Private ruling: Refundable tax offset and anti-avoidance provisions
Date of advice: 16 November 2016
Published: October 2017
Ruling period: 1 July 2016 to 30 June 2017
Date scheme commenced: 30 September 2016

Ruling: Q1: Will Company X be entitled to a refundable tax offset in accordance with section 67-25 of the Income Tax Assessment Act 1997 (ITAA 1997) as an institution that is eligible for a refund under section 207-115 of the ITAA 1997 on franked dividends or franked liquidation distributions of the Subsidiary? | A1: Yes | Q2: Will any of the 'anti-avoidance’ provisions in Subdivision 207-E of the ITAA 1997 apply to deem Company X to not be treated as an exempt institution eligible for refund? | A2: No

Relevant facts and circumstances: Company X is a public company, limited by guarantee. It is a not-for-profit organisation and registered charity. Company X has non-profit and charitable registration with the Australian Taxation Office and ACNC. The scheme: Company X is acquiring all of the shares in the Subsidiary. Completion of the contract and transfer of the shares occurred in 2016. The Subsidiary is not tax exempt for income tax purposes and is expected to continue to pay tax on profits from its operations. It is anticipated that in the future the Subsidiary may pay franked dividends to Company X if it has both sufficient retained earnings and available cash to declare and pay a dividend. This could be from profits, or franking credits generated either before or after its acquisition by Company X. Additionally, Company X is giving consideration as to whether it would be appropriate to transfer the operations conducted by the Subsidiary as part of a simplification and rationalisation of the operations of the group. In case of a transfer of the operations currently run by the Subsidiary to Company X, substantial frankable dividends would be expected to be paid either as part of the sale and transfer process, or as part of a liquidators’ distribution on any subsequent liquidation of the Subsidiary.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 50-5 | Income Tax Assessment Act 1997 Subdivision 50-B | Income Tax Assessment Act 1997 Section 67-25 | Income Tax Assessment Act 1997 Subsection 67-25(1C) | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 Subdivision 207-E | Income Tax Assessment Act 1997 Section 207-115 | Income Tax Assessment Act 1997 Subsection 207-115(2) | Income Tax Assessment Act 1997 Section 207-20 | Income Tax Assessment Act 1997 Section 207-117 | Income Tax Assessment Act 1997 Section 207-119 | Income Tax Assessment Act 1997 Section 207-120 | Income Tax Assessment Act 1997 Section 207-122 | Income Tax Assessment Act 1997 Section 207-124 | Income Tax Assessment Act 1997 Subsection 207-120(2) | Income Tax Assessment Act 1997 Subparagraphs 207-120(2)(a)(i) | Income Tax Assessment Act 1997 Subparagraphs 207-120(2)(a)(ii) | Income Tax Assessment Act 1997 Subparagraphs 207-120(2)(a)(iii) | Income Tax Assessment Act 1997 Paragraph 207-120(2)(d) | Income Tax Assessment Act 1997 Paragraph 207-120(2)(b) | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: Company X will be entitled to a refundable tax offset in accordance with section 67-25 of the Income Tax Assessment Act 1997 on franked dividends or franked liquidation distributions of the Subsidiary. | Detailed Reasoning - Detailed reasoning: Under the general rule in section 207-20 of the ITAA 1997, an entity which receives a franked distribution is entitled to a tax offset for the income year in which the distribution is made. Holders who are entitled to a tax offset under Division 207, in respect of franking credits received, will also be subject to the refundable tax offset rules in Division 67, unless specifically excluded from the refundable tax offset rules under section 67-25. Company X is a corporate tax entity, which is not ordinarily entitled to a refund due to section 67-25(1C) of the ITAA 1997. However, as an income tax exempt charity it qualifies as an exempt institution that is eligible for a refund under subsection 207-115(2). Section 67-25(1C)(a) therefore exempts the company from the section 67-25(1C) restriction. The company qualifies as an exempt institution that is eligible for a refund under section 207-115(2) because: ● Company X is a “registered charity” under the table in section 50-5 of the ITAA 1997; ● Company X is exempt from income tax under Subdivision 50-B of the ITAA 1997 following the Commissioner’s endorsement of the company as a charitable entity; and ● Company X satisfies the residency requirement in section 207-117 of the ITAA 1997 since it has a physical presence in Australia and incurs expenditure and pursues its objectives principally in Australia. Company X will therefore be entitled to a refund of the franking credits that will be attached to any future distribution from the Subsidiary or as part of a liquidator’s distribution if the Subsidiary is liquidated. | Summary: Based on the facts provided, none of the 'anti-avoidance’ provisions in Subdivision 207-E of the ITAA 1997 will apply to deem Company X to not be treated as an exempt institution entitled to a refundable tax offset. | Detailed Reasoning - Detailed reasoning: Company X will not be treated as an exempt institution that is eligible for a refund in relation to a franked distribution if any of the following sections apply to the entity: (a) section 207-120 of the ITAA 1997 (b) section 207-122 of the ITAA 1997 (c) section 207-124 of the ITAA 1997. These exceptions are considered below. | Detailed Reasoning - Exception 1: section 207-120 of the ITAA 1997: The anti-avoidance rule under section 207-119 of the ITAA 1997 will operate if section 207-120 of the ITAA 1997 applies to Company X. Section 207-120 will apply where Company X receives a franked distribution and because of a distribution event in relation to the distribution, subsection 207-120(2) of the ITAA 1997 applies. | Detailed Reasoning - Distribution event: For present purposes, a distribution event in relation to a franked distribution is an act, transaction or circumstance that has happened, will happen or may reasonably be expected to happen, as part of, in relation to or as a result of the payment or receipt of the distribution or an arrangement entered into in association with the payment or receipt of the distribution. Where such an act, transaction or circumstance happens, or might happen, as a result of the payment or receipt of the distribution, the anti-avoidance rule under section 207-120 of the ITAA 1997 will apply in certain circumstances. Should this anti-avoidance rule apply, Company X will not be an exempt institution that is eligible for a refund. | Detailed Reasoning - Anti-avoidance rule: Section 207-120 of the ITAA 1997 will apply (and consequently cause the anti-avoidance rule under section 207-119 of the ITAA 1997 to operate) in any of the following circumstances: (a) where a liability arises for an entity to make a payment or transfer property to any entity because of a distribution event related to the distribution (subparagraphs 207-120(2)(a)(i) and 207-120(2)(a)(ii) of the ITAA 1997) (b) where a detriment is incurred by an entity because of a distribution event related to the distribution (subparagraph 207-120(2)(a)(iii) of the ITAA 1997) (c) where the benefit to the entity from the distribution is reduced because of a distribution event (paragraph 207-120(2)(b) of the ITAA 1997) (d) where a benefit, advantage, right or privilege is to be obtained by the payer of the distribution or an associate of the payer because of a distribution event related to the distribution (subparagraph 207-120(2)(d) of the ITAA 1997). You have advised there is no related transaction that could operate to reduce the value of a distribution, cause Company X to suffer a detriment, or cause the Subsidiary to obtain a benefit from the payment of any distribution. Based on these facts, section 207-120 of the ITAA 1997 will not apply. | Detailed Reasoning - Exception 2: section 207-122 of the ITAA 1997: This section concerns franked distributions paid in the form of property other than money. You have advised no part of the distributions will be in the form of property other than money therefore section 207-122 of the ITAA 1997 will not apply. | Detailed Reasoning - Exception 3: section 207-124 of the ITAA 1997: Section 207-124 of the ITAA 1997 will apply to Company X or the Subsidiary if: (a) Company X / the Subsidiary or another entity has entered into an arrangement as part of, or in association with the distribution; and (b) because of the arrangement, Company X / the Subsidiary or another entity has acquired or will acquire (whether directly or indirectly) money or property, other than money or property comprising the distribution from the entity making the distribution or an associate of that entity. The term 'arrangement' is broadly defined in subsection 995-1(1) of the ITAA 1997 as: any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. You have advised there is no arrangement as part of, or in association with any future or anticipated distributions under which other money or property (in addition to the distribution) will be acquired by Company X from the Subsidiary or an associate of those entities. If there is no arrangement as part of, or in association with the distribution section 207-124 of the ITAA 1997 will not apply.