ATO ID 2005/67: Departure from Benchmark Rule: Commissioner's determination
Date of decision: 17 February 2005
Year of income: Year ending 31 December 2004
Business line: Public Groups and International

Issue
Will the Commissioner exercise his discretion under section 203-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to permit the entity to frank two distributions at a franking percentage that differs from the entity's benchmark franking percentage for that franking period?

Decision
No. The Commissioner will not exercise his discretion under section 203-55 of the ITAA 1997 to permit the entity to frank two distributions at a franking percentage that differs from the entity's benchmark franking percentage for that franking period as the required extraordinary circumstances do not exist.

Facts
Company A, company B and company C are all Australian resident public companies and ultimately 100% subsidiaries of Foreign company, a foreign company listed on an overseas stock exchange. The Australian companies have a substituted accounting period which commences on 1 January and concludes on 31 December each year. The Australian companies are franking entities and will have franking periods of six months ending 30 June and 31 December. The Australian companies propose to form a Multiple Entry Consolidated (MEC) group retrospectively from 1 January 2004 with Company A as the provisional head company. In August 2004, company B paid to Foreign company a distribution that, in an abundance of caution, was franked to 0%. At that time, the MEC group had not finalised its franking account balance to take into consideration tax consolidation and therefore was unable to determine whether sufficient franking credits existed to frank the distribution to 100%. Subsequent to the August 2004 distribution, the MEC group determined that there were sufficient franking credits to frank the August 2004 distribution to 100%. Company B and company C propose to make, by 31 December 2004, distributions franked to 100%.

Reasons for decision
Summary: Section 203-25 of the ITAA 1997 provides that all frankable distributions made by a corporate tax entity within a franking period must be franked to the franking percentage set as the benchmark for that period. This is called the benchmark rule. The Commissioner has the power to permit a departure from the benchmark rule under section 203-55 of the ITAA 1997. Subsection 203-55(1) of the ITAA 1997 provides that Commissioner may, on application by an entity, permit 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. Subsection 203-55(2) of the ITAA 1997 further provides that the Commissioner's powers under this section may only be exercised in extraordinary circumstances. In determining if the requisite extraordinary circumstances exist, subsection 203-55(3) of the ITAA 1997 requires that the Commissioner have regard to the following:

Legislative references: Income Tax Assessment Act 1936 paragraph 128B(3)(ga)
Other references: Explanatory Memorandum - New Business Tax System (Imputation) Act 2002
Subject references: Commissioner's discretion Consolidation Consolidation - franking Distributions Dividend streaming arrangements Frankable dividends Franking accounts Franking credits Imputation system Unfranked dividends