Private ruling: Conduit foreign income
Date of advice: 18 May 2016
Published: June 2016
Ruling period: 1 July 2014 to 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is part of an unfranked dividend, declared by an Australian company (Company A) to be conduit foreign income, received by an Australian company (Company B) and distributed to Company B shareholders, non-assessable non-exempt income for Company B under section 802-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Company B holds shares in Company A. Company B received distributions from Company A in the 20XX income year, to which Company A allocated a franking credit equivalent to 40% franking. The unfranked portion was declared to be conduit foreign income. Company B will declare and pay a distribution (the Distribution) with an unfranked component to Company B shareholders. The Distribution statement will declare an amount of the unfranked part to be conduit foreign income. That Distribution will be paid, and the amount that will be conduit foreign income declared, before the due date for lodgement of Company B's tax return for the 20XX income year. The amount of Company A's distribution that is non-assessable non-exempt income to Company B will be worked out in accordance with paragraph 802-20(2)(b), based on the declared conduit foreign income included in Company A's distribution, the conduit foreign income Company B declares in the Distribution statement Company B makes and expenses Company B incurred that are reasonably related to the total conduit foreign income Company B received, such as bank and interest charges. The total conduit foreign income Company B received in the 20XX income year is greater than the total expenses that are reasonably related to that total conduit foreign income.

Relevant legislative provisions: Section 802-20 of the Income Tax Assessment Act 1997 | Subsection 802-20(1) of the Income Tax Assessment Act 1997 | Subsection 802-20(2) of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Subsection 802-20(1) of the ITAA 1997 provides: An Australian corporate tax entity (the receiving entity) has an amount that is not assessable income and is not exempt income for an income year if: (a) it receives from another Australian corporate tax entity a frankable distribution that has an unfranked part; and (b) the distribution statement for the distribution declares an amount (a received conduit foreign income amount) of the unfranked part to be conduit foreign income; and (c) the receiving entity, after the start of the income year but before the due day for lodging its income tax return for that income year; (i) makes a frankable distribution that has an unfranked part; and (ii) declares an amount (a declared conduit foreign income amount) of the unfranked part to be conduit foreign income. Company B has received from Company A a frankable distribution that has an unfranked part. The Company B Distribution statement declared an amount of the unfranked part to be conduit foreign income. Company B will declare an amount of the unfranked part of the Distribution to be made by Company B to be conduit foreign income and make the Distribution to Company B shareholders before the due date for lodgement of Company B's tax return for the 20XX income year. Accordingly Company B meets the conditions of subsection 802-20(1) of the ITAA 1997. The amount of the Company A Distribution received by Company B that is treated as non-assessable non-exempt income is determined under subsection 802-20(2) of the ITAA 1997. Under subsection 802-20(2) of the ITAA 1997 the amount that is not assessable income and is not exempt income is the lesser of: (a) the sum of the received conduit foreign income amounts that Company B receives during the income year (the total received conduit foreign income (CFI) amounts); and (b) the amount worked out using this formula: Total declared Total received CFI amounts CFI amounts x Total received - Related expenses CFI amounts where: related expenses means Company B's expenses that are reasonably related to the total received conduit foreign income amounts. total declared conduit foreign income amounts means the sum of the declared conduit foreign income amounts in distributions made by Company B before the due day for lodging Company B's income tax return for the 20XX income year. Subsection 802-20(3) of the ITAA 1997 provides that if Company B's expenses that are reasonably related to the total conduit foreign income Company B received equals or exceeds the total conduit foreign income Company B received, the total received conduit foreign income Company B received is not non-assessable non-exempt income. As the total conduit foreign income Company B received in the 20XX income year is greater than the total expenses that are reasonably related to that total conduit foreign income, subsection 802-20(3) of the ITAA 1997 does not apply to Company B. As Company B has incurred expenses that are reasonably related to the total conduit foreign income Company B received, the amount of the Company A distribution that is non-assessable non-exempt income to Company B will be worked out in accordance with paragraph 802-20(2)(b) of the ITAA 1997.