑30................... Frankable distributions....................................................... 8

Operative provisions                                                                                                 9

202‑35................... Object................................................................................. 9

202‑40................... Frankable distributions....................................................... 9

202‑45................... Unfrankable distributions................................................... 9

202‑47................... Distributions of certain ADI profits following restructure 10

Subdivision 202‑D—Amount of the franking credit on a distribution        11

Guide to Subdivision 202‑D                                                                                   11

202‑50................... What this Subdivision is about......................................... 11

202‑55................... What is the maximum franking credit for a frankable distribution?          11

Operative provisions                                                                                               12

202‑60................... Amount of the franking credit on a distribution................ 12

202‑65................... Where the franking credit stated in the distribution statement exceeds the maximum franking credit for the distribution........................................................................ 12

Subdivision 202‑E—Distribution statements                                                     13

Guide to Subdivision 202‑E                                                                                   13

202‑70................... What this Subdivision is about......................................... 13

Operative provisions                                                                                               13

202‑75................... Obligation to give a distribution statement........................ 13

202‑80................... Distribution statement....................................................... 14

202‑85................... Changing the franking credit on a distribution by amending the distribution statement            15

Division 203—Benchmark rule                                                                             18

Guide to Division 203                                                                                              18

203‑1..................... What this Division is about............................................... 18

203‑5..................... Benchmark rule................................................................. 18

203‑10................... Benchmark franking percentage........................................ 19

Operative provisions                                                                                               19

203‑15................... Object............................................................................... 19

203‑20................... Application of the benchmark rule.................................... 19

203‑25................... Benchmark rule................................................................. 20

203‑30................... Setting a benchmark franking percentage.......................... 21

203‑35................... Franking percentage.......................................................... 21

203‑40................... Franking periods—where the entity is not a private company  21

203‑45................... Franking period—private companies................................ 22

203‑50................... Consequences of breaching the benchmark rule............... 22

203‑55................... Commissioner’s powers to permit a departure from the benchmark rule 25

Division 204—Anti‑streaming rules                                                                    27

Subdivision 204‑A—Objects and application                                                    27

204‑1..................... Objects.............................................................................. 27

204‑5..................... Application....................................................................... 27

Subdivision 204‑B—Linked distributions                                                          28

Guide to Subdivision 204‑B                                                                                   28

204‑10................... What this Subdivision is about......................................... 28

Operative provisions                                                                                               28

204‑15................... Linked distributions.......................................................... 28

Subdivision 204‑C—Substituting tax‑exempt bonus share for franked distributions   30

Guide to Subdivision 204‑C                                                                                   30

204‑20................... What this Subdivision is about......................................... 30

Operative provisions                                                                                               30

204‑25................... Substituting tax‑exempt bonus shares for franked distributions               30

Subdivision 204‑D—Streaming distributions                                                    32

Guide to Subdivision 204‑D                                                                                   32

204‑26................... What this Subdivision is about......................................... 32

Operative provisions                                                                                               33

204‑30................... Streaming distributions..................................................... 33

204‑35................... When does a franking debit arise if the Commissioner makes a determination under paragraph 204‑30(3)(a).......................................................................................... 36

204‑40................... Amount of the franking debit............................................ 37

204‑41................... Amount of the exempting debit......................................... 38

204‑45................... Effect of a determination about distributions to favoured members          39

204‑50................... Assessment and notice of determination........................... 39

204‑55................... Right to review where a determination made.................... 40

Subdivision 204‑E—Disclosure requirements                                                  40

Guide to Subdivision 204‑E                                                                                   40

204‑65................... What this Subdivision is about......................................... 40

Operative provisions                                                                                               40

204‑70................... Application of this Subdivision........................................ 40

204‑75................... Notice to the Commissioner.............................................. 41

204‑80................... Commissioner may require information where the Commissioner suspects streaming            42

Division 205—Franking accounts, franking deficit tax liabilities and the related tax offset      43

Guide to Division 205                                                                                              43

205‑1..................... What this Division is about............................................... 43

205‑5..................... Franking accounts, franking deficit tax liabilities and the related tax offset              44

Operative provisions                                                                                               45

205‑10................... Each entity that is or has been a corporate tax entity has a franking account            45

205‑15................... Franking credits................................................................ 45

205‑20................... Paying a PAYG instalment, income tax or diverted profits tax                49

205‑25................... Residency requirement for an event giving rise to a franking credit or franking debit              51

205‑30................... Franking debits................................................................. 52

205‑35................... Refund of income tax or diverted profits tax..................... 57

205‑40................... Franking surplus and deficit............................................. 58

205‑45................... Franking deficit tax........................................................... 58

205‑50................... Deferring franking deficit................................................. 59

205‑70................... Tax offset arising from franking deficit tax liabilities........ 60

Division 207—Effect of receiving a franked distribution                        64

Guide to Division 207                                                                                              64

207‑5..................... Overview.......................................................................... 64

Subdivision 207‑A—Effect of receiving a franked distribution generally 65

Guide to Subdivision 207‑A                                                                                   65

207‑10................... What this Subdivision is about......................................... 65

Operative provisions                                                                                               66

207‑15................... Applying the general rule.................................................. 66

207‑20................... General rule—gross‑up and tax offset.............................. 67

Subdivision 207‑B—Franked distribution received through certain partnerships and trustees                67

Guide to Subdivision 207‑B                                                                                   67

207‑25................... What this Subdivision is about......................................... 67

Gross‑up and tax offset                                                                                           68

207‑30................... Applying this Subdivision................................................ 68

207‑35................... Gross‑up—distribution made to, or flows indirectly through, a partnership or trustee            69

207‑37................... Attributable franked distribution—trusts.......................... 71

207‑45................... Tax offset—distribution flows indirectly to an entity........ 72

Key concepts                                                                                                              73

207‑50................... When a franked distribution flows indirectly to or through an entity       73

207‑55................... Share of a franked distribution.......................................... 76

207‑57................... Share of the franking credit on a franked distribution....... 80

207‑58................... Specifically entitled to an amount of a franked distribution 80

207‑59................... Franked distributions within class treated as single franked distribution  81

Subdivision 207‑C—Residency requirements for the general rule             82

Guide to Subdivision 207‑C                                                                                   82

207‑60................... What this Subdivision is about......................................... 82

207‑65................... Satisfying the residency requirement................................ 82

Operative provisions                                                                                               83

207‑70................... Gross‑up and tax offset under section 207‑20.................. 83

207‑75................... Residency requirement...................................................... 83

Subdivision 207‑D—No gross‑up or tax offset where distribution would not be taxed 84

Guide to Subdivision 207‑D                                                                                   84

207‑80................... What this Subdivision is about......................................... 84

Operative provisions                                                                                               85

207‑85................... Applying this Subdivision................................................ 85

207‑90................... Distribution that is made to an entity................................. 85

207‑95................... Distribution that flows indirectly to an entity.................... 86

Subdivision 207‑E—Exceptions to the rules in Subdivision 207‑D              89

Guide to Subdivision 207‑E                                                                                   89

207‑105................. What this Subdivision is about......................................... 89

Operative provisions                                                                                               90

207‑110................. Effect of non‑assessable income on gross up and tax offset 90

Exempt institutions                                                                                                  91

207‑115................. Which exempt institutions are eligible for a refund?......... 91

207‑117................. Residency requirement...................................................... 92

207‑119................. Entity not treated as exempt institution eligible for refund in certain circumstances 92

207‑120................. Entity may be ineligible because of a distribution event.... 93

207‑122................. Entity may be ineligible if distribution is in the form of property other than money 95

207‑124................. Entity may be ineligible if other money or property also acquired            95

207‑126................. Entity may be ineligible if distributions do not match trust share amounts               96

207‑128................. Reinvestment choice......................................................... 97

207‑130................. Controller’s liability.......................................................... 99

207‑132................. Treatment of benefits provided by an entity to a controller 102

207‑134................. Entity’s present entitlement disregarded in certain circumstances             103

207‑136................. Review of certain decisions............................................ 104

Subdivision 207‑F—No gross‑up or tax offset where the imputation system has been manipulated        104

Guide to Subdivision 207‑F                                                                                  104

207‑140................. What this Subdivision is about....................................... 104

Operative provisions                                                                                             105

207‑145................. Distribution that is made to an entity............................... 105

207‑150................. Distribution that flows indirectly to an entity.................. 107

207‑155................. When is a distribution made as part of a dividend stripping operation?    110

207‑157................. Distribution washing...................................................... 111

207‑158................. Distributions entitled to a foreign income tax deduction. 112

207‑160................. Distribution that is treated as an interest payment........... 112

Division 208—Exempting entities and former exempting entities    114

Guide to Division 208                                                                                            114

208‑5..................... What is an exempting entity?.......................................... 114

208‑10................... Former exempting entities............................................... 115

208‑15................... Distributions by exempting entities and former exempting entities          115

Subdivision 208‑A—What are exempting entities and former exempting entities?      115

208‑20................... Exempting entities........................................................... 116

208‑25................... Effective ownership of entity by prescribed persons...... 116

208‑30................... Accountable membership interests.................................. 117

208‑35................... Accountable partial interests........................................... 120

208‑40................... Prescribed persons.......................................................... 121

208‑45................... Persons who are taken to be prescribed persons............. 122

208‑50................... Former exempting companies......................................... 125

Subdivision 208‑B—Franking with an exempting credit                             125

Guide to Subdivision 208‑B                                                                                 125

208‑55................... What this Subdivision is about....................................... 125

Operative provisions                                                                                             125

208‑60................... Franking with an exempting credit.................................. 125

Subdivision 208‑C—Amount of the exempting credit on a distribution   126

Guide to Subdivision 208‑C                                                                                 126

208‑65................... What this Subdivision is about....................................... 126

Operative provisions                                                                                             126

208‑70................... Amount of the exempting credit on a distribution........... 126

Subdivision 208‑D—Distribution statements                                                   127

Guide to Subdivision 208‑D                                                                                 127

208‑75................... Guide to Subdivision 208‑D........................................... 127

Operative provisions                                                                                             127

208‑80................... Additional information to be included by a former exempting entity or exempting entity        127

Subdivision 208‑E—Distributions to be franked with exempting credits to the same extent      128

Guide to Subdivision 208‑E                                                                                 128

208‑85................... What this Subdivision is about....................................... 128

Operative provisions                                                                                             128

208‑90................... All frankable distributions made within a franking period must be franked to the same extent with an exempting credit.............................................................. 128

208‑95................... Exempting percentage..................................................... 129

208‑100................. Consequences of breaching the rule in section 208‑90... 129

Subdivision 208‑F—Exempting accounts and franking accounts of exempting entities and former exempting entities                                                                                                       129

Guide to Subdivision 208‑F                                                                                  129

208‑105................. What this Subdivision is about....................................... 129

Operative provisions                                                                                             131

208‑110................. Exempting account.......................................................... 131

208‑115................. Exempting credits........................................................... 131

208‑120................. Exempting debits............................................................ 136

208‑125................. Exempting surplus and deficit......................................... 138

208‑130................. Franking credits arising because of status as exempting entity or former exempting entity      139

208‑135................. Relationships that will give rise to a franking credit under item 5 of the table in section 208‑130            145

208‑140................. Membership of the same effectively wholly‑owned group 146

208‑145................. Franking debits arising because of status as exempting entity or former exempting entity       148

208‑150................. Residency requirement.................................................... 149

208‑155................. Eligible continuing substantial member........................... 150

208‑160................. Distributions that are affected by a manipulation of the imputation system              152

208‑165................. Amount of the exempting credit or franking credit arising because of a distribution franked with an exempting credit............................................................................... 152

208‑170................. Where a determination under paragraph 177EA(5)(b) of the Income Tax Assessment Act 1936 affects part of the distribution................................................................ 153

208‑175................. When does a distribution franked with an exempting credit flow indirectly to an entity?         154

208‑180................. What is an entity’s share of the exempting credit on a distribution?         154

208‑185................. Minister may convert exempting surplus to franking credit of former exempting entity previously owned by the Commonwealth......................................................... 154

Subdivision 208‑G—Tax effects of distributions by exempting entities  156

Guide to Subdivision 208‑G                                                                                 156

208‑190................. What this Subdivision is about....................................... 156

Operative provisions                                                                                             156

208‑195................. Division 207 does not generally apply............................ 156

208‑200................. Distributions to exempting entities.................................. 157

208‑205................. Distributions to employees acquiring shares under eligible employee share schemes              157

208‑215................. Eligible employee share schemes.................................... 157

Subdivision 208‑H—Tax effect of a distribution franked with an exempting credit    159

Guide to Subdivision 208‑H                                                                                 159

208‑220................. What this Subdivision is about....................................... 159

Operative provisions                                                                                             159

208‑225................. Division 207 does not generally apply............................ 159

208‑230................. Distributions to exempting entities and former exempting entities           159

208‑235................. Distributions to employees acquiring shares under eligible employee share schemes              160

208‑240................. Distributions to certain individuals................................. 160

Division 210—Venture capital franking                                                         162

Guide to Division 210                                                                                            162

210‑1..................... Purpose of venture capital franking................................ 162

210‑5..................... How is this achieved?..................................................... 162

210‑10................... What is a venture capital credit?...................................... 163

210‑15................... What does the PDF have to do to distribute the credits?. 163

210‑20................... Limits on venture capital franking................................... 163

Subdivision 210‑A—Franking a distribution with a venture capital credit 164

Guide to Subdivision 210‑A                                                                                 164

210‑25................... What this Subdivision is about....................................... 164

Operative provisions                                                                                             164

210‑30................... Franking a distribution with a venture capital credit........ 164

Subdivision 210‑B—Participating PDFs                                                          165

Guide to Subdivision 210‑B                                                                                 165

210‑35................... What this Subdivision is about....................................... 165

Operative provisions                                                                                             165

210‑40................... What is a participating PDF............................................ 165

Subdivision 210‑C—Distributions that are frankable with a venture capital credit     165

Guide to Subdivision 210‑C                                                                                 165

210‑45................... What this Subdivision is about....................................... 165

Operative provisions                                                                                             166

210‑50................... Which distributions can be franked with a venture capital credit?            166

Subdivision 210‑D—Amount of the venture capital credit on a distribution  166

Guide to Subdivision 210‑D                                                                                 166

210‑55................... What this Subdivision is about....................................... 166

Operative provisions                                                                                             167

210‑60................... Amount of the venture capital credit on a distribution..... 167

Subdivision 210‑E—Distribution statements                                                   167

Guide to Subdivision 210‑E                                                                                 167

210‑65................... What this Subdivision is about....................................... 167

Operative provisions                                                                                             168

210‑70................... Additional information to be included when a distribution is franked with a venture capital credit          168

Subdivision 210‑F—Rules affecting the allocation of venture capital credits                169

Guide to Subdivision 210‑F                                                                                  169

210‑75................... What this Subdivision is about....................................... 169

Operative provisions                                                                                             169

210‑80................... Draining the venture capital surplus when a distribution frankable with venture capital credits is made  169

210‑81................... Distributions to be franked with venture capital credits to the same extent               170

210‑82................... Consequences of breaching the rule in section 210‑81... 170

Subdivision 210‑G—Venture capital sub‑account                                         171

Guide to Subdivision 210‑G                                                                                 171

210‑85................... What this Subdivision is about....................................... 171

210‑90................... The venture capital sub‑account...................................... 172

210‑95................... Venture capital deficit tax................................................ 172

Operative provisions                                                                                             173

210‑100................. Venture capital sub‑account............................................ 173

210‑105................. Venture capital credits..................................................... 173

210‑110................. Determining the extent to which a franking credit is reasonably attributable to a particular payment of tax........................................................................................ 174

210‑115................. Participating PDF may elect to have venture capital credits arise on its assessment day          174

210‑120................. Venture capital debits...................................................... 175

210‑125................. Venture capital debit where CGT limit is exceeded......... 176

210‑130................. Venture capital surplus and deficit.................................. 178

210‑135................. Venture capital deficit tax................................................ 178

210‑140................. Effect of a liability to pay venture capital deficit tax on franking deficit tax              179

210‑145................. Effect of a liability to pay venture capital deficit tax on the franking account           179

210‑150................. Deferring venture capital deficit...................................... 179

Subdivision 210‑H—Effect of receiving a distribution franked with a venture capital credit   180

Guide to Subdivision 210‑H                                                                                 180

210‑155................. What this Subdivision is about....................................... 180

210‑160................. The significance of a venture capital credit...................... 181

210‑165................. Recipients for whom the venture capital credit is not significant              181

Operative provisions                                                                                             182

210‑170................. Tax offset for certain recipients of distributions franked with venture capital credits               182

210‑175................. Amount of the tax offset................................................. 183

210‑180................. Application of Division 207 where the recipient is entitled to a tax offset under section 210‑170           184

Division 214—Administering the imputation system                               185

Guide to Division 214                                                                                            185

214‑1..................... Purpose of the system..................................................... 185

214‑5..................... Key features.................................................................... 185

Subdivision 214‑A—Franking returns                                                              186

Guide to Subdivision 214‑A                                                                                 186

214‑10................... What this Subdivision is about....................................... 186

Operative provisions                                                                                             187

214‑15................... Notice to give a franking return—general notice............. 187

214‑20................... Notice to a specific corporate tax entity........................... 187

214‑25................... Content and form of a franking return............................ 188

214‑30................... Franking account balance................................................ 188

214‑35................... Venture capital sub‑account balance............................... 188

214‑40................... Meaning of franking tax................................................. 189

214‑45................... Effect of a refund on franking returns............................. 189

Subdivision 214‑B—Franking assessments                                                     190

Guide to Subdivision 214‑B                                                                                 190

214‑55................... What this Subdivision is about....................................... 190

Operative provisions                                                                                             191

214‑60................... Commissioner may make a franking assessment............ 191

214‑65................... Commissioner taken to have made a franking assessment on first return 192

214‑70................... Part‑year assessment....................................................... 193

214‑75................... Validity of assessment.................................................... 193

214‑80................... Objections....................................................................... 193

Subdivision 214‑C—Amending franking assessments                                  193

Guide to Subdivision 214‑C                                                                                 193

214‑90................... What this Subdivision is about....................................... 193

Operative provisions                                                                                             194

214‑95................... Amendments within 3 years of the original assessment.. 194

214‑100................. Amended assessments are treated as franking assessments 194

214‑105................. Further return as a result of a refund affecting a franking deficit tax liability           194

214‑110................. Later amendments—on request....................................... 195

214‑115................. Later amendments—failure to make proper disclosure... 195

214‑120................. Later amendments—fraud or evasion............................. 196

214‑125................. Further amendment of an amended particular................. 196

214‑135................. Amendment on review etc.............................................. 197

214‑140................. Notice of amendments.................................................... 197

Subdivision 214‑D—Collection and recovery                                                 197

Guide to Subdivision 214‑D                                                                                 197

214‑145................. What this Subdivision is about....................................... 197

Operative provisions                                                                                             198

214‑150................. Due date for payment of franking tax............................. 198

214‑155................. General interest charge.................................................... 199

214‑160................. Refunds of amounts overpaid......................................... 200

Subdivision 214‑E—Records                                                                               200

Guide to Subdivision 214‑E                                                                                 200

214‑170................. What this Subdivision is about....................................... 200

Operative provisions                                                                                             200

214‑175................. Record keeping............................................................... 200

Division 215—Consequences of the debt/equity rules                             202

Subdivision 215‑A—Application of the imputation system to non‑share equity interests            202

215‑1..................... Application of the imputation system to non‑share equity interests          202

Subdivision 215‑B—Non‑share dividends that are unfrankable to some extent            202

Guide to Subdivision 215‑B                                                                                 202

215‑5..................... What this Subdivision is about....................................... 202

215‑10................... Certain non‑share dividends by ADIs unfrankable......... 203

215‑15................... Non‑share dividends are unfrankable if profits are unavailable                204

215‑20................... Working out the available frankable profits.................... 205

215‑25................... Anticipating available frankable profits........................... 206

Division 216—Cum dividend sales and securities lending arrangements             209

Subdivision 216‑A—Circumstances where a distribution to a member of a corporate tax entity is treated as having been made to someone else                                                     209

216‑1..................... When a distribution made to a member of a corporate tax entity is treated as having been made to someone else........................................................................................ 209

216‑5..................... First situation (cum dividend sales)................................ 209

216‑10................... Second situation (securities lending arrangements)......... 210

216‑15................... Distribution closing time................................................. 211

Subdivision 216‑B—Statements to be made where there is a cum dividend sale or securities lending arrangement                                                                                                       211

216‑20................... Cum dividend sale—statement by securities dealer......... 211

216‑25................... Cum dividend sale—statement by party.......................... 212

216‑30................... Securities lending arrangements—statement by borrower 212

Division 218—Application of imputation rules to co‑operative companies         213

218‑5..................... Application of imputation rules to co‑operative companies 213

Division 219—Imputation for life insurance companies                        214

Guide to Division 219                                                                                            214

219‑1..................... What this Division is about............................................. 214

Subdivision 219‑A—Application of imputation rules to life insurance companies       214

219‑10................... Application of imputation rules to life insurance companies 214

Subdivision 219‑B—Franking accounts of life insurance companies      215

219‑15................... Franking credits.............................................................. 215

219‑30................... Franking debits............................................................... 221

219‑40................... Residency requirement.................................................... 223

219‑45................... Assessment day.............................................................. 223

219‑50................... Amount attributable to shareholders’ share of income tax liability           223

219‑55................... Adjustment resulting from an amended assessment........ 225

219‑70................... Tax offset under section 205‑70..................................... 226

219‑75................... Working out franking credits and franking debits where a tax offset under section 205‑70 is applied     226

Division 220—Imputation for NZ resident companies and related companies  230

Guide to Division 220                                                                                            230

220‑1..................... What this Division is about............................................. 230

Subdivision 220‑A—Objects of this Division                                                   230

220‑15................... Objects............................................................................ 231

220‑20................... What is an NZ resident?.................................................. 231

Subdivision 220‑B—NZ company treated as Australian resident for imputation system if company chooses      232

220‑25................... Application of provisions of Part 3‑6 outside this Division 232

220‑30................... What is an NZ franking company?.................................. 233

220‑35................... Making an NZ franking choice....................................... 233

220‑40................... When is an NZ franking choice in force?........................ 233

220‑45................... Revoking an NZ franking choice.................................... 233

220‑50................... Cancelling an NZ franking choice................................... 233

Subdivision 220‑C—Modifications of other Divisions of this Part           234

Franking NZ franking companies’ distributions                                           236

220‑100................. Residency requirement for franking................................ 236

220‑105................. Unfrankable distributions by NZ franking companies.... 236

220‑110................. Maximum franking credit under section 202‑60............. 236

NZ franking companies’ franking accounts etc.                                            237

220‑205................. Franking credit for payment of NZ franking company’s withholding tax liability   237

220‑210................. Effect of franked distribution to NZ franking company or flowing indirectly to NZ franking company  237

220‑215................. Effect on franking account if NZ franking choice ceases to be in force    238

Franking accounts of NZ franking company and some of its 100% subsidiaries         239

220‑300................. NZ franking company’s franking account affected by franking accounts of some of its 100% subsidiaries........................................................................................ 239

Effect of NZ franking company making distribution that is non‑assessable and non‑exempt   242

220‑350................. Providing for a franking credit to arise........................... 242

Effects of supplementary dividend from NZ franking company              243

220‑400................. Gross‑up and tax offset for distribution from NZ franking company reduced by supplementary dividend........................................................................................ 243

220‑405................. Franked distribution and supplementary dividend flowing indirectly       245

220‑410................. Franking credit reduced if tax offset reduced.................. 247

Rules about exempting entities                                                                            248

220‑500................. Publicly listed post‑choice NZ franking company and its 100% subsidiaries are not exempting entities 248

220‑505................. Post‑choice NZ franking company is not automatically prescribed person              248

220‑510................. Parent company’s status as prescribed person sets status of all other members of same wholly‑owned group........................................................................................ 249

NZ franking companies’ exempting accounts                                                 250

220‑605................. Effect on exempting account if NZ franking choice ceases to be in force 250

Tax effect of distribution franked by NZ franking company with an exempting credit              251

220‑700................. Tax effect of distribution franked by NZ franking company with an exempting credit            251

Joint and several liability for NZ resident company’s unmet franking liabilities        251

220‑800................. Joint and several liability for NZ resident company’s franking tax etc.    251

Part 3‑10—Financial transactions                                                                            255

Division 230—Taxation of financial arrangements                                 255

Guide to Division 230                                                                                            255

230‑1..................... What this Division is about............................................. 255

230‑5..................... Scope of this Division.................................................... 256

Subdivision 230‑A—Core rules                                                                          257

Objects                                                                                                                       258

230‑10................... Objects of this Division.................................................. 258

Tax treatment of gains and losses from financial arrangements              258

230‑15................... Gains are assessable and losses deductible..................... 258

230‑20................... Gain or loss to be taken into account only once under this Act                261

230‑25................... Associated financial benefits to be taken into account only once under this Act      262

230‑30................... Treatment of gains and losses related to exempt income and non‑assessable non‑exempt income           263

230‑35................... Treatment of gains and losses of private or domestic nature 264

Method to be applied to take account of gain or loss                                    265

230‑40................... Methods for taking gain or loss into account.................. 265

Financial arrangement concept                                                                          267

230‑45................... Financial arrangement..................................................... 267

230‑50................... Financial arrangement (equity interest or right or obligation in relation to equity interest)       269

230‑55................... Rights, obligations and arrangements (grouping and disaggregation rules)             270

General rules                                                                                                           272

230‑60................... When financial benefit provided or received under financial arrangement                272

230‑65................... Amount of financial benefit relating to more than one financial arrangement etc.     273

230‑70................... Apportionment when financial benefit received or right ceases                274

230‑75................... Apportionment when financial benefit provided or obligation ceases      274

230‑80................... Consistency in working out gains or losses (integrity measure)              275

230‑85................... Rights and obligations include contingent rights and obligations             276

Subdivision 230‑B—The accruals/realisation methods                               277

Guide to Subdivision 230‑B                                                                                 278

230‑90................... What this Subdivision is about....................................... 278

Objects of Subdivision                                                                                           279

230‑95................... Objects of this Subdivision............................................. 279

When accruals method or realisation method applies                                  279

230‑100................. When accruals method or realisation method applies...... 279

230‑105................. Sufficiently certain overall gain or loss........................... 281

230‑110................. Sufficiently certain gain or loss from particular event..... 282

230‑115................. Sufficiently certain financial benefits.............................. 283

230‑120................. Financial arrangements with notional principal............... 286

The accruals method                                                                                             287

230‑125................. Overview of the accruals method.................................... 287

230‑130................. Applying accruals method to work out period over which gain or loss is to be spread            288

230‑135................. How gain or loss is spread............................................. 289

230‑140................. Method of spreading gain or loss—effective interest method  291

230‑145................. Application of effective interest method where differing income and accounting years           292

230‑150................. Election for portfolio treatment of fees............................ 294

230‑155................. Election for portfolio treatment of fees where differing income and accounting years             294

230‑160................. Portfolio treatment of fees............................................... 296

230‑165................. Portfolio treatment of premiums and discounts for acquiring portfolio    297

230‑170................. Allocating gain or loss to income years.......................... 299

230‑172................. Applying accruals method to loss resulting from impairment  300

230‑175................. Running balancing adjustments...................................... 301

Realisation method                                                                                                303

230‑180................. Realisation method.......................................................... 303

Reassessment and re‑estimation                                                                         305

230‑185................. Reassessment.................................................................. 305

230‑190................. Re‑estimation.................................................................. 307

230‑192................. Re‑estimation—impairments and reversals..................... 309

230‑195................. Balancing adjustment if rate of return maintained on re‑estimation          311

230‑200................. Re‑estimation if balancing adjustment on partial disposal 312

Subdivision 230‑C—Fair value method                                                           314

230‑205................. Objects of this Subdivision............................................. 314

230‑210................. Fair value election........................................................... 315

230‑215................. Fair value election where differing income and accounting years             316

230‑220................. Financial arrangements to which fair value election applies 317

230‑225................. Financial arrangements to which election does not apply 319

230‑230................. Applying fair value method to gains and losses.............. 320

230‑235................. Splitting financial arrangements into 2 financial arrangements 321

230‑240................. When election ceases to apply......................................... 322

230‑245................. Balancing adjustment if election ceases to apply............. 323

Subdivision 230‑D—Foreign exchange retranslation method                    324

230‑250................. Objects of this Subdivision............................................. 324

230‑255................. Foreign exchange retranslation election.......................... 324

230‑260................. Foreign exchange retranslation election where differing income and accounting years            326

230‑265................. Financial arrangements to which general election applies 327

230‑270................. Financial arrangements to which general election does not apply             329

230‑275................. Balancing adjustment for election in relation to qualifying forex accounts               330

230‑280................. Applying foreign exchange retranslation method to gains and losses      331

230‑285................. When election ceases to apply......................................... 333

230‑290................. Balancing adjustment if election ceases to apply............. 334

Subdivision 230‑E—Hedging financial arrangements method                  335

230‑295................. Objects of this Subdivision............................................. 336

230‑300................. Applying hedging financial arrangement method to gains and losses      336

230‑305................. Table of events and allocation rules................................ 338

230‑310................. Aligning tax classification of gain or loss from hedging financial arrangement with tax classification of hedged item................................................................................. 340

230‑315................. Hedging financial arrangement election.......................... 344

230‑320................. Hedging financial arrangement election where differing income and accounting years            345

230‑325................. Hedging financial arrangements to which election applies 345

230‑330................. Hedging financial arrangements to which election does not apply           346

230‑335................. Hedging financial arrangement and hedged item........... 347

230‑340................. Generally whole arrangement must be hedging financial arrangement     351

230‑345................. Requirements not satisfied because of honest mistake or inadvertence    352

230‑350................. Derivative financial arrangement and foreign currency hedge                353

230‑355................. Recording requirements.................................................. 354

230‑360................. Determining basis for allocating gain or loss.................. 356

230‑365................. Effectiveness of the hedge.............................................. 357

230‑370................. When election ceases to apply......................................... 357

230‑375................. Balancing adjustment if election ceases to apply............. 358

230‑380................. Commissioner may determine that requirement met........ 358

230‑385................. Consequences of failure to meet requirements................ 360

Subdivision 230‑F—Reliance on financial reports                                        361

230‑390................. Objects of this Subdivision............................................. 362

230‑395................. Election to rely on financial reports................................. 362

230‑400................. Financial reports election where differing income and accounting years  364

230‑405................. Commissioner discretion to waive requirements in paragraphs 230‑395(2)(c) and (e)            365

230‑410................. Financial arrangements to which the election applies...... 366

230‑415................. Financial arrangements not covered by election.............. 369

230‑420................. Effect of election to rely on financial reports................... 370

230‑425................. When election ceases to apply......................................... 371

230‑430................. Balancing adjustment if election ceases to apply............. 372

Subdivision 230‑G—Balancing adjustment on ceasing to have a financial arrangement           373

230‑435................. When balancing adjustment made................................... 373

230‑440................. Exceptions...................................................................... 375

230‑445................. Balancing adjustment...................................................... 376

Subdivision 230‑H—Exceptions                                                                         381

230‑450................. Short‑term arrangements where non‑money amount involved 381

230‑455................. Certain taxpayers where no significant deferral.............. 382

230‑460................. Various rights and/or obligations.................................... 385

230‑465................. Ceasing to have a financial arrangement in certain circumstances            390

230‑470................. Forgiveness of commercial debts.................................... 391

230‑475................. Clarifying exceptions...................................................... 392

230‑480................. Treatment of gains in form of franked distribution etc.... 393

230‑481................. Registered emissions units.............................................. 393

Subdivision 230‑I—Other provisions                                                                393

230‑485................. Effect of change of residence—rules for particular methods 394

230‑490................. Effect of change of residence—disposal and reacquisition etc. after ceasing to be Australian resident where no further recognised gains or losses from arrangement...... 396

230‑495................. Effect of change of accounting principles or standards... 396

230‑500................. Comparable foreign accounting and auditing standards.. 397

230‑505................. Financial arrangement as consideration for provision or acquisition of a thing        398

230‑510................. Non‑arm’s length dealings in relation to financial arrangement                400

230‑515................. Arm’s length dealings in relation to financial arrangement—adjustment to gain or loss in certain situations........................................................................................ 401

230‑520................. Disregard gains or losses covered by value shifting regime 402

230‑522................. Adjusting a gain or loss that gives rise to a hybrid mismatch.. 403

230‑525................. Consolidated financial reports......................................... 404

230‑527................. Elections—reporting documents of foreign ADIs.......... 404

Subdivision 230‑J—Additional operation of Division                                  405

230‑530................. Additional operation of Division.................................... 405

Division 235—Particular financial transactions                                        407

Guide to Division 235                                                                                            407

235‑1..................... What this Division is about............................................. 407

Subdivision 235‑I—Instalment trusts                                                                407

Guide to Subdivision 235‑I                                                                                   407

235‑805................. What this Subdivision is about....................................... 407

Operative provisions                                                                                             408

235‑810................. Object of this Subdivision.............................................. 408

235‑815................. Application of Subdivision............................................. 408

235‑820................. Look‑through treatment for instalment trusts.................. 409

235‑825................. Meaning of instalment trust and instalment trust asset.. 409

235‑830................. What trusts are covered—instalment trust arrangements. 410

235‑835................. Requirement for underlying investments to be listed or widely held        411

235‑840................. What trusts are covered—limited recourse borrowings by regulated superannuation funds    412

235‑845................. Interactions with other provisions................................... 413

Division 240—Arrangements treated as a sale and loan                      414

Guide to Division 240                                                                                            414

240‑1..................... What this Division is about............................................. 414

240‑3..................... How the recharacterisation affects the notional seller...... 414

240‑7..................... How the recharacterisation affects the notional buyer..... 415

Subdivision 240‑A—Application and scope of Division                               416

Operative provisions                                                                                             416

240‑10................... Application of this Division............................................ 416

240‑15................... Scope of Division........................................................... 417

Subdivision 240‑B—The notional sale and notional loan                            417

Operative provisions                                                                                             417

240‑17................... Who is the notional seller and the notional buyer?.......... 417

240‑20................... Notional sale of property by notional seller and notional acquisition of property by notional buyer        418

240‑25................... Notional loan by notional seller to notional buyer........... 418

Subdivision 240‑C—Amounts to be included in notional seller’s assessable income    419

Guide to Subdivision 240‑C                                                                                 419

240‑30................... What this Subdivision is about....................................... 419

Operative provisions                                                                                             420

240‑35................... Amounts to be included in notional seller’s assessable income                420

240‑40................... Arrangement payments not to be included in notional seller’s assessable income    421

Subdivision 240‑D—Deductions allowable to notional buyer                     421

Guide to Subdivision 240‑D                                                                                 421

240‑45................... What this Subdivision is about....................................... 421

Operative provisions                                                                                             422

240‑50................... Extent to which deductions are allowable to notional buyer 422

240‑55................... Arrangement payments not to be deductions.................. 422

Subdivision 240‑E—Notional interest and arrangement payments          422

Operative provisions                                                                                             423

240‑60................... Notional interest.............................................................. 423

240‑65................... Arrangement payments................................................... 424

240‑70................... Arrangement payment periods........................................ 424

Subdivision 240‑F—The end of the arrangement                                          425

Operative provisions                                                                                             425

240‑75................... When is the end of the arrangement?.............................. 425

240‑80................... What happens if the arrangement is extended or renewed 426

240‑85................... What happens if an amount is paid by or on behalf of the notional buyer to acquire the property            427

240‑90................... What happens if the notional buyer ceases to have the right to use the property      427

Subdivision 240‑G—Adjustments if total amount assessed to notional seller differs from amount of interest     428

Guide to Subdivision 240‑G                                                                                 428

240‑100................. What this Subdivision is about....................................... 428

Operative provisions                                                                                             429

240‑105................. Adjustments for notional seller....................................... 429

240‑110................. Adjustments for notional buyer...................................... 430

Subdivision 240‑H—Application of Division 16E to certain arrangements 431

240‑112................. Division 16E applies to certain arrangements................. 431

Subdivision 240‑I—Provisions applying to hire purchase agreements    432

Operative provisions                                                                                             432

240‑115................. Another person, or no person taken to own property in certain cases      432

Division 242—Leases of luxury cars                                                                434

Guide to Division 242                                                                                            434

242‑1..................... What this Division is about............................................. 434

Subdivision 242‑A—Notional sale and loan                                                    435

Guide to Subdivision 242‑A                                                                                 435

242‑5..................... What this Subdivision is about....................................... 435

Operative provisions                                                                                             435

242‑10................... Application..................................................................... 435

242‑15................... Notional sale and acquisition.......................................... 436

242‑20................... Consideration for notional sale, and cost, of car............. 437

242‑25................... Notional loan by lessor to lessee..................................... 437

Subdivision 242‑B—Amount to be included in lessor’s assessable income 438

Guide to Subdivision 242‑B                                                                                 438

242‑30................... What this Subdivision is about....................................... 438

Operative provisions                                                                                             439

242‑35................... Amount to be included in lessor’s assessable income..... 439

242‑40................... Treatment of lease payments........................................... 440

Subdivision 242‑C—Deductions allowable to lessee                                      441

Guide to Subdivision 242‑C                                                                                 441

242‑45................... What this Subdivision is about....................................... 441

Operative provisions                                                                                             441

242‑50................... Extent to which deductions are allowable to lessee......... 441

242‑55................... Lease payments not deductible........................................ 442

Subdivision 242‑D—Adjustments if total amount assessed to lessor differs from amount of interest      442

Guide to Subdivision 242‑D                                                                                 442

242‑60................... What this Subdivision is about....................................... 442

Operative provisions                                                                                             443

242‑65................... Adjustments for lessor.................................................... 443

242‑70................... Adjustments for lessee.................................................... 444

Subdivision 242‑E—Extension, renewal and final ending of the lease     444

Guide to Subdivision 242‑E                                                                                 444

242‑75................... What this Subdivision is about....................................... 444

Operative provisions                                                                                             445

242‑80................... What happens if the term of the lease is extended or the lease is renewed                445

242‑85................... What happens if an amount is paid by the lessee to acquire the car          447

242‑90................... What happens if the lessee stops having the right to use the car               447

Division 243—Limited recourse debt                                                               449

Guide to Division 243                                                                                            449

243‑10................... What this Division is about............................................. 449

Subdivision 243‑A—Circumstances in which Division operates                449

Operative provisions                                                                                             450

243‑15................... When does this Division apply?..................................... 450

243‑20................... What is limited recourse debt?........................................ 451

243‑25................... When is a debt arrangement terminated?......................... 453

243‑30................... What is the financed property and the debt property?..... 454

Subdivision 243‑B—Working out the excessive deductions                        454

Operative provisions                                                                                             455

243‑35................... Working out the excessive deductions............................ 455

Subdivision 243‑C—Amounts included in assessable income and deductions                457

Operative provisions                                                                                             458

243‑40................... Amount included in debtor’s assessable income............. 458

243‑45................... Deduction for later payments in respect of debt.............. 458

243‑50................... Deduction for payments for replacement debt................. 459

243‑55................... Effect of Division on later capital allowance deductions. 460

243‑57................... Effect of Division on later capital allowance balancing adjustments         461

243‑58................... Adjustment where debt only partially used for expenditure 462

Subdivision 243‑D—Special provisions                                                            463

Operative provisions                                                                                             463

243‑60................... Application of Division to partnerships.......................... 463

243‑65................... Application where partner reduces liability..................... 463

243‑70................... Application of Division to companies ceasing to be 100% subsidiary     465

243‑75................... Application of Division where debt forgiveness rules also apply            465

Division 245—Forgiveness of commercial debts                                       466

Guide to Division 245                                                                                            466

245‑1..................... What this Division is about............................................. 466

245‑2..................... Simplified outline of this Division.................................. 466

Subdivision 245‑A—Debts to which operative rules apply                          468

Guide to Subdivision 245‑A                                                                                 468

245‑5..................... What this Subdivision is about....................................... 468

Application of Division                                                                                         468

245‑10................... Commercial debts........................................................... 468

245‑15................... Non‑equity shares........................................................... 469

245‑20................... Parts of debts.................................................................. 469

Subdivision 245‑B—What constitutes forgiveness of a debt                       469

Guide to Subdivision 245‑B                                                                                 469

245‑30................... What this Subdivision is about....................................... 469

Operative provisions                                                                                             470

245‑35................... What constitutes forgiveness of a debt............................ 470

245‑36................... What constitutes forgiveness of a debt if the debt is assigned  470

245‑37................... What constitutes forgiveness of a debt if a subscription for shares enables payment of the debt              471

245‑40................... Forgivenesses to which operative rules do not apply...... 471

245‑45................... Application of operative rules if forgiveness involves an arrangement    471

Subdivision 245‑C—Calculation of gross forgiven amount of a debt      472

Guide to Subdivision 245‑C                                                                                 472

245‑48................... What this Subdivision is about....................................... 472

Working out the value of a debt                                                                         473

245‑50................... Extent of forgiveness if consideration is given............... 473

245‑55................... General rule for working out the value of a debt............. 474

245‑60................... Special rule for working out the value of a non‑recourse debt 475

245‑61................... Special rule for working out the value of a previously assigned debt       476

Working out if an amount is offset against the value of the debt               476

245‑65................... Amount offset against amount of debt............................ 476

Working out the gross forgiven amount                                                          479

245‑75................... Gross forgiven amount of a debt.................................... 479

245‑77................... Gross forgiven amount shared between debtors............. 480

Subdivision 245‑D—Calculation of net forgiven amount of a debt          480

Guide to Subdivision 245‑D                                                                                 480

245‑80................... What this Subdivision is about....................................... 480

Operative provisions                                                                                             481

245‑85................... Reduction of gross forgiven amount............................... 481

245‑90................... Agreement between companies under common ownership for creditor to forgo capital loss or deduction........................................................................................ 481

Subdivision 245‑E—Application of net forgiven amounts                          483

Guide to Subdivision 245‑E                                                                                 483

245‑95................... What this Subdivision is about....................................... 483

General operative provisions                                                                              485

245‑100................. Subdivision not to apply to calculation of attributable income  485

245‑105................. How total net forgiven amount is applied....................... 485

Reduction of tax losses                                                                                          486

245‑115................. Total net forgiven amount is applied in reduction of tax losses                486

245‑120................. Allocation of total net forgiven amount in respect of tax losses               486

Reduction of net capital losses                                                                            486

245‑130................. Remaining total net forgiven amount is applied in reduction of net capital losses    486

245‑135................. Allocation of remaining total net forgiven amount in respect of net capital losses    487

Reduction of expenditure                                                                                     487

245‑145................. Remaining total net forgiven amount is applied in reduction of expenditure            487

245‑150................. Allocation of remaining total net forgiven amount in respect of expenditures          489

245‑155................. How expenditure is reduced—straight line deductions... 489

245‑157................. How expenditure is reduced—diminishing balance deductions               490

245‑160................. Amount applied in reduction of expenditure included in assessable income in certain circumstances      491

Reduction of cost bases of assets                                                                         491

245‑175................. Remaining total net forgiven amount is applied in reduction of cost bases of CGT assets       491

245‑180................. Allocation of remaining total net forgiven amount among relevant cost bases of CGT assets  492

245‑185................. Relevant cost bases of investments in associated entities are reduced last                492

245‑190................. Reduction of the relevant cost bases of a CGT asset....... 493

Unapplied total net forgiven amount                                                                494

245‑195................. No further consequences if there is any remaining unapplied total net forgiven amount          494

Subdivision 245‑F—Special rules relating to partnerships                         494

Guide to Subdivision 245‑F                                                                                  494

245‑200................. What this Subdivision is about....................................... 494

Operative provisions                                                                                             494

245‑215................. Unapplied total net forgiven amount of a partnership is transferred to partners       494

Subdivision 245‑G—Record keeping                                                                496

245‑265................. Keeping and retaining records......................................... 496

Division 247—Capital protected borrowings                                              499

Guide to Division 247                                                                                            499

247‑1..................... What this Division is about............................................. 499

Operative provisions                                                                                             499

247‑5..................... Object of Division.......................................................... 499

247‑10................... What capital protected borrowing and capital protection are  500

247‑15................... Application of this Division............................................ 500

247‑20................... Treating capital protection as a put option....................... 501

247‑25................... Number of put options.................................................... 503

247‑30................... Exercise or expiry of option............................................ 504

Division 250—Assets put to tax preferred use                                            505

Guide to Division 250                                                                                            505

250‑1..................... What this Division is about............................................. 505

Subdivision 250‑A—Objects                                                                                506

250‑5..................... Main objects................................................................... 506

Subdivision 250‑B—When this Division applies to you and an asset        506

Overall test                                                                                                               507

250‑10................... When this Division applies to you and an asset.............. 507

250‑15................... General test..................................................................... 507

250‑20................... First exclusion—small business entities......................... 508

250‑25................... Second exclusion—financial benefits under minimum value limit           508

250‑30................... Third exclusion—certain short term or low value arrangements              509

250‑35................... Exceptions to section 250‑30.......................................... 510

250‑40................... Fourth exclusion—sum of present values of financial benefits less than amount otherwise assessable   512

250‑45................... Fifth exclusion—Commissioner determination............... 514

Tax preferred use of asset                                                                                    514

250‑50................... End user of an asset........................................................ 514

250‑55................... Tax preferred end user................................................... 515

250‑60................... Tax preferred use of an asset.......................................... 515

250‑65................... Arrangement period for tax preferred use...................... 517

250‑70................... New tax preferred use at end of arrangement period if tax preferred use continues 518

250‑75................... What constitutes a separate asset for the purposes of this Division          518

250‑80................... Treatment of particular arrangements in the same way as leases              519

Financial benefits in relation to tax preferred use                                        520

250‑85................... Financial benefits in relation to tax preferred use of an asset 520

250‑90................... Financial benefit provided directly or indirectly.............. 522

250‑95................... Expected financial benefits in relation to an asset put to tax preferred use                523

250‑100................. Present value of financial benefit that has already been provided             523

Discount rate to be used in working out present values                                523

250‑105................. Discount rate to be used in working out present values.. 523

Predominant economic interest                                                                          524

250‑110................. Predominant economic interest....................................... 524

250‑115................. Limited recourse debt test............................................... 524

250‑120................. Right to acquire asset test................................................ 526

250‑125................. Effectively non‑cancellable, long term arrangement test.. 527

250‑130................. Meaning of effectively non‑cancellable arrangement....... 527

250‑135................. Level of expected financial benefits test.......................... 528

250‑140................. When to retest predominant economic interest under section 250‑135     529

Subdivision 250‑C—Denial of, or reduction in, capital allowance deductions               531

250‑145................. Denial of capital allowance deductions........................... 531

250‑150................. Apportionment rule......................................................... 531

Subdivision 250‑D—Deemed loan treatment of financial benefits provided for tax preferred use          533

250‑155................. Arrangement treated as loan............................................ 533

250‑160................. Financial benefits that are subject to deemed loan treatment 536

250‑180................. End value of asset........................................................... 538

250‑185................. Financial benefits subject to deemed loan treatment not assessed             540

Subdivision 250‑E—Taxation of deemed loan                                               540

Guide to Subdivision 250‑E                                                                                 541

250‑190................. What this Subdivision is about....................................... 541

Application and objects of Subdivision                                                             542

250‑195................. Application of Subdivision............................................. 542

250‑200................. Objects of this Subdivision............................................. 542

Tax treatment of gains and losses from financial arrangements              542

250‑205................. Gains are assessable and losses deductible..................... 542

250‑210................. Gain or loss to be taken into account only once under this Act                543

Method to be applied to take account of gain or loss                                    544

250‑215................. Methods for taking gain or loss into account.................. 544

General rules                                                                                                           544

250‑220................. Consistency in working out gains or losses (integrity measure)              544

250‑225................. Rights and obligations include contingent rights and obligations             545

The accruals method                                                                                             545

250‑230................. Application of accruals method....................................... 545

250‑235................. Overview of the accruals method.................................... 545

250‑240................. Applying accruals method to work out period over which gain or loss is to be spread            546

250‑245................. How gain or loss is spread............................................. 546

250‑250................. Allocating gain or loss to income years.......................... 547

250‑255................. When to re‑estimate........................................................ 548

250‑260................. Re‑estimation if balancing adjustment on partial disposal 550

Balancing adjustment                                                                                            552

250‑265................. When balancing adjustment made................................... 552

250‑270................. Exception for subsidiary member leaving consolidated group 553

250‑275................. Balancing adjustment...................................................... 553

Other provisions                                                                                                     557

250‑280................. Financial arrangement received or provided as consideration.. 557

Subdivision 250‑F—Treatment of asset when Division ceases to apply to the asset      559

250‑285................. Treatment of asset after Division ceases to apply to the asset.. 559

250‑290................. Balancing adjustment under Subdivision 40‑D in some circumstances    562

Subdivision 250‑G—Objections against determinations and decisions by the Commissioner   563

250‑295................. Objections against determinations and decisions by the Commissioner   563

Division 253—Financial claims scheme for account‑holders with insolvent ADIs           564

Subdivision 253‑A—Tax treatment of entitlements under financial claims scheme     564

Guide to Subdivision 253‑A                                                                                 564

253‑1..................... What this Subdivision is about....................................... 564

Operative provisions                                                                                             565

253‑5..................... Payment of entitlement under financial claims scheme treated as payment from ADI              565

253‑10................... Disposal of rights against ADI to APRA and meeting of financial claims scheme entitlement have no CGT effects............................................................................. 565

253‑15................... Cost base of financial claims scheme entitlement and any remaining part of account that gave rise to entitlement........................................................................................ 566


Chapter 3Specialist liability rules

Part 3‑6The imputation system

Division 200Guide to Part 3‑6

  

Guide to Division 200

200‑1  What this Division is about

This Division provides an overview of the imputation system.

Table of sections

200‑5        The imputation system

200‑10      Franking a distribution

200‑15      The franking account

200‑20      How a distribution is franked

200‑25      A corporate tax entity must not give its members credit for more tax than the entity has paid

200‑30      Benchmark rule

200‑35      Effect of receiving a franked distribution

200‑40      An Australian corporate tax entity can pass the benefit of having received a franked distribution on to its members

200‑45      Special rules for franking by some entities

200‑5  The imputation system

                   The *imputation system partially integrates the income tax liabilities of an Australian corporate tax entity and its members by:

                     (a)  allowing the entity, when distributing profits to its members, to pass to those members credit for income tax paid by the entity on those profits; and

                     (b)  allowing the entity’s Australian members to claim a tax offset for that credit; and

                     (c)  allowing the entity’s Australian members to claim a refund if they are unable to fully utilise the tax offset in reducing their income tax.

200‑10  Franking a distribution

                   When an Australian corporate tax entity distributes profits to its members, the entity has the option of passing to those members credit for income tax paid by the entity on the profits. This is done by franking the distribution.

200‑15  The franking account

             (1)  A franking account is used to keep track of income tax paid by the entity, so that the entity can pass to its members the benefit of having paid that tax when a distribution is made.

             (2)  Each corporate tax entity has a franking account.

             (3)  Typically, a corporate tax entity receives a credit in the account if the entity pays income tax or receives a franked distribution. A credit in the franking account is called a franking credit.

             (4)  Typically, a corporate tax entity receives a debit in the account if the entity receives a refund of tax or franks a distribution to its members. A debit in the franking account is called a franking debit.

200‑20  How a distribution is franked

             (1)  A corporate tax entity franks a distribution by allocating a franking credit to it.

             (2)  The amount of the franking credit on the distribution is the amount specified in a statement that accompanies the distribution.

             (3)  Only some kinds of distribution can be franked. These are called frankable distributions.

200‑25  A corporate tax entity must not give its members credit for more tax than the entity has paid

             (1)  A corporate tax entity must not frank a distribution from profits with a franking credit that exceeds the maximum amount of income tax that could have been paid, at the entity’s corporate tax rate for imputation purposes for the income year in which the distribution is made, on the profits distributed.

             (2)  If a distribution is franked in excess of this limit, the entity will be taken to have franked the distribution with the maximum franking credit for the distribution.

200‑30  Benchmark rule

             (1)  All frankable distributions made within a particular period must be franked to the same extent. This is the benchmark rule.

             (2)  It is designed to ensure that one member of a corporate tax entity is not preferred over another by the manner in which distributions are franked.

200‑35  Effect of receiving a franked distribution

             (1)  Under Division 207, if an Australian member of a corporate tax entity receives a franked distribution, the member can usually offset, against the member’s own income tax liability, income tax paid by the entity on the profits underlying the distribution.

             (2)  The tax offset to which the member is entitled is equal to the franking credit on the distribution.

Note 1:       A member may be entitled to a refund under Division 67 if the sum of the tax offset and certain other tax offsets exceeds the amount of income tax that the member would have to pay if the member had not got those tax offsets.

Note 2:       If the member is not a resident, the tax effects of receiving a distribution will be dealt with under Division 11A of Part III of the Income Tax Assessment Act 1936, and Subdivision 207‑D of this Part.

200‑40  An Australian corporate tax entity can pass the benefit of having received a franked distribution on to its members

                   If an Australian corporate tax entity receives a franked distribution, it can pass the benefit of having received a franking credit on the distribution to its own members by franking distributions to those members.

200‑45  Special rules for franking by some entities

                   There are special rules to deal with:

                     (a)  venture capital franking by a pooled development fund; and

                     (b)  franking by life insurance companies; and

                     (c)  franking by exempting companies and former exempting companies; and

                     (d)  franking by co‑operative companies; and

                     (e)  franking by companies that are NZ residents or members of the same wholly‑owned group as one or more companies that are NZ residents.

Division 201Objects and application of Part 3‑6

  

Table of sections

201‑1        Objects

201‑5        Application of this Part

201‑1  Objects

             (1)  The main object of this Part is to allow certain *corporate tax entities to pass to their *members the benefit of having paid income tax on the profits underlying certain *distributions.

             (2)  The other objects of this Part are to ensure that:

                     (a)  the imputation system is not used to give the benefit of income tax paid by a *corporate tax entity to *members who do not have a sufficient economic interest in the entity; and

                     (b)  the imputation system is not used to prefer some members over others when passing on the benefits of having paid income tax; and

                     (c)  the *membership of a corporate tax entity is not manipulated to create either of the outcomes mentioned in paragraphs (a) and (b).

201‑5  Application of this Part

                   Subject to the rules on the application of this Part set out in the Income Tax (Transitional Provisions) Act 1997, this Part applies to events that occur on or after 1 July 2002.

Division 202Franking a distribution

  

Table of Subdivisions

202‑A   Franking a distribution

202‑B    Who can frank a distribution?

202‑C    Which distributions can be franked?

202‑D   Amount of the franking credit on a distribution

202‑E    Distribution statements

Subdivision 202‑AFranking a distribution

Guide to Subdivision 202‑A

202‑1  What this Subdivision is about

An entity can only frank a distribution if certain conditions are met. These conditions are set out in this Subdivision.

Table of sections

Operative provisions

202‑5        Franking a distribution

Operative provisions

202‑5  Franking a distribution

                   An entity franks a *distribution if:

                     (a)  the entity is a *franking entity that satisfies the *residency requirement when the distribution is made; and

                     (b)  the distribution is a *frankable distribution; and

                     (c)  the entity allocates a *franking credit to the distribution.

Note 1:       Division 205 deals with a corporate tax entity’s franking account and sets out when credits, known as franking credits, and debits, known as franking debits, arise in that account.

Note 2:       The mechanism by which an entity allocates a franking credit to a distribution (for example, whether it is done by resolution or some other means) is determined by the entity.

Subdivision 202‑BWho can frank a distribution?

Guide to Subdivision 202‑B

202‑10  What this Subdivision is about

Generally, a corporate tax entity that is an Australian resident at the time a distribution is made, can frank the distribution.

There are some exceptions.

Table of sections

Operative provisions

202‑15      Franking entities

202‑20      Residency requirement when making a distribution

Operative provisions

202‑15  Franking entities

                   An entity is a franking entity at a particular time if:

                     (a)  it is a *corporate tax entity at that time; and

                     (b)  it is not a *life insurance company that is a *mutual insurance company at that time; and

                     (c)  in a case where the entity is a company that is a trustee of a trust—it is not acting in its capacity as trustee of the trust at that time.

202‑20  Residency requirement when making a distribution

                   An entity satisfies the residency requirement when making a *distribution if:

                     (a)  in the case of a company—the company is an Australian resident at that time; and

                     (b)  in the case of a *corporate limited partnership—the corporate limited partnership is an Australian resident at that time; and

                     (d)  in the case of a *public trading trust—the public trading trust is a resident unit trust for the income year in which that time occurs.

Subdivision 202‑CWhich distributions can be franked?

Guide to Subdivision 202‑C

202‑25  What this Subdivision is about

Generally, distributions that are made out of realised profits can be franked.

Those distributions that are not frankable are identified.

Table of sections

202‑30      Frankable distributions

Operative provisions

202‑35      Object

202‑40      Frankable distributions

202‑45      Unfrankable distributions

202‑47      Distributions of certain ADI profits following restructure

202‑30  Frankable distributions

                   Distributions and non‑share dividends are frankable unless it is specified that they are unfrankable.

Operative provisions

202‑35  Object

                   The object of this Subdivision is to ensure that only distributions equivalent to realised taxed profits can be franked.

202‑40  Frankable distributions

             (1)  A *distribution is a frankable distribution, to the extent that it is not unfrankable under section 202‑45.

             (2)  A *non‑share dividend is a frankable distribution, to the extent that it is not unfrankable under section 202‑45.

202‑45  Unfrankable distributions

                   The following are unfrankable:

                     (c)  where the purchase price on the buy‑back of a *share by a *company from one of its *members is taken to be a dividend under section 159GZZZP of that Act—so much of that purchase price as exceeds what would be the market value (as normally understood) of the share at the time of the buy‑back if the buy‑back did not take place and were never proposed to take place;

                     (d)  a distribution in respect of a *non‑equity share;

                     (e)  a distribution that is sourced, directly or indirectly, from a company’s *share capital account;

                      (f)  an amount that is taken to be an unfrankable distribution under section 215‑10 or 215‑15;

                     (g)  an amount that is taken to be a dividend for any purpose under any of the following provisions:

                              (i)  unless subsection 109RB(6) or 109RC(2) applies in relation to the amount—Division 7A of Part III of that Act (distributions to entities connected with a *private company);

                            (iii)  section 109 of that Act (excessive payments to shareholders, directors and associates);

                            (iv)  section 47A of that Act (distribution benefits—CFCs);

                     (h)  an amount that is taken to be an unfranked dividend for any purpose:

                              (i)  under section 45 of that Act (streaming bonus shares and unfranked dividends);

                             (ii)  because of a determination of the Commissioner under section 45C of that Act (streaming dividends and capital benefits);

                      (i)  a *demerger dividend;

                      (j)  a distribution that section 152‑125 or 220‑105 says is unfrankable.

202‑47  Distributions of certain ADI profits following restructure

             (1)  This section applies to an amount paid by a body corporate if:

                     (a)  the body corporate is a non‑operating holding company within the meaning of the Financial Sector (Transfer and Restructure) Act 1999; and

                     (b)  a restructure instrument under Part 4A of that Act is in force in relation to the body; and

                     (c)  because of the restructure to which the instrument relates, an *ADI becomes a subsidiary (within the meaning of that Act) of the body; and

                     (d)  the amount is sourced, directly or indirectly, from the profits of the ADI before the restructure instrument came into force; and

                     (e)  the amount would have been a *frankable distribution if it had been distributed by the ADI before the restructure instrument came into force.

             (2)  The amount:

                     (a)  is taken to be a dividend paid by the body, for the purposes of this Act (and so is a *distribution by the body); and

                     (b)  is not taken to be an *unfrankable distribution by the body just because of paragraph 202‑45(e) (which makes distributions from *share capital accounts unfrankable).

Subdivision 202‑DAmount of the franking credit on a distribution

Guide to Subdivision 202‑D

202‑50  What this Subdivision is about

The amount of the franking credit on a distribution is that stated in the distribution statement, unless the amount stated exceeds the maximum franking credit for the distribution.

In that case, the amount of the franking credit on the distribution is taken to be the maximum franking credit for the distribution, worked out under this Subdivision.

Table of sections

202‑55      What is the maximum franking credit for a frankable distribution?

Operative provisions

202‑60      Amount of the franking credit on a distribution

202‑65      Where the franking credit stated in the distribution statement exceeds the maximum franking credit for the distribution

202‑55  What is the maximum franking credit for a frankable distribution?

                   The maximum franking credit for a distribution is equivalent to the maximum amount of income tax that the entity making the distribution could have paid, at the entity’s corporate tax rate for imputation purposes for the income year in which the distribution is made, on the profits underlying the distribution.

Operative provisions

202‑60  Amount of the franking credit on a distribution

             (1)  The amount of the *franking credit on a *distribution is that stated in the *distribution statement for the distribution, unless that amount exceeds the *maximum franking credit for the distribution.

             (2)  The maximum franking credit for a *distribution is worked out using the formula:

where:

applicable gross‑up rate means the *corporate tax gross‑up rate of the entity making the distribution for the income year in which the distribution is made.

202‑65  Where the franking credit stated in the distribution statement exceeds the maximum franking credit for the distribution

                   If the amount of a *franking credit stated in a *distribution statement for a *distribution exceeds the *maximum franking credit for the distribution, the amount of the franking credit on the distribution is taken to be the amount of the maximum franking credit for the distribution, and not the amount stated in the distribution statement.

Subdivision 202‑EDistribution statements

Guide to Subdivision 202‑E

202‑70  What this Subdivision is about

An entity that makes a frankable distribution must give the recipient a statement setting out details of the distribution.

Table of sections

Operative provisions

202‑75      Obligation to give a distribution statement

202‑80      Distribution statement

202‑85      Changing the franking credit on a distribution by amending the distribution statement

Operative provisions

202‑75  Obligation to give a distribution statement

             (1)  An entity that makes a *frankable distribution must give the recipient a *distribution statement.

             (2)  The statement must be given on or before the day on which the *distribution is made, unless the entity is allowed to give the statement at a later time under subsection (3).

             (3)  If the entity is a *private company for the income year in which the *distribution is made, the statement must be given:

                     (a)  before the end of 4 months after the end of the income year in which the distribution is made; or

                     (b)  before the time determined by the Commissioner under subsection (5);

whichever is later.

             (4)  However, the entity is not allowed to give the statement at a later time under subsection (3) if the statement indicates that a *franking credit has been allocated to the *distribution and the franking credit would, either alone or when added to other franking credits allocated to other distributions made by the entity during the income year, result in the entity having a liability for *franking deficit tax, or an increased liability for franking deficit tax, at the end of the income year.

Note:          The combined effect of subsections (3) and (4) is that a private company can retrospectively frank a distribution, but not so as to create or increase a liability for franking deficit tax.

             (5)  The Commissioner may determine in writing that a *private company may give the statement before a time specified in the determination.

202‑80  Distribution statement

             (1)  A distribution statement is a statement made in accordance with this section.

             (2)  The statement must be in the *approved form.

             (3)  The statement must:

                     (a)  identify the entity making the distribution; and

                     (b)  state the date on which the distribution is made; and

                     (c)  state the amount of the distribution; and

                     (d)  state that there is a *franking credit of an amount specified on the distribution; and

                     (e)  state the *franking percentage for the distribution; and

                      (f)  state the amount of any *withholding tax that has been deducted from the distribution by the entity; and

                     (g)  include any other information required by the *approved form that is relevant to imputation generally or the distribution.

Note:          Under the Taxation Administration Act 1953 it is an offence to fail to give a statement required under this Subdivision, or make a misleading statement in connection with a distribution (whether franked or not).

202‑85  Changing the franking credit on a distribution by amending the distribution statement

Changing the franking credit on a specified distribution

             (1)  The Commissioner may, on application by an entity, determine in writing that the entity may change the *franking credit on a specified *distribution by amending the *distribution statement for the distribution.

             (2)  In deciding whether to make a determination under subsection (1), the Commissioner must have regard to:

                     (a)  whether the date for lodgment of an *income tax return by the recipient of the specified *distribution for the income year in which the distribution was made has passed; and

                     (b)  whether, if the *franking credit on the specified distribution were changed in accordance with the entity’s application, there would be any difference in the *withholding tax liability of the recipient; and

                     (c)  whether amending the distribution statement as requested by the entity would lead to a breach of the *benchmark rule, or any of the rules in Division 204 (the anti‑streaming rules); and

                     (d)  whether amending the distribution statement as requested by the entity would lead to a new *benchmark franking percentage being set for the entity for the *franking period in which the distribution was made; and

                     (e)  any other matters that the Commissioner considers relevant.

Changing the franking credits on a specified class of distributions

             (3)  The Commissioner may, on application by an entity, determine in writing that the entity may change the *franking credits on *distributions of a specified class by amending the *distribution statements for the distributions.

             (4)  In deciding whether to make a determination under subsection (3), the Commissioner must have regard to:

                     (a)  the number of recipients to whom an amended *distribution statement would be made; and

                     (b)  whether the date for lodgment of *income tax returns by recipients of *distributions of the specified class for the income year in which the distributions were made has passed; and

                     (c)  whether, if the *franking credit on the specified distributions were changed in accordance with the entity’s application, there would be any difference in the *withholding tax liability of the recipients; and

                     (d)  whether amending the distribution statements as requested by the entity would lead to a breach of the *benchmark rule, or any of the rules in Division 204 (the anti‑streaming rules); and

                     (e)  whether amending the distribution statements as requested by the entity would lead to a new *benchmark franking percentage being set for the entity for the *franking period in which the distributions were made; and

                      (f)  any other matters that the Commissioner considers relevant.

Applying to the Commissioner

             (5)  The entity must:

                     (a)  make its application under this section in writing; and

                     (b)  include in the application all information relevant to the matters to which the Commissioner must have regard under:

                              (i)  subsection (2), if the application relates to a *distribution; or

                             (ii)  subsection (4), if the application relates to a class of distributions.

Review

             (6)  If the entity or a *member of the entity is dissatisfied with a determination under subsection (3), the entity or member may object to it in the manner set out in Part IVC of the Taxation Administration Act 1953.

Division 203Benchmark rule

  

Guide to Division 203

203‑1  What this Division is about

Distributions within a particular period must all be franked to the same extent.

Table of sections

203‑5        Benchmark rule

203‑10      Benchmark franking percentage

Operative provisions

203‑15      Object

203‑20      Application of the benchmark rule

203‑25      Benchmark rule

203‑30      Setting a benchmark franking percentage

203‑35      Franking percentage

203‑40      Franking periods—where the entity is not a private company

203‑45      Franking period—private companies

203‑50      Consequences of breaching the benchmark rule

203‑55      Commissioner’s powers to permit a departure from the benchmark rule

203‑5  Benchmark rule

             (1)  A corporate tax entity must frank all frankable distributions made within a particular period at a franking percentage set as the benchmark for that period. This is the benchmark rule.

             (2)  The benchmark rule does not apply to some corporate tax entities. Those entities are identified in section 203‑20.

203‑10  Benchmark franking percentage

             (1)  The benchmark franking percentage for an entity is set by reference to the franking percentage for the first frankable distribution made by the entity during the relevant period.

             (2)  An entity has a benchmark franking percentage, even if it is not subject to the benchmark rule.

Operative provisions

203‑15  Object

                   The object of this Subdivision is to ensure that one *member of a *corporate tax entity is not preferred over another when the entity *franks *distributions.

203‑20  Application of the benchmark rule

             (1)  The *benchmark rule does not apply to a company in a *franking period if either:

                     (a)  the company satisfies each of the following criteria:

                              (i)  at all times during the franking period, the company is a *listed public company;

                             (ii)  the company cannot make a *distribution on one *membership interest during the franking period without making a distribution under the same resolution on all other membership interests;

                            (iii)  the company cannot *frank a distribution made on one membership interest during the franking period without franking distributions made on all other membership interests under the same resolution with a *franking credit worked out using the same *franking percentage; or

                     (b)  the entity is a *100% subsidiary of a company that satisfies the criteria set out in paragraph (a).

             (2)  The following are examples of cases in which a company satisfies the criteria set out in paragraph (1)(a):

                     (a)  the company is a *listed public company with a single *class of *membership interest at all times during the relevant *franking period;

                     (b)  the company is a listed public company that, under its constituent documents, must not:

                              (i)  make a *distribution on one membership interest during the relevant franking period without making a distribution under the same resolution on all other membership interests; or

                             (ii)  *frank a distribution made on one membership interest during the relevant franking period without franking distributions made on all other membership interests under the same resolution with a *franking credit worked out using the same *franking percentage;

                     (c)  the company is a listed public company with more than one class of membership interest, but the rights in relation to distributions and the franking of distributions are the same for each class of membership interest.

This is not an exhaustive list.

             (3)  For the purposes of subsection (1), ignore *membership interests that do not carry a right to receive *distributions (other than distributions on the winding up of the company).

203‑25  Benchmark rule

                   An entity must not make a *frankable distribution whose *franking percentage differs from the entity’s *benchmark franking percentage for the *franking period in which the distribution is made. This is the benchmark rule.

Note:          If a corporate tax entity franks a distribution in breach of this rule, the distribution will still be a franked distribution, although consequences will flow under section 203‑50.

203‑30  Setting a benchmark franking percentage

                   The benchmark franking percentage for an entity for a *franking period is the same as the *franking percentage for the first *frankable distribution made by the entity within the period.

Note:          If no frankable distribution is made during the period, there is no benchmark franking percentage for the period.

203‑35  Franking percentage

             (1)  Subject to subsection (2), the franking percentage for a *frankable distribution is worked out using the formula:

             (2)  If the *franking percentage for a *frankable distribution would exceed 100% if it were worked out under subsection (1), it is taken to be 100%.

203‑40  Franking periods—where the entity is not a private company

             (1)  Use this section to work out the franking periods for an entity in an income year where the entity is not a *private company for the income year.

             (2)  If the entity’s income year is a period of 12 months, each of the following is a franking period for the entity in that year:

                     (a)  the period of 6 months beginning at the start of the entity’s income year;

                     (b)  the remainder of the income year.

             (3)  If the entity’s income year is a period of 6 months or less, the franking period for the entity in that year is the same as the income year.

             (4)  If the entity’s income year is a period of more than 6 months and less than 12 months, each of the following is a franking period for the entity in that year:

                     (a)  the period of 6 months beginning at the start of the entity’s income year;

                     (b)  the remainder of the income year.

             (5)  If the entity’s income year is a period of more than 12 months, each of the following is a franking period for the entity in that year:

                     (a)  the period of 6 months beginning at the start of the entity’s income year (the first franking period);

                     (b)  the period of 6 months beginning immediately after the end of the first franking period;

                     (c)  the remainder of the income year.

203‑45  Franking period—private companies

                   The franking period for an entity that is a *private company for an income year is the same as the income year.

203‑50  Consequences of breaching the benchmark rule

             (1)  If an entity makes a *frankable distribution in breach of the *benchmark rule:

                     (a)  the entity is liable to pay over‑franking tax imposed by the New Business Tax System (Over‑franking Tax) Act 2002 if the *franking percentage for the *distribution exceeds the entity’s *benchmark franking percentage for the *franking period in which the distribution is made; and

                     (b)  a *franking debit arises in the entity’s *franking account if the franking percentage for the distribution is less than the entity’s benchmark franking percentage for the franking period in which the distribution is made.

             (2)  Use the following formula to work out:

                     (a)  in a case dealt with under paragraph (1)(a)—the amount of the *over‑franking tax; and

                     (b)  in a case dealt with under paragraph (1)(b)—the amount of the *franking debit:

where:

applicable gross‑up rate means the *corporate tax gross‑up rate of the entity making the distribution for the income year in which the distribution is made.

franking % differential is the difference between:

                     (a)  the *franking percentage for the *frankable distribution; and

                     (b)  either:

                              (i)  if subparagraph (ii) does not apply—the entity’s *benchmark franking percentage for the *franking period in which the *distribution is made; or

                             (ii)  if the Commissioner in the exercise of the Commissioner’s powers under subsection 203‑55(1), permits the entity to frank the distribution at a different franking percentage—that percentage.

Example:    An entity makes 3 successive frankable distributions in a franking period. Each of those distributions is represented in the following diagram. The franking percentage for the first distribution is 40%, and so the entity’s benchmark franking percentage for the period is 40%.

 

 

Note:          Distribution 2 is under‑franked to the extent of the franking % differential. This is used to work out the amount of the under‑franking debit under subsection (2).

                   Distribution 3 is over‑franked to the extent of the franking % differential. This is used to work out the amount of over‑franking tax on the distribution under the New Business Tax System (Over‑franking Tax) Act 2002. The amount of the tax is calculated using the same formula as that set out in subsection (2).

             (3)  A *franking debit arising under paragraph (1)(b) is in addition to any franking debit that would otherwise arise for the entity because of the *distribution.

             (4)  The *franking debit arises on the day on which the *frankable distribution is made.

203‑55  Commissioner’s powers to permit a departure from the benchmark rule

Powers of the Commissioner

             (1)  The Commissioner may, on application by an entity, make a determination in writing permitting the entity to *frank a *distribution at a *franking percentage that differs from the entity’s *benchmark franking percentage for the *franking period in which the distribution is made.

             (2)  Because the *benchmark rule is an integral part of the imputation system, the Commissioner’s powers under this section may only be exercised in extraordinary circumstances.

Matters to which the Commissioner must have regard in exercising the power

             (3)  In deciding whether there are extraordinary circumstances justifying the exercise of the Commissioner’s power to make a determination under subsection (1), the Commissioner must have regard to:

                     (a)  the entity’s reasons for departing, or proposing to depart, from the *benchmark rule; and

                     (b)  the extent of the departure, or proposed departure, from the benchmark rule; and

                     (c)  if the circumstances that give rise to the entity’s application are within the entity’s control, the extent to which the entity has sought the exercise of the Commissioner’s powers under this section in the past; and

                     (d)  whether a *member of the entity has been or will be disadvantaged as a result of the departure, or proposed departure, from the benchmark rule; and

                     (e)  whether a *member of the entity will receive greater *imputation benefits than another member of the entity because a distribution *franked at a *franking percentage that differs from the *benchmark franking percentage for the *franking period is made to one of them; and

                      (f)  any other matters that the Commissioner considers relevant.

When may the powers be exercised?

             (4)  The Commissioner may make a determination under subsection (1) either before or after the *frankable distribution is made.

Consequence of the Commissioner exercising the power under this section

             (5)  An allocation of a *franking credit at a percentage specified by the Commissioner in a determination under subsection (1) is taken to comply with the *benchmark rule.

Applying to the Commissioner

             (6)  The entity must:

                     (a)  make its application under this section in writing; and

                     (b)  include in the application all information relevant to the matters to which the Commissioner must have regard under subsection (3).

Review

             (7)  If the entity or a *member of the entity is dissatisfied with the determination under subsection (1), the entity or member may object to it in the manner set out in Part IVC of the Taxation Administration Act 1953.

Division 204Anti‑streaming rules

Table of Subdivisions

204‑A   Objects and application

204‑B    Linked distributions

204‑C    Substituting tax‑exempt bonus share for franked distributions

204‑D   Streaming distributions

204‑E    Disclosure requirements

Subdivision 204‑AObjects and application

Table of sections

204‑1        Objects

204‑5        Application to non‑share dividends

204‑1  Objects

                   The objects of this Division are to ensure that:

                     (a)  an entity and its *members cannot avoid the effect of the *benchmark rule by exploiting the *benchmark franking percentage of another entity; and

                     (b)  an entity does not stream *franked distributions and *tax‑exempt bonus shares; and

                     (c)  an entity does not stream *distributions to members of the entity who *derive a *greater benefit from franking credits than other members.

204‑5  Application

             (1)  The rules in this Division will apply to an entity even if it is not subject to the benchmark rule.

             (2)  This Division applies to non‑share dividends in the same way as it applies to distributions.

Subdivision 204‑BLinked distributions

Guide to Subdivision 204‑B

204‑10  What this Subdivision is about

This Subdivision prevents the exploitation of a corporate tax entity’s benchmark franking percentage by another corporate tax entity, or that other entity’s members, by imposing a franking debit where there is exploitation.

Table of sections

Operative provisions

204‑15      Linked distributions

Operative provisions

204‑15  Linked distributions

Franking debit arises where a distribution by one entity is substituted for a distribution by another

             (1)  This section gives rise to a *franking debit if:

                     (a)  the exercise of a choice or selection by a *member of an entity (the first entity); or

                     (b)  the member’s failure to exercise a choice or selection;

has the effect of determining (to any extent) that another entity makes to one of its members a *distribution (the linked distribution) that is:

                     (c)  in substitution (in whole or in part) for a distribution by the first entity to that member or any other member of the first entity; and

                     (d)  unfranked, or *franked at a *franking percentage that differs from the first entity’s *benchmark franking percentage for the *franking period in which the linked distribution is made.

Note:          Division 205 deals with a corporate tax entity’s franking account and sets out when a debit, known as a franking debit, arises in that account.

Franking account in which the debit arises

             (2)  The debit arises in the *franking account of the entity with the higher *benchmark franking percentage for the *franking period in which the linked distribution is made.

Amount of the debit

             (3)  The debit is equal to the one that would arise in that *franking account if the entity had made a *franked distribution, equal to the linked distribution, with a *franking percentage equal to the *benchmark franking percentage for that entity.

When does the debit arise

             (4)  The debit arises on the day on which the linked distribution is made.

Debit is in addition to any other franking debit arising because of the linked distribution

             (5)  The debit is in addition to any other debit that arises in an entity’s *franking account because of the linked distribution.

Where an entity has no benchmark franking percentage

             (6)  If an entity has no *benchmark franking percentage for the *franking period in which the linked distribution is made, this section applies as if:

                     (a)  in a case where the linked distribution has a *franking percentage of less than 50%—the entity had a benchmark franking percentage of 100% for that period; and

                     (b)  in a case where the linked distribution has a franking percentage equal to or greater than 50%—the entity had a benchmark franking percentage of 0% for that period.

Subdivision 204‑CSubstituting tax‑exempt bonus share for franked distributions

Guide to Subdivision 204‑C

204‑20  What this Subdivision is about

This Subdivision prevents the substitution of a tax‑exempt bonus share for a franked distribution by imposing a franking debit on the issue of the share as if it were a franked distribution.

Table of sections

Operative provisions

204‑25      Substituting tax‑exempt bonus shares for franked distributions

Operative provisions

204‑25  Substituting tax‑exempt bonus shares for franked distributions

Franking debit arises if tax‑exempt bonus shares are issued in substitution for a franked distribution

             (1)  This section gives rise to a *franking debit in an entity’s *franking account if:

                     (a)  the exercise of a choice or selection by a *member of the entity; or

                     (b)  the member’s failure to exercise a choice or selection;

has the effect of determining (to any extent) that the entity issues one or more *tax‑exempt bonus shares, to that member or another member of the entity, in substitution (in whole or in part) for one or more *franked distributions by the entity to that member or another member.

Amount of the debit

             (2)  The debit is equal to the one that would arise in the entity’s *franking account if the entity made a *distribution, equal to the *franked distributions referred to in subsection (1), franked at the entity’s *benchmark franking percentage for the *franking period in which the shares are issued.

When does the debit arise

             (3)  The debit arises on the day when the shares are issued.

Meaning of tax‑exempt bonus share

             (4)  For a company whose *shares have no par value, tax‑exempt bonus share means a share issued by the company in the circumstances mentioned in subsection 6BA(6) of the Income Tax Assessment Act 1936.

             (5)  For any other company, tax‑exempt bonus share means a *share issued by the company to a *shareholder in the company where:

                     (a)  the amount or value of the share is debited against an amount standing to the credit of a share premium account of the company; and

                     (b)  no part of the paid‑up value of the share is a dividend; and

                     (c)  the share is issued:

                              (i)  as a bonus share; or

                             (ii)  in the circumstances mentioned in subsection 6BA(1) of the Income Tax Assessment Act 1936, as in force immediately before 1 July 1998.

Where a company has no benchmark franking percentage for the franking period

             (6)  If a company has no *benchmark franking percentage for the *franking period in which the *tax‑exempt bonus share is issued, this section applies as if the entity had a benchmark franking percentage of 100% for that period.

Subdivision 204‑DStreaming distributions

Guide to Subdivision 204‑D

204‑26  What this Subdivision is about

This Subdivision prevents the streaming of imputation benefits to one member of a corporate tax entity in preference to another by either imposing a franking debit or denying an imputation benefit where there is streaming.

Table of sections

Operative provisions

204‑30      Streaming distributions

204‑35      When does a franking debit arise if the Commissioner makes a determination under paragraph 204‑30(3)(a)

204‑40      Amount of the franking debit

204‑41      Amount of the exempting debit

204‑45      Effect of a determination about distributions to favoured members

204‑50      Assessment and notice of determination

204‑55      Right to review where a determination made

Operative provisions

204‑30  Streaming distributions

Commissioner’s power to make a determination when distributions or distributions and other benefits are streamed

             (1)  This section empowers the Commissioner to make determinations if an entity streams one or more *distributions (or one or more distributions and the giving of other benefits), whether in a single *franking period or in a number of franking periods, in such a way that:

                     (a)  an *imputation benefit is, or apart from this section would be, received by a *member of the entity as a result of the distribution or distributions; and

                     (b)  the member would *derive a *greater benefit from franking credits than another member of the entity; and

                     (c)  the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.

The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member.

Examples of other benefits

             (2)  These are examples of the giving of other benefits:

                     (a)  issuing bonus *shares;

                     (b)  returning *paid‑up share capital;

                     (c)  *forgiving a debt;

                     (d)  the entity or another entity making a payment of any kind, or giving any property, to a *member or to another person on a member’s behalf.

Nature of the determination that the Commissioner may make

             (3)  The Commissioner may make one or more of these determinations:

                     (a)  that a specified *franking debit arises in the *franking account of the entity, for a specified *distribution or other benefit to a disadvantaged member;

                            (b)   that a specified *exempting debit arises in the *exempting account of the entity, for a specified *distribution or other benefit to a disadvantaged member;

                            (c)   that no *imputation benefit is to arise in respect of a distribution that is made to a favoured member and specified in the determination.

A determination must be in writing.

                 (4)   The Commissioner may:

                            (a)   specify the *franking debit under paragraph (3)(a) by specifying the *franking percentage to be used in working out the amount of the debit; and

                            (b)   specify the *exempting debit under paragraph (3)(b) by specifying the *exempting percentage to be used in working out the amount of the debit.

             (5)  The Commissioner may specify the *distribution under paragraph (3)(a), (b) or (c) by specifying:

                     (a)  the date on which the distribution was made, or the period during which the distribution was made; and

                     (b)  the member, or class of members, to whom the distribution was made.

What is an imputation benefit?

             (6)  A *member of an entity receives an imputation benefit as a result of a distribution if:

                     (a)  the member is entitled to a *tax offset under Division 207 as a result of the distribution; or

                     (b)  an amount would be included in the member’s assessable income as a result of the distribution because of the operation of section 207‑35; or

                     (c)  a *franking credit would arise in the *franking account of the member as a result of the distribution; or

                            (d)   an *exempting credit would arise in the *exempting account of the member as a result of the distribution; or

                            (e)   the member would not be liable to pay *withholding tax on the distribution, because of the operation of paragraph 128B(3)(ga) of the Income Tax Assessment Act 1936; or

                      (f)  the member is entitled to a *tax offset under section 210‑170 as a result of the distribution.

When does a favoured member derive greater benefit from franking credits?

             (7)  The following subsection lists some of the cases in which a *member of an entity *derives a greater benefit from franking credits than another member of the entity. It is not an exhaustive list.

             (8)  A *member of an entity *derives a greater benefit from franking credits than another member of the entity if any of the following circumstances exist in relation to the other member in the income year in which the distribution giving rise to the benefit is made, and not in relation to the first member:

                     (a)  the other member is a foreign resident;

                     (b)  the other member would not be entitled to any *tax offset under Division 207 because of the distribution;

                     (c)  the amount of income tax that, apart from this Division, would be payable by the other member because of the distribution is less than the tax offset to which the other member would be entitled;

                     (d)  the other member is a *corporate tax entity at the time the distribution is made, but no *franking credit arises for the entity as a result of the distribution;

                     (e)  the other member is a *corporate tax entity at the time the distribution is made, but cannot use *franking credits received on the distribution to *frank distributions to its own members because:

                              (i)  it is not a *franking entity; or

                             (ii)  it is unable to make *frankable distributions;

                             (f)   the other member is an *exempting entity.

                 (9)   A *member of an entity *derives a greater benefit from franking credits than another member of the entity if any of the following circumstances exist in relation to the first member in the income year in which the *distribution giving rise to the benefit is made, and not in relation to the other member:

                            (a)   a *franking credit arises for the first member under item 5, 6 or 7 of the table in section 208‑130 (distributions by *exempting entities to exempting entities);

                            (b)   a franking credit or *exempting credit arises for the first member because the distribution is *franked with an exempting credit;

                            (c)   the first member is entitled to a *tax offset because:

                                       (i)   the distribution is a *franked distribution made by an exempting entity; or

                                      (ii)   the distribution is *franked with an exempting credit.

           (10)  A *member of an entity *derives a greater benefit from franking credits than another member if the first member is entitled to a *tax offset under section 210‑170 as a result of the *distribution, and the other member is not.

204‑35  When does a franking debit arise if the Commissioner makes a determination under paragraph 204‑30(3)(a)

             (1)  If the Commissioner makes a determination giving rise to a *franking debit in the *franking account of an entity under paragraph 204‑30(3)(a), the debit arises in the franking account of the entity on the day on which the notice of determination is given to the entity in accordance with section 204‑50.

                 (2)   If the Commissioner makes a determination giving rise to an *exempting debit in the *exempting account of an entity under paragraph 204‑30(3)(b), the debit arises in the exempting account of the entity on the day on which the notice of determination is given to the entity in accordance with section 204‑50.

204‑40  Amount of the franking debit

             (1)  The amount of the *franking debit arising because of a determination by the Commissioner under paragraph 204‑30(3)(a) must not exceed:

                     (a)  if the specified *distribution has been *franked—the difference between the amount of the *franking credit on the distribution and an amount worked out by multiplying the amount of the distribution by the highest *franking percentage at which a distribution to a favoured member is franked; or

                     (b)  if the specified distribution, although *frankable, has not been franked—an amount worked out by multiplying the amount of the distribution by the highest franking percentage at which a distribution to a favoured member is franked; or

                     (c)  if the specified distribution is *unfrankable—an amount worked out by multiplying the amount of the distribution by the highest franking percentage at which a distribution to a favoured member is franked; or

                     (d)  if the specified benefit is the issue of bonus shares from a share premium account—an amount worked out by multiplying the amount debited to the share premium account in respect of the bonus shares by the highest franking percentage at which a distribution to a favoured member is franked; or

                     (e)  if some other benefit is specified—an amount worked out by multiplying the value of the benefit by the highest franking percentage at which a distribution to a favoured member is franked.

             (2)  In specifying the *franking debit, the Commissioner must have regard to:

                     (a)  any *franking debit already arising in the *franking account of the entity under paragraph 203‑50(1)(b) because the entity franked the specified *distribution in breach of the *benchmark rule; and

                     (b)  any franking debit already arising in the franking account of the entity, because of the specified distribution or benefit, under section 204‑15 (about linked distributions) or section 204‑25 (about substituting *tax‑exempt bonus shares for *franked distributions).

204‑41  Amount of the exempting debit

                         The amount of the *exempting debit arising because of a determination by the Commissioner under paragraph 204‑30(3)(b) must not exceed:

                            (a)   if the specified *distribution has been *franked with an exempting credit—the difference between the amount of the *exempting credit on the distribution and an amount worked out by multiplying the amount of the distribution by the highest *exempting percentage at which a distribution to a favoured member is franked; or

                            (b)   if the specified distribution, although *frankable, has not been franked with an exempting credit—an amount worked out by multiplying the amount of the distribution by the highest exempting percentage at which a distribution to a favoured member is franked; or

                            (c)   if the specified distribution is *unfrankable—an amount worked out by multiplying the amount of the distribution by the highest exempting percentage at which a distribution to a favoured member is franked; or

                            (d)   if the specified benefit is the issue of bonus shares from a share premium account—an amount worked out by multiplying the amount debited to the share premium account in respect of the bonus shares by the highest exempting percentage at which a distribution to a favoured member is franked; or

                            (e)   if some other benefit is specified—an amount worked out by multiplying the value of the benefit by the highest exempting percentage at which a distribution to a favoured member is franked.

204‑45  Effect of a determination about distributions to favoured members

                   If the Commissioner makes a determination denying an *imputation benefit under paragraph 204‑30(3)(c) (about distributions to favoured members), the determination has effect according to its terms.

204‑50  Assessment and notice of determination

             (1)  A determination under subsection 204‑30(3) does not form part of an assessment.

             (2)  The Commissioner must give notice in writing of the determination:

                     (a)  in a case where the Commissioner determines that a *franking debit is to arise in the *franking account of an entity under paragraph 204‑30(3)(a)—to the entity; and

                            (b)   in a case where the Commissioner determines that an *exempting debit is to arise in the *exempting account of an entity under paragraph 204‑30(3)(b)—to the entity; and

                            (c)   in a case where a favoured member is denied an *imputation benefit under paragraph 204‑30(3)(c)—to the favoured member.

             (3)  If the Commissioner makes a determination denying an *imputation benefit under paragraph 204‑30(3)(c) on a *distribution made by a *listed public company, the Commissioner is taken to have served notice in writing of the determination on the favoured member if the Commissioner causes a notice to be published in a daily newspaper that circulates generally in each State, the Australian Capital Territory and the Northern Territory. The notice is taken to have been served on the day on which the publication takes place.

204‑55  Right to review where a determination made

                   If a taxpayer to whom a determination relates is dissatisfied with the determination, the taxpayer may object to it in the manner set out in Part IVC of the Taxation Administration Act 1953.

Subdivision 204‑EDisclosure requirements

Guide to Subdivision 204‑E

204‑65  What this Subdivision is about

This Subdivision requires an entity to notify the Commissioner where there is a significant difference in its benchmark franking percentage over time, so that the Commissioner can assess whether there is streaming.

Table of sections

Operative provisions

204‑70      Application of this Subdivision

204‑75      Notice to the Commissioner

204‑80      Commissioner may require information where the Commissioner suspects streaming

Operative provisions

204‑70  Application of this Subdivision

             (1)  This Subdivision applies to an entity if the difference between:

                     (a)  the *benchmark franking percentage for the entity for a *franking period (the current franking period); and

                     (b)  the benchmark franking percentage for the entity for the last franking period in which a *frankable distribution was made (the last relevant franking period);

is more than the amount worked out using the following formula (whether the percentage for the current franking period is more than or less than the percentage for the last relevant franking period):

             (2)  However, this Subdivision does not apply to an entity to which the benchmark rule does not apply.

Note:          Section 203‑20 identifies the entities to which the benchmark rule does not apply.

204‑75  Notice to the Commissioner

             (1)  The entity must notify the Commissioner in writing of the difference.

             (3)  The notice must also state:

                     (a)  the *benchmark franking percentage for the current franking period; and

                     (b)  the benchmark franking percentage for the last relevant franking period.

             (4)  The notice must be in the *approved form and must be given to the Commissioner:

                     (a)  if the entity is required to give the Commissioner a *franking return for the income year in which the current franking period occurs—with that return; or

                     (b)  otherwise—within one month after the end of the income year in which the current franking period occurs.

Note:          See Subdivision 214‑A for requirements to give the Commissioner franking returns.

204‑80  Commissioner may require information where the Commissioner suspects streaming

             (1)  The Commissioner may request the entity to give the Commissioner the following information:

                     (a)  the entity’s reasons for setting a benchmark franking percentage for the current franking period that differs significantly from the benchmark franking percentage for the last relevant franking period; and

                     (b)  the *franking percentages for all *frankable distributions made in the current franking period and the last relevant franking period; and

                     (c)  details of any other benefits given to the entity’s *members, either by the entity or an *associate of the entity, during the period beginning at the beginning of the last relevant franking period and ending at the end of the current franking period; and

                     (d)  whether any member of the entity has *derived, or will derive, a *greater benefit from franking credits than another member of the entity as a result of the variation in the benchmark franking percentage between the current franking period and the last relevant franking period; and

                     (e)  any other information required by the *approved form that is relevant in determining whether the entity is streaming *distributions.

             (2)  The entity must comply with the Commissioner’s request.

Division 205Franking accounts, franking deficit tax liabilities and the related tax offset

  

Guide to Division 205

205‑1  What this Division is about

This Division:

•      creates a franking account for each entity that is, or has been, a corporate tax entity; and

•      identifies when franking credits and debits arise in those accounts and the amount of those credits and debits; and

•      identifies when there is a franking surplus or deficit in the account; and

•      creates a liability to pay franking deficit tax if the account is in deficit at certain times; and

•      creates a tax offset for that liability.

Table of sections

205‑5        Franking accounts, franking deficit tax liabilities and the related tax offset

Operative provisions

205‑10      Each entity that is or has been a corporate tax entity has a franking account

205‑15      Franking credits

205‑20      Paying a PAYG instalment, income tax or diverted profits tax

205‑25      Residency requirement for an event giving rise to a franking credit or franking debit

205‑30      Franking debits

205‑35      Refund of income tax or diverted profits tax

205‑40      Franking surplus and deficit

205‑45      Franking deficit tax

205‑50      Deferring franking deficit

205‑70      Tax offset arising from franking deficit tax liabilities

205‑5  Franking accounts, franking deficit tax liabilities and the related tax offset

             (1)  Each entity that is, or has ever been, a corporate tax entity has a franking account.

             (2)  The payment of a PAYG instalment or income tax will generate a franking credit in that account. The amount of the credit is equal to the amount of tax paid. The receipt of a franked distribution by an entity from another corporate tax entity will also generate a franking credit. There are other circumstances in which a franking credit arises.

             (3)  The receipt of a refund of income tax or the payment of a franked distribution by a corporate tax entity will generate a franking debit. There are, however, other cases where a franking debit arises. For example, a franking debit might arise under a determination by the Commissioner because distributions have been streamed.

             (4)  An entity must be a franking entity at certain times and satisfy certain residency requirements before a franking credit or debit arises in its account.

             (5)  Franking deficit tax is payable if the franking account of an entity is in deficit at the end of the entity’s income year, or when the entity ceases to be a franking entity.

             (6)  A tax offset is available to an entity that has incurred a liability to pay franking deficit tax.

Operative provisions

205‑10  Each entity that is or has been a corporate tax entity has a franking account

                   There is a franking account for each entity that is, or has at any time been, a *corporate tax entity.

Note:          The balance in the franking account on 1 July 2002 will either be nil or, if the entity had a franking surplus or deficit immediately before 1 July 2002 under the imputation scheme existing at that time, an amount calculated under the Income Tax (Transitional Provisions) Act 1997.

205‑15  Franking credits

             (1)  The following table sets out when a credit arises in the *franking account of an entity and the amount of the credit. The credit is called a franking credit.

 

Credits in the franking account

Item

If:

A credit of:

Arises:

1

the entity *pays a PAYG instalment; and

the entity satisfies the *residency requirement for the income year in relation to which the PAYG instalment is paid; and

the entity is a *franking entity for the whole or part of the relevant *PAYG instalment period

that part of the payment that is attributable to the period during which the entity was a franking entity, less any reduction under subsection (4)

on the day on which the payment is made

2

the entity *pays income tax; and

the entity satisfies the *residency requirement for the income year for which the tax is paid; and

the entity is a *franking entity for the whole or part of that income year

that part of the payment that is attributable to the period during which the entity was a franking entity, less any reduction under subsection (4)

on the day on which the payment is made

3

a *franked distribution is made to the entity; and

the entity satisfies the *residency requirement for the income year in which the distribution is made; and

the entity is a *franking entity when it receives the distribution; and

the entity is entitled to a *tax offset because of the distribution under Division 207

the *franking credit on the distribution

on the day on which the distribution is made

4

a *franked distribution *flows indirectly to the entity through a partnership or the trustee of a trust; and

the entity is a *franking entity when the franked distribution is made; and

the entity is entitled to a *tax offset because of the distribution under Division 207

the entity’s share of the *franking credit on the distribution

at the time specified in subsection (2)

5

the entity incurs a liability to pay *franking deficit tax under section 205‑45 or 205‑50

the amount of the liability

immediately after the liability is incurred

6

a *franking credit arises under section 316‑275 for the *friendly society or one of its *wholly‑owned subsidiaries because the society or subsidiary *receives a refund of income tax

the amount of the debit specified in subsection 316‑275(3)

at the time provided by subsection 316‑275(4)

7

a *franking credit arises under subsection 418‑50(1) in relation to an *exploration credit

the amount of the *franking credit specified in subsection 418‑50(2)

at the time provided by subsection 418‑50(3)

8

the entity *pays diverted profits tax; and

the entity satisfies the *residency requirement for the income year for which the tax is paid; and

the entity is a *franking entity for the whole or part of that income year

that part of the payment that is attributable to the period during which the entity was a franking entity, multiplied by the proportion worked out under subsection (5)

on the day on which the payment is made

             (2)  A *franking credit covered by item 4 of the table arises at the end of the income year:

                     (a)  that is an income year of the last partnership or trust interposed between:

                              (i)  the entity; and

                             (ii)  the *corporate tax entity that made the distribution; and

                     (b)  during which the *franked distribution *flows indirectly to the entity.

             (3)  Despite item 1 or 2 of the table in subsection (1), no credit arises on that part of the payment that is attributable to a payment of income tax in relation to an *RSA component.

             (4)  An entity’s *franking credit for a payment mentioned in item 1 or 2 of the table in subsection (1) is reduced by the amount (if any) worked out as follows, but not below zero.

Method statement

Step 1.   Identify any income years ending before the payment was made for which the entity has *received a refund of income tax.

Step 2.   Add up the part (if any) of each of those refunds that is attributable to a *tax offset that is subject to the refundable tax offset rules because of section 67‑30 (about R&D).

Step 3.   Subtract any reduction under this subsection of a *franking credit for any earlier payment by the entity. (For this purpose, assume a credit reduced to zero is still a franking credit.)

             (5)  The proportion is the standard corporate tax rate (within the meaning of Part IVA of the Income Tax Assessment Act 1936) divided by 40%.

205‑20  Paying a PAYG instalment, income tax or diverted profits tax

             (1)  An entity pays a PAYG instalment if and only if:

                     (a)  the entity has a liability to pay the instalment; and

                     (b)  either:

                              (i)  the entity makes a payment to satisfy the liability (in whole or in part); or

                             (ii)  a credit, or an *RBA surplus, is applied to discharge or reduce the liability.

Note:          The requirement in paragraph (a) means that the entity cannot generate franking credits by making a “voluntary” payment of income tax (that is, paying an amount on account of income tax for which the entity is not liable at the time when the payment is made).

             (2)  If an entity:

                     (a)  is liable to pay a *PAYG instalment; and

                     (b)  has a *PAYG instalment variation credit;

the PAYG instalment variation credit must be fully applied to reduce the liability for the PAYG instalment before any other credit or payment can be applied to reduce that liability.

             (3)  An entity pays income tax if and only if:

                     (a)  the entity has a liability to pay the income tax; and

                     (b)  either:

                              (i)  the entity makes a payment to satisfy the liability (in whole or in part); or

                             (ii)  a credit, or an *RBA surplus, is applied to discharge or reduce the liability.

Note:          The requirement in paragraph (a) means that the entity cannot generate franking credits by making a “voluntary” payment of income tax (that is, paying an amount on account of income tax for which the entity is not liable at the time when the payment is made).

          (3A)  An entity pays diverted profits tax if and only if:

                     (a)  the entity has a liability to pay the *diverted profits tax; and

                     (b)  either:

                              (i)  the entity makes a payment to satisfy the liability (in whole or in part); or

                             (ii)  a credit, or an *RBA surplus, is applied to discharge or reduce the liability.

             (4)  Subparagraphs (1)(b)(ii), (3)(b)(ii) and (3A)(b)(ii) do not apply to the application of a credit allowable under or by virtue of section 45‑30 or 45‑215 in Schedule 1 to the Taxation Administration Act 1953 (these sections deal with credits for *PAYG instalments payable and credit on using a varied rate in certain cases).

             (5)  The amount of the *PAYG instalment or income tax paid is equal to:

                     (a)  the amount of the liability, if it is satisfied in full; or

                     (b)  the amount by which the liability is reduced, if it is not satisfied in full.

             (6)  If:

                     (a)  a surplus in an *RBA of an entity is applied to satisfy a liability of the entity to *pay a PAYG instalment in respect of an income year; and

                     (b)  a credit allowable under section 45‑30 in Schedule 1 to the Taxation Administration Act 1953 in respect of that income year is included in the RBA; and

                     (c)  the RBA does not include the liability to pay the *PAYG instalment; and

                     (d)  the amount of the credit exceeds the income tax assessed to the entity in respect of that income year;

the amount of the PAYG instalment paid by virtue of the application of the surplus is reduced by the amount of the excess mentioned in paragraph (d).

205‑25  Residency requirement for an event giving rise to a franking credit or franking debit

             (1)  An entity satisfies the residency requirement for an income year in which, or in relation to which, an event specified in a relevant table occurs if:

                     (a)  the entity is a company, or a *corporate limited partnership, to which at least one of the following subparagraphs applies:

                              (i)  the entity is an Australian resident for more than one half of the 12 months immediately preceding the event if the event occurs before the end of the income year;

                             (ii)  the entity is an Australian resident at all times during the income year when the entity exists if the event occurs at or after the end of the income year;

                            (iii)  the entity is an Australian resident for more than one half of the income year (whether or not the event occurs before the end of the income year); or

                     (c)  the entity is a *public trading trust for the income year.

                 (2)   The tables in sections 205‑15 and 205‑30 are relevant for the purposes of subsection (1).

205‑30  Franking debits

             (1)  The following table sets out when a debit arises in the *franking account of an entity and the amount of the debit. The debit is called a franking debit.

 

Debits in the franking account

Item

If:

A debit of:

Arises:

1

the entity *franks a *distribution

the amount of the *franking credit on the distribution

on the day on which the distribution is made

2

the entity *receives a refund of income tax; and

the entity satisfies the *residency requirement for the income year to which the refund relates; and

the entity was a *franking entity during the whole or part of the income year to which the refund relates

that part of the refund that is attributable to the period during which the entity was a franking entity

on the day on which the refund is received

2A

the entity *receives a *tax offset refund; and

the entity does not satisfy the *residency requirement for the income year to which the refund relates; and

the entity was a *franking entity during the whole or part of the income year to which the refund relates; and

the entity’s *franking account is in *surplus on the day on which the refund is received

the lesser of:

(a) that part of the refund that is attributable to the period during which the entity was a franking entity; and

(b) the amount of the *franking surplus

on the day on which the refund is received

3

a *franking debit arises for the entity under paragraph 203‑50(1)(b) (the entity *franks a *distribution in contravention of the *benchmark rule)

the franking debit worked out under paragraph 203‑50(2)(b)

on the day specified in subsection 203‑50(4)

4

the entity ceases to be a *franking entity; and

the entity’s *franking account is in *surplus immediately before ceasing to be a franking entity

the amount of the *franking surplus

on the day on which the entity ceases to be a franking entity

5

a *franking debit arises for the entity under section 204‑15 (linked distributions)

the franking debit specified in subsection 204‑15(3)

on the day specified in subsection 204‑15(4)

6

a *franking debit arises under section 204‑25 (debit for substituting *tax‑exempt bonus shares for *franked distributions)

the amount of the debit specified in subsection 204‑25(2)

on the day specified in subsection 204‑25(3)

7

the Commissioner makes a determination under paragraph 204‑30(3)(a) giving rise to a *franking debit for the entity (streaming distributions)

the amount of the debit specified in the determination

on the day specified in section 204‑35

7A

a *franking debit arises under subsection 197‑45(1) because an amount to which Division 197 applies is transferred to a company’s *share capital account

the amount of the debit specified in subsection 197‑45(2)

at the time provided by subsection 197‑45(1)

7B

a *franking debit arises under subsection 197‑65(2) because a company chooses to untaint its *share capital account

the amount of the debit specified in subsection 197‑65(3)

at the time provided by subsection 197‑65(2)

9

an *on‑market buy‑back by a company of a *membership interest in the company

an amount equal to the debit that would have arisen if:

(a) the purchase of the interest were a *frankable distribution equal to the one that would have arisen if the company had purchased the interest *off‑market; and

(b) the distribution were *franked at the entity’s *benchmark franking percentage for the *franking period in which the purchase was made or, if the entity does not have a benchmark franking percentage for the period, at a *franking percentage of 100%

on the day on which the interest is purchased

10

a *franking debit arises under section 316‑260 for the *friendly society or one of its *wholly‑owned subsidiaries because the *franking account of the society or subsidiary is in *surplus

the amount of the debit specified in subsection 316‑260(2)

at the time provided by subsection 316‑260(3)

11

a *franking debit arises under section 316‑265 for the *friendly society or one of its *wholly‑owned subsidiaries because a *franking credit arises for the society or subsidiary

the amount of the debit specified in subsection 316‑265(3)

at the time provided by subsection 316‑265(4)

12

a *franking debit arises under section 316‑270 for the *friendly society or one of its *wholly‑owned subsidiaries because a *franking credit arises for the society or subsidiary

the amount of the debit specified in subsection 316‑270(3)

at the time provided by subsection 316‑270(4)

13

the entity *receives a refund of diverted profits tax; and

the entity satisfies the *residency requirement for the income year to which the refund relates; and

the entity was a *franking entity during the whole or part of the income year to which the refund relates

that part of the refund that is attributable to the period during which the entity was a franking entity, multiplied by the proportion worked out under subsection (3)

on the day on which the refund is received

Note:          For completeness, the table refers to some franking debits that arise under other sections of the Act. This does not mean that separate franking debits arise both under the relevant section and this table.

             (2)  Despite item 2 of the table in subsection (1), no debit arises on that part of the refund that is attributable to any of the following:

                     (a)  a payment of income tax in relation to an *RSA component;

                     (b)  a *tax offset that is subject to the refundable tax offset rules because of section 67‑30 (about R&D).

             (3)  The proportion is the standard corporate tax rate (within the meaning of Part IVA of the Income Tax Assessment Act 1936) divided by 40%.

205‑35  Refund of income tax or diverted profits tax

             (1)  An entity receives a refund of income tax if and only if:

                     (a)  either:

                              (i)  the entity receives an amount as a refund; or

                             (ii)  the Commissioner applies a credit, or an *RBA surplus, against a liability or liabilities of the entity; and

                     (b)  the refund of the amount, or the application of the credit, represents in whole or in part:

                              (i)  a return to the entity of an amount paid or applied to satisfy the entity’s liability to pay income tax; or

                             (ii)  the amount remaining after applying a *tax offset that is subject to the refundable tax offset rules because of section 67‑30 (about R&D) against the entity’s basic income tax liability.

          (1A)  An entity receives a refund of diverted profits tax if and only if:

                     (a)  either:

                              (i)  the entity receives an amount as a refund; or

                             (ii)  the Commissioner applies a credit, or an *RBA surplus, against a liability or liabilities of the entity; and

                     (b)  the refund of the amount, or the application of the credit, represents in whole or in part a return to the entity of an amount paid or applied to satisfy the entity’s liability to pay *diverted profits tax.

             (2)  The amount of the refund is so much of the amount refunded or applied as represents the return, or amount remaining, referred to in paragraph (1)(b) or (1A)(b).

205‑40  Franking surplus and deficit

             (1)  An entity’s *franking account is in surplus at a particular time if, at that time, the sum of the *franking credits in the account exceeds the sum of the *franking debits in the account. The amount of the franking surplus is the amount of the excess.

             (2)  An entity’s *franking account is in deficit at a particular time if, at that time, the sum of the *franking debits in the account exceeds the sum of the *franking credits in the account. The amount of the franking deficit is the amount of the excess.

205‑45  Franking deficit tax

Object

             (1)  While recognising that an entity may anticipate *franking credits when *franking *distributions, the object of this section is to prevent those credits from being anticipated indefinitely by requiring the entity to reconcile its *franking account at certain times and levying tax if the account is in *deficit.

Franking deficit at end of income year

             (2)  An entity is liable to pay franking deficit tax imposed by the New Business Tax System (Franking Deficit Tax) Act 2002 if its *franking account is in *deficit at the end of an income year.

Corporate tax entity ceases to be a franking entity

             (3)  An entity is liable to pay *franking deficit tax imposed by the New Business Tax System (Franking Deficit Tax) Act 2002 if:

                     (a)  it ceases to be a *franking entity; and

                     (b)  immediately before it ceases to be a franking entity, its *franking account is in *deficit.

Note:          The tax is imposed in the New Business Tax System (Franking Deficit Tax) Act 2002 and the amount of the tax is set out in that Act.

205‑50  Deferring franking deficit

Object

             (1)  The object of this section is to ensure that an entity does not avoid *franking deficit tax by deferring the time at which a *franking debit occurs in its *franking account.

End of year deficit deferred

             (2)  An entity is taken to have *received a refund of income tax for an income year immediately before the end of that year for the purposes of subsection 205‑45(2) if:

                     (a)  the refund is paid within 3 months after the end of that year; and

                     (b)  the *franking account of the entity would have been in *deficit, or in deficit to a greater extent, at the end of that year if the refund had been received in that year.

Deficit on ceasing to be a franking entity deferred

             (3)  If an entity ceases to be a *franking entity during an income year, the entity is taken to have *received a refund of income tax immediately before it ceased to be a franking entity for the purposes of subsection 205‑45(3) if:

                     (a)  the refund is attributable to a period in the year during which the entity was a franking entity; and

                     (b)  the refund is paid within 3 months after the entity ceases to be a franking entity; and

                     (c)  the *franking account of the entity would have been in *deficit, or in deficit to a greater extent, immediately before it ceased to be a franking entity if the refund had been received before it ceased to be a franking entity.

205‑70  Tax offset arising from franking deficit tax liabilities

When does the tax offset arise?

             (1)  A *corporate tax entity is entitled to a *tax offset for an income year for which it satisfies the *residency requirement (the relevant year) if at least one of the following applies:

                     (a)  the entity has incurred a liability to pay *franking deficit tax in the relevant year;

                     (b)  the entity incurred such a liability in a previous income year for which it did not satisfy the residency requirement, and that liability has not been taken into account in working out a tax offset under this section;

                     (c)  when the entity was last entitled to a tax offset under this section for a previous income year, some of the offset remained after applying section 63‑10 (tax offset priority rules).

The amount of the tax offset

             (2)  Work out the amount of the *tax offset for the relevant year as follows:

Method statement

Step 1.   Work out the total amount of *franking deficit tax that is covered by paragraph (1)(a).

              Then, subject to subsections (5) and (6), reduce so much of it as is attributable to *franking debits to which subsection (8) applies by 30% if that part exceeds 10% of the total amount of *franking credits that arose in the entity’s *franking account for the relevant year.

Step 2.   Work out the total amount of *franking deficit tax that is covered by paragraph (1)(b) for a previous income year.

              Then, subject to subsections (5) and (6), reduce so much of it as is attributable to *franking debits to which subsection (8) applies by 30% if that part exceeds 10% of the total amount of *franking credits that arose in the entity’s *franking account for that previous income year.

Step 3.   Add up the results of step 2 for all the previous income years covered by paragraph (1)(b).

Step 4.   Work out the remaining amount of a *tax offset covered by paragraph (1)(c).

Step 5.   Add up the results of steps 1, 3 and 4. The result is the *tax offset to which the entity is entitled under this section for the relevant year.

Note:          This method statement is modified for certain late balancing entities: see section 205‑70 of the Income Tax (Transitional Provisions) Act 1997.

Example:    The following apply to a corporate tax entity that satisfies the residency requirement for an income year:

•       the entity’s income tax liability for that year would be $100,000 if its tax offsets were disregarded;

•       for that year, the entity has a tax offset of $60,000 under this section (the franking deficit offset) and a tax offset of $80,000 in respect of foreign income tax paid by the entity (the foreign income tax offset).

                   Under section 63‑10 (about tax offset priority rules), the foreign income tax offset must be applied before the franking deficit offset is applied. As a result, that offset and $20,000 of the franking deficit offset combine to reduce the entity’s income tax liability to nil. The remaining $40,000 of the franking deficit offset will be included in a franking deficit offset for the next income year for which the entity satisfies the residency requirement.

Residency requirement

             (4)  To determine whether the entity satisfies the *residency requirement for the relevant year, section 205‑25 has effect as if each of the following were an event specified in a relevant table for the purposes of that section:

                     (a)  the entity incurring a liability to pay *franking deficit tax in the relevant year;

                     (b)  the assessment of the entity’s income tax liability for the relevant year that is made on the *assessment day for that year.

30% reduction will generally not apply to private company’s first year of tax liability

             (5)  The 30% reductions in steps 1 and 2 of the method statement in subsection (2) do not apply in working out the amount of the *tax offset to which the entity is entitled for the relevant year if:

                     (a)  the entity is a *private company for the relevant year; and

                     (b)  if the company did not have the tax offset (but had all its other tax offsets) it would have had an income tax liability for the relevant year; and

                     (c)  the company has not had an income tax liability for any income year before the relevant year; and

                     (d)  the amount of the liability referred to in paragraph (b) is at least 90% of the amount of the *deficit in the company’s *franking account at the end of the relevant year.

Commissioner’s discretion

             (6)  The 30% reductions in steps 1 and 2 of the method statement in subsection (2) do not apply in working out the amount of the *tax offset to which the entity is entitled for the relevant year if the Commissioner determines in writing, on application by the entity in the *approved form, that the excess referred to in those steps was due to events outside the control of the entity.

             (7)  A determination under subsection (6) is not a legislative instrument.

Applicable franking debits

             (8)  This subsection applies to *franking debits in the *franking account of an entity:

                     (a)  that arise under table item 1, 3, 5 or 6 in section 205‑30 for an income year; and

                     (b)  if the entity has franking debits covered by paragraph (a) for that income year—that arise under table item 2 in that section for that income year.

Division 207Effect of receiving a franked distribution

  

Table of Subdivisions

             Guide to Division 207

207‑A   Effect of receiving a franked distribution generally

207‑B    Franked distribution received through certain partnerships and trustees

207‑C    Residency requirements for the general rule

207‑D   No gross‑up or tax offset where distribution would not be taxed

207‑E    Exceptions to the rules in Subdivision 207‑D

207‑F    No gross‑up or tax offset where the imputation system has been manipulated

Guide to Division 207

Table of sections

207‑5        Overview

207‑5  Overview

             (1)  If a corporate tax entity makes a franked distribution to one of its members, then, as a general rule:

                     (a)  an amount equal to the franking credit on the distribution is included in the member’s assessable income; and

                     (b)  the member is entitled to a tax offset equal to the same amount.

             (2)  In some cases a residency requirement must be satisfied for the general rule to apply.

             (3)  If a franked distribution is made to a member that is a partnership or the trustee of a trust, an amount equal to the franking credit on the distribution is also included in the member’s assessable income as mentioned in paragraph (1)(a).

             (4)  However, a tax offset in relation to that distribution is only available to an entity (who may be a partner, beneficiary or a trustee) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. The tax offset is equal to its share of the franking credit on the distribution.

Note:          That share is a notional amount and the entity can have that share without actually receiving any of that franking credit or distribution.

             (5)  There are exceptions to both the general rule mentioned in subsection (1) and the special rule mentioned in subsection (4). Basically, these exceptions are created:

                     (a)  where the relevant entity would not have paid tax on the distribution or a share of the distribution (see Subdivisions 207‑D and 207‑E); and

                     (b)  where there is a manipulation of the imputation system in a manner that is not permitted under the income tax law (see Subdivision 207‑F).

Subdivision 207‑AEffect of receiving a franked distribution generally

Guide to Subdivision 207‑A

207‑10  What this Subdivision is about

As a general rule, if a member of an entity receives a franked distribution:

•      an amount equal to the franking credit on the distribution is included in the member’s assessable income; and

•      the member is entitled to a tax offset equal to the franking credit on the distribution.

Table of sections

Operative provisions

207‑15      Applying the general rule

207‑20      General rule—gross‑up and tax offset

Operative provisions

207‑15  Applying the general rule

             (1)  This Subdivision sets out, as a general rule, the tax effect of receiving a *franked distribution.

             (2)  This Subdivision does not apply to:

                     (a)  a partnership or trustee to whom a *franked distribution is made (except a partnership or trustee that is a *corporate tax entity, or a trustee of a trust that is a *complying superannuation entity, when the distribution is made); or

                     (b)  an entity to whom a franked distribution *flows indirectly.

Note:          Subject to the other provisions in this Division, Subdivision 207‑B applies to an entity excluded from the application of this Subdivision because of this subsection.

             (3)  This Subdivision applies subject to Subdivisions 207‑C, 207‑D, 207‑E and 207‑F.

Note 1:       Subdivision 207‑C sets out the residency requirements that must be satisfied by an individual or a corporate tax entity that receives a franked distribution.

Note 2:       Subdivision 207‑D sets out the cases in which the gross‑up and tax offset rules in this Subdivision and Subdivision 207‑B will not apply because the franked distribution (or a share of it) would not have been taxed in any case.

Note 3:       Subdivision 207‑E sets out the exceptions to the rules in Subdivision 207‑D.

Note 4:       Subdivision 207‑F sets out the cases in which the gross‑up and tax offset rules in this Subdivision and Subdivision 207‑B will not apply because the imputation system has been manipulated in a way that is not permitted under the income tax law.

207‑20  General rule—gross‑up and tax offset

             (1)  If an entity makes a *franked distribution to another entity, the assessable income of the receiving entity, for the income year in which the distribution is made, includes the amount of the *franking credit on the distribution. This is in addition to any other amount included in the receiving entity’s assessable income in relation to the distribution under any other provision of this Act.

             (2)  The receiving entity is entitled to a *tax offset for the income year in which the distribution is made. The tax offset is equal to the *franking credit on the distribution.

Subdivision 207‑BFranked distribution received through certain partnerships and trustees

Guide to Subdivision 207‑B

207‑25  What this Subdivision is about

This Subdivision deals with an entity that receives a benefit of a franked distribution where:

               (a)     the distribution is made to a partnership or the trustee of a trust; and

              (b)     the benefit is received either directly or through other interposed partnerships or trusts.

The distribution is regarded as flowing indirectly to the entity under this Subdivision.

On the basis of a notional amount of the entity’s share of the distribution, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under this Subdivision.

Table of sections

Gross‑up and tax offset

207‑30      Applying this Subdivision

207‑35      Gross‑up—distribution made to, or flows indirectly through, a partnership or trustee

207‑37      Attributable franked distribution—trusts

207‑45      Tax offset—distribution flows indirectly to an entity

Key concepts

207‑50      When a franked distribution flows indirectly to or through an entity

207‑55      Share of a franked distribution

207‑57      Share of the franking credit on a franked distribution

207‑58      Specifically entitled to an amount of a franked distribution

207‑59      Franked distributions within class treated as single franked distribution

Gross‑up and tax offset

207‑30  Applying this Subdivision

                   This Subdivision applies subject to Subdivisions 207‑D, 207‑E and 207‑F.

Note 1:       Subdivision 207‑D sets out the cases in which the gross‑up and tax offset rules in this Subdivision and Subdivision 207‑A will not apply because the franked distribution (or a share of it) would not have been taxed in any case.

Note 2:       Subdivision 207‑E sets out the exceptions to the rules in Subdivision 207‑D.

Note 3:       Subdivision 207‑F sets out the cases in which the gross‑up and tax offset rules in this Subdivision and Subdivision 207‑A will not apply because the imputation system has been manipulated in a way that is not permitted under the income tax law.

207‑35  Gross‑up—distribution made to, or flows indirectly through, a partnership or trustee

Additional amount of assessable income

             (1)  If:

                     (a)  a *franked distribution is made in an income year to an entity that is a partnership or the trustee of a trust; and

                     (b)  the entity is not a *corporate tax entity when the distribution is made; and

                     (c)  if the entity is the trustee of a trust—the trust is not a *complying superannuation entity when the distribution is made;

the assessable income of the partnership or trust for that income year includes the amount of the *franking credit on the distribution.

             (2)  The amount is in addition to any other amount included in that assessable income in relation to the distribution under any other provision of this Act.

Note:          The amount will affect the income tax liability of a partner in the partnership, or a beneficiary or the trustee of the trust: see Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936.

             (3)  Subsection (4) applies if:

                     (a)  a *franked distribution is made, or *flows indirectly, to a partnership or the trustee of a trust in an income year; and

                     (b)  the assessable income of the partnership or trust for that year includes an amount (the franking credit amount) that is all or a part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and

                     (c)  the distribution flows indirectly to an entity that is a partner in the partnership, or a beneficiary or the trustee of the trust; and

                     (d)  disregarding Division 6E of Part III of the Income Tax Assessment Act 1936, the entity has an amount of assessable income for that year that is attributable to all or a part of the distribution.

             (4)  Despite any provisions in Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936, the entity’s assessable income for that year also includes:

                     (a)  in the case of an entity that is a partner in a partnership—so much of the franking credit amount as is equal to the entity’s *share of the *franking credit on the distribution; and

                     (b)  in the case of an entity that is a beneficiary of a trust:

                              (i)  so much of the franking credit amount as is equal to the entity’s share of the franking credit on the distribution; and

                             (ii)  the amount mentioned in section 207‑37.

Example:    A franked distribution of $70 is made to the trustee of a trust in an income year. The trust also has $100 of assessable income from other sources. Under subsection (1), the trust’s assessable income includes an additional amount of $30 (which is the franking credit on the distribution). The trust has a net income of $200 for that income year.

                   There are 2 beneficiaries of the trust, P and Q, who are presently entitled to the trust’s income. Under the trust deed, P is entitled to all of the franked distribution and Q is entitled to all other income.

                   The distribution flows indirectly to P (as P has a share of the trust’s net income that is covered by paragraph 97(1)(a) and has a share of the distribution under section 207‑55 equal to 100% of the distribution).

                   Under this subsection, P’s assessable income includes $70 (the amount mentioned in section 207‑37 (attributable franked distribution)) and also includes the full amount of the franking credit (as P’s share of the franking credit on the distribution is $30 under section 207‑57). Q’s assessable income does not include any of the amount of the franked distribution or the franking credit.

             (5)  Subsection (6) applies if:

                     (a)  a *franked distribution is made, or *flows indirectly, to the trustee of a trust in an income year; and

                     (b)  the assessable income of the trust for that year includes an amount (the franking credit amount) that is all or a part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and

                     (c)  disregarding Division 6E of Part III of the Income Tax Assessment Act 1936, the trustee of the trust is liable to be assessed (and pay tax) in respect of an amount (the assessable amount) under section 98, 99 or 99A of that Act in relation to the trust.

             (6)  Despite any provisions in Division 6 of Part III of the Income Tax Assessment Act 1936, for the purposes of that Division, increase the assessable amount by so much of the franking credit amount as is equal to:

                     (a)  if the trustee of the trust is liable to be assessed (and pay tax) under section 98 of that Act—the sum of:

                              (i)  the trustee’s *share of the *franking credit on the distribution in respect of the beneficiary; and</