Private ruling: Franking credits for early payment of company tax
Date of advice: 5 October 2018
Published: November 2018
Ruling period: Income year ending 30 June 2018
Date scheme commenced: During the income year ended 30 June 2018

Ruling: Q1: Can the payment of PAYG Instalment for the 30 June 2018 quarter which was paid prior to 30 June 2018 be a credit to the taxpayer’s Franking Account for the 2018 tax year pursuant to section 205-15 of the Income Tax Assessment Act 1997 ? | A1: Yes

Relevant facts and circumstances: HeadCo1 is the head company of an Australian income tax consolidated group having satisfied the requirements at item 1 of the table in subsection 703-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997) and has a number of other members of the consolidated group, including SubCo1. HeadCo1 is an Australian resident franking entity for the whole of the relevant PAYG instalment period. On June 2018 the tax agent for HeadCo1 (the Tax Agent) identified that HeadCo1 had not been issued with a PAYG Instalment for the quarter ended 30 June 2018. Instead, the PAYG Instalment was incorrectly issued to another member of the group, SubCo1. The Tax Agent contacted the ATO on June 2018 to have the PAYG Instalment reallocated from SubCo1 to HeadCo1. On June 2018, HeadCo1 paid the PAYG Instalment amount in relation to the quarter ended 30 June 2018. On July 2018, the ATO correctly applied and credited the PAYG Instalment for the quarter ended 30 June 2018 to HeadCo1 with an effective payment date of June 2018.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 205-15 | Income Tax Assessment Act 1997 subsection 205-15(1) | Income Tax Assessment Act 1997 subsection 205-15(4) | Income Tax Assessment Act 1997 subsection 703-15(2) | Taxation Administration Act 1953 s ection 45-15

Reasons for decision: Summary: In accordance with section 205-15 of the ITAA 1997, HeadCo1 can credit its franking account for the year ended 30 June 2018 with the PAYG Instalment paid prior to 30 June 2018. | Detailed Reasoning - Detailed reasoning: In accordance with section 205-15 of the ITAA 1997, credits will arise in a franking account in several circumstances, including the payment of a PAYG instalment and payment of income tax. Subsection 205-15(1) of the ITAA 1997 sets out when a credit arises in the franking account of an entity and the amount of the credit. Item 1 of subsection 205-15(1) of the ITAA 1997 states that if the entity pays a PAYG instalment, satisfies the residency requirement for the income year to which the PAYG instalment is paid and it is a franking entity for the whole or part of the relevant PAYG instalment period, a credit of that part of the payment pertaining to the period during which the entity was a franking entity, less any reduction under subsection 205-15(4) of the ITAA 1997 arises on the day on which the payment is made. Section 45-15 of Schedule 1 of the Taxation Administration Act 1953 establishes a general liability to pay instalments if the Commissioner issues an instalment rate to a taxpayer. Subsection 45-50(1) establishes a specific liability to pay an instalment for an instalment quarter in an income year if at the end of that instalment quarter the taxpayer is either a quarterly payer who pays 4 instalments annually on the basis of GDP-adjusted notional tax or a quarterly payer who pays on the basis of instalment income. In this case, HeadCo1 is an Australian resident franking entity for the whole of the relevant PAYG instalment period and the Commissioner has issued an instalment rate to the taxpayer. In coming to our decision, we have taken into consideration ATO Interpretative Decision ATO ID 2001/757 Income Tax Franking Accounts - early payment of company tax, which states that the payment of PAYG instalments does not discharge a company's tax debt. The tax debt is not discharged until the Commissioner actually applies the instalments against the debt. Where a company is able to ascertain its final tax liability for an income year prior to the end of that income year, the early payment of company tax will give rise to a franking credit in accordance with section 205-15 of the ITAA 1997. This is because the debt would have come into existence at the time that the final tax liability was ascertained, even though that liability was ascertained prior to the end of the income year. In the circumstances of this case, the PAYG instalment payment for the quarter ended 30 June 2018 was paid before 30 June 2018 but not applied to HeadCo1 until July 2018 due to an administrative delay with the crediting of the instalment to the correct entity. However the effective date of PAYG instalment payment was June 2018. Therefore HeadCo1 has made an early payment of company tax, that is, prior to 30 June 2018. Accordingly, HeadCo1 is entitled to a credit of the PAYG instalment amount paid pertaining to the quarter ended 30 June 2018 in HeadCo1’s franking account for the year ended 30 June 2018 pursuant to section 205-15 of the ITAA 1997.