Private ruling: Deferred franking debits
Date of advice: 5 May 2026
Published: 20 July 2026
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: XX/XX/20XX

Ruling: Q1: When the Company joined TCG 2 did the head company of TCG 2 inherit the deferred franking debits of the Company under section 701-5 of the Income Tax Assessment Act 1997 (ITAA1997)? | A1: No. | Q2: Will the Company recognise its deferred franking debit history when it leaves tax consolidated group TCG 2? | A2: Yes. | Q3: When NewCo chose to form a tax consolidated group TCG 3, does it inherit the deferred franking debits of the Company under section 701-5 of the ITAA 1997? | A3: No.

Relevant facts and circumstances: 1. The Company was incorporated on XX/XX/20XX. 2. The Company chose to form a tax consolidated group (TCG 1) on XX/XX/20XX. 3. The Company registered R&D activities with AusIndustry / Department of Industry, Science and Resources during the period XX/XX/20XX to XX/XX/20XX. and claimed refundable R&D tax offsets. 4. The Company has deferred franking debits of $XXX,XXX as at XX/XX/20XX, due to the refundable R&D tax offsets it received as a result of its registered R&D activities and because of the operation of subsection 205-15(4). 5. On XX/XX/20XX, the Company's shareholders entered into an agreement with a Purchaser for it to acquire X% of the Company's shares 6. The Company was restructured prior to the sale, so that it only held the assets of the tax consolidated group the Purchaser had agreed to acquire. 7. On XX/XX/20XX, the Purchaser acquired the shares in the Company. 8. On XX/XX/20XX the Purchaser sold the shares in the Company to NewCo. After NewCo completed the purchase of the Company it chose to form a tax consolidated group pursuant to section 703-50 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 205-15(1) | Income Tax Assessment Act 1997 subsection 205-15(4) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 subsection 701-1(2) | Income Tax Assessment Act 1997 subsection 701-1(3) | Income Tax Assessment Act 1997 section 701-5 | Income Tax Assessment Act 1997 subsection 703-15(2) | Income Tax Assessment Act 1997 section 703-50

Reasons for decision: Summary: Head company of TCG 2 did not inherit the deferred franking debits of Company under section 701-5 upon the Company joining TCG 2. | Detailed Reasoning - History inherited by the head company when a subsidiary member joins a tax consolidated group: 1. Section 701-1 provides the single entity rule, that all subsidiary members of a tax consolidated group are taken for the 'head company core purposes' and 'entity core purposes' (only) to be parts of the head company, rather than separate entities for the duration of the membership. 2. The term 'head company core purposes' is defined in subsection 701-1(2) as follows: The purposes covered by this subsection (the head company core purposes ) are: (a) working out the amount of the *head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the head company's loss (if any) of a particular * sort for any such income year. 3. The term 'entity core purposes' is defined in subsection 701-1(3) and is identical to subsection 701-1(2), except substituting the word 'head company' with 'entity'. 4. Section 701-5 states: For the head company core purposes in relation to the period after the entity becomes a *subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the *head company. 5. In respect of section 701-5, paragraph 2.35 of the Explanatory Memorandum to the Bill accompanying the New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 states: Only history in respect of things that affected taxable income or could affect a later taxable income of the head company is inherited. Consequently history in relation to franking credits ... would not be inherited. | Detailed Reasoning - Deferred franking debits: 6. Generally, a franking credit arises in an entity's franking account when, so far as is relevant, the entity pays a PAYG instalment or income tax (items 1 and in the table in subsection 205-15(1)). However, where a franking debit is not make to the entity's franking account because of a refund of income tax attributable to the refund of a tax offset which the entity is entitled under Division 355 (R&D tax offset refund), a franking credit will not arise in respect of the payment of a PAYG instalment or income tax paid until the deferred franking debit is recovered. 7. Subsection 205-15(4) states: An entity's *franking credit for a payment mentioned in item 1 or 2 of the table in subsection (1) is reduced by the amount (if any) worked out as follows, but not below zero. Method statement Step 1. Identify any income years ending before the payment was made for which the entity has *received a refund of income tax. Step 2. Add up the part (if any) of each of those refunds that is attributable to a *tax offset that is subject to the refundable tax offset rules because of section 67-30 (about R & D). Step 3. Subtract any reduction under this subsection of a *franking credit for any earlier payment by the entity. (For this purpose, assume a credit reduced to zero is still a franking credit.) 8. In the present case, the deferred franking debits of the company when it joins TCG 2 does not affect the determination of liability for income tax or a loss for the head company of TCG 2. This is because franking credits generally only have the potential to affect a shareholder's liability for income tax, as it is the shareholder who can utilise the franking credits attached to a dividend to reduce their future potential income tax liability or the amount that has to be withheld if the company has an obligation to withhold an amount from a distribution because the shareholder is a non-resident. 9. As the deferred franking debits are not required for a head company core purpose, the head company of TCG 2 did not inherit the history concerning the deferred franking debits from the Company under section 701-5 when the Company joined TCG 2. | Detailed Reasoning - Question 2: Will the Company recognise its deferred franking debit history when it leaves TCG 2? | Summary: Yes, the income tax history of the Company before it joined TCG 2 is not forgotten or ignored. When the Company left TCG 2 and became a separate entity for income tax purposes, its franking account is reactivated and the method statement in subsection 205-15(4) would apply to determine if credits to the franking account arising under Items 1 and 2 of the table in subsection 205-15(1) needs to be reduced. | Detailed Reasoning - Detailed reasoning: 10. When a subsidiary member of a tax consolidated group leaves the tax consolidated group, it is treated as separate entity for income tax purposes unless, on leaving, it immediately becomes subsidiary member of another tax consolidated group. 11. The single entity rule only treats subsidiary members of a tax consolidated group for the 'head company core purposes' and 'entity core purposes' only to be parts of the head company, rather than separate entities for the duration of the membership in the tax consolidated group. 12. This does not mean that the income tax history of the entity before it joined the tax consolidated group is forgotten or disregarded. In fact, the note to subsection 701-1(3) states an assessment of the entity's liability calculated by reference to income tax for a period when it was not a subsidiary member of the tax consolidated group may be made, and that tax recovered from it, even while it is a subsidiary member. Accordingly, the subsidiary member retains is income tax history from when it was a separate entity for income tax purposes. 13. Consequently, any deferred franking debits an entity has is not forgotten or disregarded merely because it became a subsidiary member of a tax consolidated group. 14. Items 1 and 2 of the table in subsection 205-15(1) referenced in subsection 205-15(4) broadly provide that a credit arises in the franking account of an entity on the day on which it pays a PAYG instalment or income tax. 15. The Company left TCG 2 on XX/XX/20XX, as it was no longer eligible to be a subsidiary member of that tax consolidated group under Item 2 of table in subsection 703-15(2) because it was not a wholly owned subsidiary of TCG 2 as the exercise of the option resulted in all the Company's shares held by the head company of TCG 2 being transferred to NewCo. 16. Following NewCo acquiring all the shares in the Company, it made the choice pursuant to section 703-50 to form a tax consolidated group. Consequently, all the wholly-owned subsidiaries of NewCo become subsidiary members of the tax consolidated group formed, including the Company. 17. Clearly, if the Company had been a separate entity for income tax purposes after it left TCG 2, it would have had to determine if franking credits, from payments of either PAYG instalments or income tax, would be reduced as a result of applying the method statement in subsection 205-15(4) before being credited to the franking account. This is because the Company had received income tax refunds attributable to refundable R&D tax offsets in income years prior to it becoming a member of TCG 2. | Detailed Reasoning - Question 3: When NewCo chose to form a tax consolidated group, does it inherit the deferred franking debits of the Company under section 701-5? | Summary: When NewCo formed a tax consolidated group, it does not inherit the deferred franking debits of NewCo under section 701-5 upon NewCo joining its tax consolidated group. | Detailed Reasoning - History inherited by the head company when a subsidiary member joins a tax consolidated group: 18. Section 701-1 provides the single entity rule, that all subsidiary members of a tax consolidated group are taken for the 'head company core purposes' and 'entity core purposes' (only) to be parts of the head company, rather than separate entities for the duration of the membership. 19. The term 'head company core purposes' is defined in subsection 701-1(2) as follows: The purposes covered by this subsection (the head company core purposes ) are: (a) working out the amount of the *head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the head company's loss (if any) of a particular * sort for any such income year. 20. The term 'entity core purposes' is defined in subsection 701-1(3) and is identical to subsection 701-1(2), except substituting the word 'head company' with 'entity'. 21. Section 701-5 states: For the head company core purposes in relation to the period after the entity becomes a *subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the *head company. 22. In respect of section 701-5, paragraph 2.35 of the Explanatory Memorandum to the Bill accompanying the New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 states: Only history in respect of things that affected taxable income or could affect a later taxable income of the head company is inherited. Consequently history in relation to franking credits ... would not be inherited. | Detailed Reasoning - Deferred franking debits: 23. Generally, a franking credit arises in an entity's franking account when, so far as is relevant, the entity pays a PAYG instalment or income tax (items 1 and in the table in subsection 205-15(1)). However, where a franking debit is not make to the entity's franking account because of a refund of income tax attributable to the refund of a tax offset which the entity is entitled under Division 355 (R&D tax offset refund), a franking credit will not arise in respect of the payment of a PAYG instalment or income tax paid until the deferred franking debit is recovered. 24. Subsection 205-15(4) states: An entity's *franking credit for a payment mentioned in item 1 or 2 of the table in subsection (1) is reduced by the amount (if any) worked out as follows, but not below zero. Method statement Step 1. Identify any income years ending before the payment was made for which the entity has *received a refund of income tax. Step 2. Add up the part (if any) of each of those refunds that is attributable to a *tax offset that is subject to the refundable tax offset rules because of section 67-30 (about R & D). Step 3. Subtract any reduction under this subsection of a *franking credit for any earlier payment by the entity. (For this purpose, assume a credit reduced to zero is still a franking credit.) 25. In the present case, the deferred franking debits of the Company does not affect the determination of liability for income tax or a loss for NewCo (the head company of TCG 3). This is because franking credits generally only have the potential to affect a shareholder's liability for income tax, as it is the shareholder who can utilise the franking credits attached to a dividend to reduce their future potential income tax liability or the amount that has to be withheld if the company has an obligation to withhold an amount from a distribution because the shareholder is a non-resident. 26. As the deferred franking debits is not required for a head company core purpose, NewCo did not inherit the history concerning the deferred franking debits from the Company under section 701-5 when the Company joined TCG 3.

Reasons for decision: All legislative references are to the ITAA 1997, unless otherwise stated.