Private ruling: Business - franking credit deficit tax
Date of advice: 11 September 2025
Published: 17 November 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise their discretion under subsection 205-70(6) of Income Tax Assessment Act 1997 (ITAA 1997) and allow the full franking deficit offset? | A1: No.

Relevant facts and circumstances: The Company is a family-owned company that has traded since the 1960s. Two brothers, person A and person B, have been the indirect owners and directors since 20XX. Due to several personal and business mishaps made by one of the directors (person B), the family decided to remove all person B's involvement with the business/company in August 20XX. Legal deeds were drafted and share transfer forms executed in August 20XX. A restructure was required to be completed by 30 September 20XX. This created a tight time constraint and pressure involving the calculations to determine the retained earnings of the Company. When determining the franking account position, a refund of PAYG instalments received in the September 20XX quarter was missed, resulting in a franking account deficit on 30 September 20XX. The final dividend was declared and paid in August 20XX. This error was recently identified when the tax agent prepared the 2024 company tax return.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 205-70(1) | Income Tax Assessment Act 1997 subsection 205-70(5) | Income Tax Assessment Act 1997 subsection 205-70(6)

Reasons for decision: Summary: If an entity's account is in deficit at the end of an income year, subsection 205-45(2) of the ITAA 1997 provides that the entity is liable to pay franking deficit tax. Franking deficit tax is an amount equal to the amount of the deficit in the franking account. The object of applying franking deficit tax is to prevent entities relying on franking credits that they anticipate to arise for an indefinite period into the future. Subsection 205-70(1) of the ITAA 1997 provides that a corporate tax entity is entitled to a tax offset arising from a franking deficit tax liability for an income year for which it meets certain residency requirements if at least one of the following applies: • the entity has incurred a liability to pay franking deficit tax in that year • the entity incurred a liability to pay franking deficit tax in a previous income year for which it did not satisfy the residency requirements, and the entity has not already received a tax offset in relation to it, or • when the entity was last entitled to a tax offset under the section for a previous income year, that offset exceeded the amount that would have been its income tax liability for that year if it did not have that offset (but had all its other tax offsets). The amount of the tax offset is usually equal to the amount of the franking deficit tax liability. However, the offset will be reduced by 30% in certain circumstances. The 30% reduction applies where the franking deficit tax liability attributable to certain debits that arose in the franking account for a year is greater than 10% of the total franking credits that arose in the franking account for that year. Subsection 205-70(5) of the ITAA 1997 is about how the offset reduction applies to a private company's first year of tax liability. It states that the 30% reduction of the franking deficit tax offset does not apply if: a) the entity is a private company for the relevant year 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 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. Subsection 205-70(6) of the ITAA 1997 provides that the 30% offset reduction does not apply if the Commissioner exercises his discretion in the relevant year. The Commissioner will determine this in writing, after receiving an application by the entity. The 30% reduction will not be applied if the franking deficit occurred as a result of events that were outside of the control of the entity. The Commissioner will generally consider a franking deficit to have arisen due to events outside the taxpayer's control if the events that gave rise to the deficit were not readily foreseeable and could not be influenced or controlled by the company. For a circumstance to be outside of the taxpayer's or their agent's control or unanticipated, there must have been an event or circumstance which: • was unforeseeable or unexpected • operated alone or together with other circumstances (unusual or not) • was beyond the control of the taxpayer or their agent, and • could not have been avoided by compliance with accepted standards of business organisation and professional conduct. Examples of circumstances outside of the control or unanticipated are: 1. A downturn in business that is linked to the reduced offset. There must be evidence of behaviour on the part of the taxpayer that there was an attempt at mitigation, but that the result was unavoidable. 2. Unusual events which interrupt the ordinary course of business such as: • protracted audits undertaken by the Tax Office which may hinder the preparation, lodgement and payment of income tax • reviews or objections in relation to specific taxation issues which cause unexpected or unavoidable refunds resulting in large franking debits to the franking account • situations resulting in unexpected or unavoidable refunds which trigger franking debits in the franking account • substituted accounting periods which have the effect of shortening the income year and hence shortening the period within which sufficient franking credits can be generated • liquidations, whether voluntary or not, which may shorten the income year and hence shorten the period within which sufficient franking credits can be generated, or • take-overs or consolidation of entities that trigger the consolidation rules obliging the joining entity to determine and pay any outstanding franking deficit tax at the joining time. 3. Circumstances which give rise to special consideration. Where the entity does not provide sufficient evidence of events which fall into one of the three categories which warrant the favourable exercise of the discretion, then the Commissioner cannot make a determination under subsection 205-70(6) of the ITAA 1997. The following do not meet the legislative requirements of 'unanticipated circumstances' or circumstances 'beyond the entity's control': • improper tax planning • bad management • inadvertent errors, and • expansion of business Application to your circumstances The Commissioner has acknowledged that you took immediate action to rectify the franking deficit as soon as it was brought to attention. There is no suggestion that you intended to exploit the imputation system. However, the Commissioner's discretion is limited to deciding as to whether the event or events which caused the excess were outside the control of the company. In this case there was a tight frame between an involuntary exit of a director/shareholder of the company and the calculations to determine the retained earnings. This time frame meant a PAYG instalment refund was missed. We consider the missed PAYG instalment refund was the result of an inadvertent error. Therefore, the Commissioner will not exercise his discretion to make a determination under subsection 205-70(6) of the ITAA 1997.