Private ruling: Franking of dividends and the new section 254T of the Corporations Act 2001
Published: January 2012
Ruling period: 2011 income year | 2012 income year

Ruling: Q1: Was the 2011 final dividend a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Was the interim 2011 dividend a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes.

Relevant facts and circumstances: The company is an Australian tax resident. The company and its wholly owned subsidiaries have formed a tax consolidated group for income tax purposes. The company paid a dividend to its shareholders in the 2011and 2012 income years. The company had accumulated losses at the time of payment of the dividends. Both dividends were sourced from the company's current year trading profits for each respective income year. At the time the dividends were paid the company had sufficient franking credits to frank the dividends.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 202-40 | Income Tax Assessment Act 1997 section 202-45 | Income Tax Assessment Act 1997 section 975-300

Reasons for decision: Summary: Under section 202-40 of the ITAA 1997, a distribution is a frankable distribution to the extent that it is not unfrankable under section 202-45 of the ITAA 1997. Section 202-45 of the ITAA 1997 lists the distributions that are unfrankable. Paragraph 202-45(e) of the ITAA 1997 lists one of those distributions as: a distribution that is sourced, directly or indirectly, from a company's share capital account. Section 975-300 of the ITAA 1997 states that: A company's share capital account is: (a) an account that the company keeps of its share capital; or (b) any other account (whether or not called a share capital account) that satisfies the following conditions: (i) the account was created on or after 1 July 1998; (ii) the first amount credited to the account was an amount of share capital. Draft Taxation Ruling TR 2011/ D8 (TR 2011/D8) is about the assessment and franking of dividends paid from 28 June 2010 in light of amendments to section 254T of the Corporations Act 2001 (the Corporations Act). TR 2011/D8 states at paragraph 3 that a company that pays a dividend to its shareholders, in accordance with its constitution and without breaching section 254T or Part 2J.1 of the Corporations Act, that is paid out of current trading profits recognised in its accounts and available for distribution, is not prevented by paragraph 202-45(e) of the ITAA 1997 from franking the dividend merely because the company has unrecouped prior year accounting losses or has lost part of its share capital. The 2011 final and interim dividends were sourced from current year trading profits. The company had current year profits in excess of the amount of the dividends paid to its shareholders. In accordance with paragraph 3 of TR 2011/D8, since the 2011 final and the interim dividends were paid out of current year trading profits, the company is not prevented by paragraph 202-45(e) of the ITAA 1997 from franking the dividends merely because it had unrecouped prior year accounting losses at the time of the payment of the dividends. Therefore in view of the facts as presented for this case, the interim and the final dividends paid by the company to its shareholders constitute frankable distributions under section 202-40 of the ITAA 1997.

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