Private ruling: Franking deficit tax offset - whether the exclusion for certain companies in subsection 205-70(5) of the ITAA 1997 applies to prevent the 30% reduction applying
Date of advice: 2 October 2025
Published: 24 November 2025
Ruling period: XXXX income year

Ruling: Q1: Does subsection 205-70(5) apply to Company A to prevent the 30% reduction applying to Company A's tax offset? | A1: Yes

Relevant facts and circumstances: 1. Company A Limited is an Australian tax resident company incorporated in a foreign jurisdiction. 2. Company A and its wholly owned Australian tax resident companies aren't an income tax consolidated group for Australian tax purposes. 3. Company A hasn't had income tax liabilities in any income year before the XXXX income year. 4. Company A first reported taxable income in the XXXX income year. 5. Redacted for privacy reasons. 6. After receiving a fully franked dividend from one of its subsidiaries early in the XXXX income year, Company A paid a fully franked dividend of about $XM to its shareholders with about $XM of attached franking credits. 7. Redacted for privacy reasons. 8. Company A had a franking account deficit of around $YM on 30 June XXXX. 9. Company A estimates it will have an income tax liability for the XXXX income year of about $ZM, which is greater than the franking account deficit of $YM. Table 1 showed the calculations but has been redacted for privacy reasons. Table 1: redacted for privacy reasons

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 205 | Section 205-70 | Section 995-1 | Income Tax Assessment Act 1936 Section 103A

Reasons for decision: Summary: 10. Subsection 205-70(5) disregards the 30% tax offset reduction where (broadly) a) the entity is a private company, b) the entity didn't have a tax liability in any previous year, and c) the entity's income tax liability (but for the offset) is at least 90% of the entity's franking account deficit. 11. Subsection 205-70(5) will apply to disregard the 30% reduction for Company A because these conditions are met. Company A is a private company, hasn't had a tax liability in previous years, and its income tax liability (but for the offset) is more than its franking account deficit. | Detailed Reasoning - Explanation: Relevant law: Section 205-70 allows an offset for FDT payable, but reduces the offset by 30% where the deficit exceeds 10% of the total franking credits for the relevant year. 12. Division 205 has rules about the franking account. 13. Entities get franking credits for paying tax and receiving franked distributions, and get franking debits for receiving tax refunds or paying franked distributions. 14. An account is in deficit when the franking deficits exceed the franking credits: see section 205-40. 15. Section 205-45 imposes FDT when the account is in deficit at the end of an income year: see subsection 205-45(2). 16. Section 205-70 entitles corporate tax entities to a tax offset where they incur FDT, 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 [1] ). • 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.) Subsection 205-70(5) disregards the 30% reduction where a private company hasn't had an income tax liability in previous years, and the liability (but for the offset) is at least 90% of the franking deficit. 17. Subsection 205-70(5) says the reductions in steps 1 and 2 of the method statement don't apply in working out the amount of the tax offset to which the entity is entitled in the relevant year if the conditions are met. We list and apply the conditions in Table 2. | Detailed Reasoning - Applied to Company A: a) the entity is a private company for the relevant year Note: section 995-1 says 'private company' means a company that isn't a public company for the income year, and 'public company' means a public company under section 103A of the ITAA 1936. Section 103A of the ITAA 1936 says a public company means a company falling within certain listed categories. These categories include a) companies with shares listed on a stock exchange, b) cooperative companies, c) non-profit companies, or d) mutual life assurance companies, friendly society dispensaries, certain government bodies, or subsidiaries of other public companies. This is met. The facts don't suggest Company A falls within any of the categories of public companies listed in section 103A. Therefore, Company A is a private company for tax purposes. b) if the company didn't have the tax offset (but had all its other tax offsets) it would have had an income tax liability for the relevant year Met. Disregarding the offset, Company A would have had an income tax liability of about $ZM. c) the company hasn't had an income tax liability for any income year before the relevant year Met. Company A didn't have an income tax liability before the XXXX income year. d) the amount of the liability referred to in paragraph (b) is at least 90% of the amount of the deficit in the company's franking account at the end of the relevant year Met. Company A's income tax liability in paragraph (b) is about $ZM. This is more than the franking account deficit of about $YM. 18. Since the conditions in subsection 205-70(5) are met, the reductions in steps 1 and 2 of the method statement don't apply to reduce Company A's tax offset. [1] 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.

• Division 205, section 205-70, and section 995-1 are in the Income Tax Assessment Act 1997 | • section 103A is in the Income Tax Assessment Act 1936 | • FDT means franking deficit tax.