ATO ID 2004/873: Benchmark Rule: exemption for listed public company
Date of decision: 1 October 2004
Year of income: Year ended 31 March 2004 Year ended 31 March 2005
Business line: Public Groups and International

Issue
Will the benchmark rule in section 203-25 of Income Tax Assessment Act 1997 (ITAA 1997) apply to a provisional head company of a Multiple Entry Consolidated Group (MEC group) whose parent is a listed public company on a foreign stock exchange?

Decision
No. The benchmark rule in section 203-25 of the ITAA 1997 does not apply because the criteria in paragraph 203-20(1)(b) of the ITAA 1997 is satisfied.

Facts
Y Company is a public company listed on a foreign stock exchange, a non-resident for Australian income tax purposes and has only one class of share on issue. The foreign stock exchange is listed in Schedule 12 of the Income Tax Regulations 1936. Y Company owns all the shares of X Company. X Company is a 100% subsidiary (within the meaning of section 975-505 of the ITAA 1997) of Y Company. X Company is the provisional head company of the MEC group, effective from 1 April 2003, involving all of the Australian companies. X Company and other group companies have paid dividends, franked at different percentages over the period since 1 April 2003.

Reasons for decision
Summary: A corporate tax entity is required by section 203-25 of the ITAA 1997 to frank all frankable distributions made within a particular franking period to the same extent. This is known as the benchmark rule. The objective of the benchmark rule is to ensure that a corporate tax entity does not, in the act of franking distributions made by it, demonstrate a preference for some members at the expense of others. However, the benchmark rule does not apply to a company where each of the criteria in paragraph 203-20(1)(a) of the ITAA 1997 are satisfied. These criteria are as follows: X Company is not a listed public company and so does not satisfy paragraph 203-20(1)(a) of the ITAA 1997. However, an entity that is a 100% subsidiary of an entity that satisfies the conditions in paragraph 203-20(1)(a) of the ITAA 1997 will itself qualify for the benchmark rule exclusion under paragraph 203-20(1)(b) of the ITAA 1997. X Company is, and has been, a 100% subsidiary of Y Company, under section 975-505 of the ITAA 1997, throughout the relevant franking periods. Therefore, the benchmark rule will not apply to X Company if Y Company satisfies the conditions in paragraph 203-20(1)(a) of the ITAA 1997. A listed public company is defined in subsection 995-1(1) of the ITAA 1997, subject to a few exceptions that do not apply in this case, as one whose shares are listed for quotation in the official list of an approved stock exchange. An approved stock exchange is defined in subsection 995-1(1) of the ITAA 1997 by reference to section 470 of the Income Tax Assessment Act 1936 , and is a stock exchange named in regulations made for the purposes of the definition. Schedule 12 of the Income Tax Regulations includes the stock exchange on which Y Company is listed. Therefore, Y Company satisfies the criteria in subparagraph 203-20(1)(a)(i) of the ITAA 1997. Y Company has a single class of membership interest. Consequently, it will not be possible for Y Company to make a distribution on one membership interest to the exclusion of another. Therefore, Y Company satisfies the criteria in subparagraph 203-20(1)(a)(ii) of the ITAA 1997. Y Company, because of residency requirements, will not meet the requirements of paragraph 202-5(a) of the ITAA 1997. Consequently, Y Company will not be able to frank a distribution in respect of one membership interest at a franking percentage that differs from that associated with a distribution on another membership interest as it is an entity that is unable to frank any distributions it makes. Therefore, Y Company satisfies the criteria in subparagraph 203-20(1)(a)(iii) of the ITAA 1997. Accordingly, Y Company is not subject to the benchmark rule. This conclusion is supported by paragraph 203-20(2)(a) of the ITAA 1997 which sets out an example of a case in which a company will not be subject to the benchmark rule. As set out above, Y Company is a listed public company with a single class of membership interest at all times during the relevant franking period. As a 100% subsidiary of Y Company, the benchmark rule will not apply to X Company under paragraph 203-20(1)(b) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 section 470
Subject references: Company tax Imputation system