ATO ID 2005/31: Streaming of franking credits: distribution to only one class of shareholder
Date of decision: 20 December 2004
Year of income: Year ended 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Will the Commissioner make a determination under paragraph 204-30(3)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) where Company B pays franked dividends to its A-class shareholder to the exclusion of its ordinary shareholder?

Decision
No, the Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 where it cannot be shown that the A class shareholder would derive a greater benefit from franking credits than the ordinary shareholder.

Facts
Company B is an Australian resident company with two shareholders, X and Y. X owns all the ordinary shares and Y owns an A class share in the company. They are both natural persons and Australian residents for taxation purposes. There have been no distributions made to X or Y since the company was incorporated. Company B wishes to pay a franked dividend to its A class shareholder only. The holder of the ordinary shares is not going to be provided with any other benefits (including loans) in lieu of the franked distribution to be paid to the holder of the A class share. X and Y are the only shareholders of the company. There are no other shares on issue.

Reasons for decision
Summary: Section 204-30 of the ITAA1997 was introduced as a specific anti-avoidance provision to apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most, in preference to other shareholders. As a resident recipient of a franked distribution from Company B, Y will be required to gross-up the distribution under section 207-20(1) of the ITAA 1997 and be entitled to a tax offset under section 207-20(2). Consequently, upon receipt of the distribution, Y will be taken to have received an imputation benefit under paragraph 204-30(6)(a) of the ITAA 1997. Subsections 204-30(7) and 204-30(8) of the ITAA 1997 list instances in which a member of an entity will be taken to derive a greater benefit from franking credits than another member of the entity. Of the factors listed in section 204-30(8) of the ITAA 1997 only those listed in paragraphs (a), (b) and (c) will be of relevance in the context of distributions to shareholders that are natural persons. As X and Y are natural persons and Australian residents, their residential status will not in itself confer greater benefits upon one to the exclusion of the other. Furthermore, as they will both be entitled to tax offsets in the event of receiving a franked distribution, one will not secure a greater benefit than the other from franking, on account of their entitlement to an offset. Consequently paragraphs (a) and (b) will not distinguish between X and Y insofar as the ability of one to secure a greater benefit from franking than the other is concerned. Paragraph (c) of section 204-30(8) of the ITAA 1997 examines whether a distribution is being directed towards one member in preference to another based upon the member's ability to derive a greater benefit from the associated tax offset. As an example, the Explanatory Memorandum for the New Business Tax System (Imputation) Bill 2002 cites a corporate tax entity that is not entitled to a refund of excess imputation credits. While the introduction of the loss wastage measures reduces the circumstances in which excess franking credits are wasted, the focus of paragraph (c) is on instances where one member's tax profile limits the value of a tax offset to them. However, both X and Y are entitled to refunds of excess imputation credits and consequently are able to utilize tax offsets associated with distributions to the same extent. To the extent that the amount of tax payable as a result of the distribution is less than the tax offset associated with the distribution, they will both be entitled to a refund equal to the excess. Accordingly, it cannot be said that the entity has directed distributions in such a manner as to confer greater benefits from franking upon a member that is able to derive a greater benefit from franking credits to the exclusion of a member that is unable to do so. Consequently, the Commissioner will not make a determination under paragraph 204-30(3)(c)of the ITAA 1997 where Company B pays franked dividends to it's A-class shareholder to the exclusion of its ordinary shareholder.

Legislative references: Income Tax Assessment Act 1997 section 204-30 section 207-20
Related ATO interpretative decisions: ATO ID 2002/622
Other references: Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002
Subject references: Dividend streaming arrangements Franked dividends Imputation system Shareholders