Private ruling: Franking deficit tax offset - Commissioner's discretion to not apply the 30% reduction - subsection 205-70(6) of the ITAA 1997
Date of advice: 2 October 2025
Published: 24 November 2025
Ruling period: XXXX income year

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 205-70(6) to not apply the 30% reduction to Company A's tax offset? | A1: No | Q2: If the Commissioner does not exercise the discretion in subsection 205-70(6), will Company A have any further amount of FDT to pay? | A2: No

Relevant facts and circumstances: 1. Company A is an Australian tax resident company incorporated in a foreign jurisdiction. 2. The XXXX income year is the second income year Company A had an income tax liability. 3. Company A is wholly owned by Company B, an Australian tax resident company incorporated in another foreign jurisdiction. 4. Company A and Company B aren't part of an income tax consolidated group for Australian tax purposes. 5. Company A applied for a TFN with the ATO early in the XXXX income year, but the ATO didn't issue Company A with a TFN until a couple of months before the end of the XXXX income year. 6. Company A paid a fully franked dividend to Company B early in the XXXX income year of $X, with $Y of franking credits attached. 7. Company A lodged its income tax return for the previous income year during the XXXX income year, creating an income tax liability of $X. 8. Company A paid $X to its income tax account during the XXXX income year. 9. Company A raised $X to pay an instalment on 30 June XXXX, but the effective date for payment was 1 July. 10. Company A's bank account confirms that the following events happened at the following times (see Table 1 ) in the relevant overseas time zone and AEST, taking AEST to be 8 hours ahead of the relevant overseas time zone. Table 1 : Events relevant to the instalment payment Event Time in the relevant overseas time zone AEST Transaction requested 30 June XXXX at about 7am 30 June XXXX at about 3pm Approved by Company A's bank 30 June XXXX at about 7am 1 July XXXX at about 3pm Sent to the ATO's bank account 30 June XXXX shortly before midnight 1 July XXXX at about 7am Received by the ATO 30 June XXXX shortly before midnight 1 July XXXX at about 7am 11. Company A's income tax account transaction list shows an effective date of 1 July XXXX and a processed date of 2 July XXXX. 12. Company A had a franking account deficit of $X on 30 June XXXX. 13. Company A lodged its Franking Account Tax Return before 31 July XXXX, and paid the $X deficit amount to the ATO on 1 August XXXX. 14. Company A calculates that Company A's franking account deficit: • was about 15% of the total franking credits for the XXXX income year, and • would have been about 5% of the total franking credits for the XXXX income year, had the instalment payment on 1 July been received by the ATO on 30 June. 15. Company A had a daily cap transfer limit with its banks. For example, one of them had a daily transfer limit of $1M. 16. Company A submits that it had made payments to the ATO up to its daily transfer limits for the 5 days before the due date (around $1M each day from 25 June to 30 June). 17. Redacted for privacy reasons. Table 2: payments to the ATO (redacted for privacy reasons) 18. Company A requests the Commissioner to exercise his discretion under subsection 205-70(6).

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 205 | Section 205-70

Reasons for decision: Summary: 19. The discretion in subsection 205-70(6) is only available where the events causing the franking deficit to exceed 10% (of the franking credits for the income year) were outside the entity's control. 20. The Commissioner won't exercise the discretion here. We think bank processing timeframes, bank account transaction limits, and time zone differences are all foreseeable circumstances. We think the cause of the excess was Company A's failure to allow more time to pay. Since this event was within Company A's control, the discretion in subsection 205-70(6) isn't available. | Detailed Reasoning - Explanation: Relevant law: section 205-70 allows an offset for FDT payable but reduces the offset by 30%. 21. Division 205 has rules about the franking account. Entities get franking credits for paying tax and receiving franked distributions, and get franking debits for receiving tax refunds or paying franked distributions. An account is in deficit when the franking deficits exceed the franking credits: see section 205-40. 22. Section 205-45 imposes FDT when the account is in deficit at the end of an income year: see subsection 205-45(2). [1] 23. Section 205-70 entitles a corporate tax entity to a tax offset where it incurs an FDT liability, worked out under a method statement. • Subsection 205-70(1) says a corporate tax entity is entitled to a tax offset for an income year if it incurred a liability for FDT (and satisfies the residency requirement [2] ). • Subsection 205-70(2) has a method statement for working out the amount of the tax offset. • Steps 1 and 2 of that method statement reduce the offset by the amount of franking debits to which subsection (8) applies by 30%, if that part exceeds 10% of the total franking credits that arose in the franking account for the relevant year. • Subsection (8) applies to franking debits that arise from certain items in the table in section 205-30. (Including item 1 for franking a distribution.) The Commissioner's has a discretion not to apply the 30% reduction if the relevant excess is due to events outside the entity's control. 24. The Commissioner has a discretion not to apply the 30% reduction. Subsection 205-70(6) says the 30% reductions in steps 1 and 2 of the method statement don't apply in working out the tax offset if the Commissioner determines that the excess was due to events "outside the control of the entity." 25. The relevant explanatory memorandum [3] (as corrected) [4] made some comments about the Commissioner's discretion. We'll extract or paraphrase the following relevant points. • The purpose of the 30% reduction is to deter companies from passing excessive franking credits to shareholders. [5.4] • The reduction shouldn't apply if the franking debit that caused the franking account to go into deficit arose because of the imposition of a penalty or because the franking deficit arose due to circumstances beyond the company's control. [5.4] • The Commissioner's discretion was announced by a government press release stating that it should apply where, broadly, events that caused the over franking were outside the company's control or were unanticipated, and didn't involve any broader exploitation of the imputation system. [5.15 of the EM as corrected] • While subsection 205-70(6) hasn't been drafted using the same words as the press release, the EM considered that the subsection had the same effect as the press release. [5.16 of the EM as corrected] • An event outside an entity's control includes (but isn't limited to) an event that's unanticipated. In addition, in exercising the discretion, the Commissioner must consider whether the taxpayer has any broader intention to exploit the imputation system. (That is, if the deficit arose where the taxpayer intended to exploit the imputation system, the events would be within the taxpayer's control, and the Commissioner wouldn't exercise the discretion.) [5.15 of the EM as corrected] • Example 5.3 of the EM (as corrected) illustrated a scenario where the Commissioner would exercise the discretion. A company that paid a fully franked dividend reasonably expecting that future PAYG instalment payments would ensure it wouldn't have a deficit at the end of the income year. However, an unexpected business downturn resulted in the company's future PAYG instalment payments being less than expected, creating a deficit. The circumstances were unanticipated and beyond the company's control, so the Commissioner would exercise the discretion to disregard the 30% tax offset reduction. 26. The ATO website [5] makes the following points about the Commissioner's discretion. • The Commissioner will generally consider events outside the entity's control if they are "not readily foreseeable and could not be influenced by the company or did not involve the broader exploitation of the imputation system." • However, the Commissioner doesn't consider that a franking deficit arising due to improper tax planning, bad management, inadvertent errors, or expansion of business are circumstances that are unanticipated or beyond the entity's control. 27. We don't think an event should be treated as being outside the entity's control simply because it doesn't involve broader exploitation of the imputation system. The event must be both not readily foreseeable and unable to be influenced by the entity. The word 'or' in the website's phrase or did not involve the broader exploitation of the imputation system, in this context, should be read as meaning 'and'. An event within the entity's control shouldn't be deemed to be outside the entity's control simply where the entity didn't intend to exploit the imputation system. If we adopted a view that the Commissioner's discretion was available whenever the taxpayer wasn't seeking to exploit the imputation system, this would be both a) unsupported by the text of subsection 205-70(6) and b) inconsistent with the EM. The Commissioner won't exercise the discretion. We think bank processing timeframes, bank account transaction limits, and time zone differences are foreseeable circumstances, and the true cause of the excess was Company A's failure to allow more time to transfer the money. 28. The Commissioner's discretion in subsection 205-70(6) is only available if the circumstances that caused Company A's franking deficit to exceed 10% (of the total franking credits for the income year) were outside the entity's control. 29. Following ATO guidance, to be an event 'outside the entity's control' that caused the excess, an event must be 1) not readily foreseeable, 2) unable to be influenced by the entity, and 3) not involve broader exploitation of the imputation system. 30. In this scenario, Company A arranged with its bank to pay a PAYG instalment on 30 June XXXX but, due to banking processing delays and time zone differences, the Commissioner didn't receive the payment until 1 July Australian time. Company A requested the transfer at about 7am in the relevant time zone (about 3 pm AEST on 30 June), but Company A's bank didn't complete the transfer until about 7pm (about 3am AEST on 1 July). 31. Company A has also made comments suggesting that daily transaction limits on its bank accounts may have contributed to late payment. 32. We don't think the circumstances that caused Company A excess were outside Company A's control in the relevant sense for this discretion. • We accept that how long Company A's bank took to process the transaction is, in a sense, outside Company A's control, but we don't think this time was the critical circumstance causing Company A to have the relevant excess. • We think it's reasonably foreseeable that an overseas bank may take up to a couple of business days to process a funds transfer to an Australian bank account. [6] • We also think it's reasonably foreseeable that time zone differences may mean a transaction completed on 30 June in the relevant overseas time zone happens on 1 July in Australian time. • In our view, a reasonable company in Company A's position should be expected to allow for processing delays, international time zone differences, and transaction limits on its bank accounts when meeting its tax obligations. • Company A could have reasonably avoided paying late by arranging the relevant transfer a few days before 30 June to ensure that the Commissioner would receive the funds before the end of the income year (Australian time). • Since it could have avoided paying late by planning for these foreseeable circumstances, we think that 1) the critical circumstance that caused Company A's excess was Company A's failure to allow appropriate time for the payment to be processed, and 2) this circumstance was within Company A's control. • Therefore, we don't think Company A's excess was caused by circumstances outside its control. 33. We've considered Company A's submissions, but don't think the Commissioner can exercise the discretion here. • We don't think it's enough that Company A didn't intend to exploit the imputation system. Company A needs to demonstrate that the excess arose because of events outside its control. In our view, the bank processing time, time zone differences, and bank account transaction limits were foreseeable. Those events weren't outside Company A's control in the relevant sense. We characterise the critical cause of Company A having an excess as its failure to allow more time to complete the payment. This event was within Company A's control. • While Company A submits it made payments up to its transaction limits for 5 consecutive business days before 30 June, we don't think this affects our conclusion. This merely shows that Company A left it to the last 5 days to make 5 daily payments (with an average payment of about $1M per day), without accounting for possible processing delays and time zone differences. We still think a reasonable company in its position would have understood that its transaction limit would affect its ability to pay on time, and either a) allowed a few extra business days for possible processing delays and time zone differences), or b) arranged with one of its banks to temporarily lift a transaction limit so it could make the payment in a single transfer or fewer daily transfers. • We don't consider the Commissioner can take a lenient approach where the relevant circumstances are within the taxpayer's control. We appreciate that missing a deadline by a few hours is unfortunate, particularly where processing delays and time zone differences have contributed to that missed deadline. But since these are foreseeable obstacles, we think the true cause of the missed deadline is Company A's failure to allow more time to complete payment, and this failure was within Company A's control. We accept that inexperience and a good compliance attitude could be relevant circumstances if the discretion was available . However, we don't think they are relevant to determining whether Company A's excess was caused by circumstances outside its control. • IT 2560 [7] has been withdrawn and never applied to the current law in subsection 205-70(6). We don't think that ruling justifies ATO officers exercising the subsection 205-70(6) discretion favourably where the events causing the excess were within the entity's control. 34. Since we consider the events causing Company A's excess (its failure to allow more time to complete the payment) was within Company A's control, the Commissioner won't exercise the discretion in subsection 205-70(6). | Detailed Reasoning - Question 2: If the Commissioner does not exercise the discretion in subsection 205-70(6), will Company A have any further amount of FDT to pay? | Detailed Reasoning - Answer 2: No | Detailed Reasoning - Explanation: 35. We explained how the FDT and associated income tax offset provisions work at paragraphs 22 to 24. Broadly, a company with a franking deficit at the end of a year will pay FDT but will get an income tax offset to reduce its income tax liability (potentially by an amount equal to the FDT amount). 36. The Commissioner's discretion in subsection 205-70(6) is only relevant to determining whether the income tax offset is reduced under the method statement in subsection (2). 37. Our decision to not exercise the discretion in subsection 205-70(6) means the 30% reduction will apply to Company A's tax offset. 38. Our decision only affects the amount of the available tax offset - not the amount of the FDT liability. 39. But our decision will mean Company A's tax offset will be less than it otherwise may have been and won't fully offset the amount of its FDT liability. [1] The franking deficit tax amount is the same as the entity's franking account deficit at the end of the income year. See section 5 of the New Business Tax System (Franking Deficit Tax) Act 2002 . [2] Broadly, an entity satisfies the residency requirement if it's an Australian resident or carries on business in Australia through a permanent establishment. See section 207-75. [3] Explanatory Memorandum (House of Representatives) to the Tax Laws Amendment (2006 Measures No. 2) Bill 2006. [4] See the Corrections to the Explanatory Memorandum (House of Representatives) to the Tax Laws Amendment (2006 Measures No. 2) Bill 2006. [5] ATO (November 2023) Franking deficit tax offset calculations, reduction rule and exclusions | Australian Taxation Office (QC 50647) accessed at https://www.ato.gov.au on 17 September 2025. [6] The Commonwealth Bank's website says it usually takes 1-3 business days to process an International Money Transfer (but may take longer depending on the recipient's country and bank), while the National Australia Bank's website says international funds transfers are usually received within 24 hours and processed within 72 hours (but there may be circumstances outside of NAB's control which could cause additional delays). www.commbank.com.au at How long does it take to transfer money? and www.nab.com.au at Payment processing times | Online payments and transfers - NAB both accessed 17 September 2025. [7] Taxation Ruling IT 2560 Income tax: dividend imputation system: guidelines for remission of additional tax imposed for overfranking of dividends.

• all legislative provisions are in the Income Tax Assessment Act 1997 | • FDT means franking deficit tax.