Private ruling: Commissioner's discretion - franking deficit tax
Date of advice: 30 January 2023
Published: 13 March 2023
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise discretion under subsection 205-70(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to not apply the 30% offset reduction in the 20XX financial year? | A1: No.

Relevant facts and circumstances: Your agent advised that a franked dividend was declared in the 20XX tax year as the tax planning had shown the company had incurred a sufficient 20XX tax liability. The company paid a dividend on 30 June 20XX. A franking deficit liability arose in the 20XX income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 205-70(6)

Reasons for decision: Summary: 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 agents 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 • international 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. The following examples do not meet the legislative requirements of unanticipated circumstances or circumstances beyond the entities control: • improper tax planning • bad management • inadvertent errors, and • expansion of business. | Detailed Reasoning - Application to your circumstances: In this case, the franking deficit arose as expected debts were not paid within the required time frames. We consider the company could have planned for this occurrence. While we appreciate your circumstances, the Commissioner is unable to exercise the discretion. Improper tax planning does not meet the legislative requirement of unanticipated circumstances or circumstances beyond your control.