Private ruling: Income tax capital management franking credits/tax offsets
Date of advice: 12 September 2016
Published: November 2016
Ruling period: 1 July 2000 to 30 June 2001 | 1 July 2001 to 30 June 2002 | 1 July 2002 to 30 June 2003 | 1 July 2003 to 30 June 2004 | 1 July 2004 to 30 June 2005 | 1 July 2005 to 30 June 2006 | 1 July 2006 to 30 June 2007 | 1 July 2007 to 30 June 2008 | 1 July 2008 to 30 June 2009 | 1 July 2009 to 30 June 2010 | 1 July 2011 to 30 June 2012 | 1 July 2012 to 30 June 2013 | 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017
Date scheme commenced: July 20XX

Ruling: Q1: Do the franking credits of the Company, relating to the payment of PAYG Instalments (item 1 of the table in subsection 205-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)), and the payment of income tax (item 2 of the table in subsection 205-15(1) of the ITAA 1997) for the period 1 July XXXX to 31 August XXXX total $XXXX? | A1: Yes | Q2: If the Company pays a fully franked dividend to its parent company in a foreign country will the Company have any further withholding obligations? | A2: No

Relevant facts and circumstances: 1. The Company is an Australian resident proprietary limited company. 2. The sole shareholder of the Company is a foreign resident company. 3. During the period 1 July XXXX to 31 August XXXX the Company has never paid a dividend. 4. ATO records show that PAYG Instalments and income tax paid (including refunds of tax) by The Company for the period 1 July XXXX to 30 August XXXX total $XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 , subsection 202-15 | Income Tax Assessment Act 1997 , subsection 205-15(1) | Income Tax Assessment Act 1997 , subsection 205-30(1) | Income Tax Assessment Act 1997 , section 960-115 | Income Tax Assessment Act 1936 , section 128B | Income Tax Assessment Act 1936 , subsection 128B(1) | Income Tax Assessment Act 1936 , paragraph 128B(3)(ga) | Income Tax Assessment Act 1936 , subsection 128B(4)

Reasons for decision: Detailed Reasoning - Question 1: Subsection 205-15(1) of the ITAA 1997 provides: The following table sets out when a credit arises in the *franking account of an entity and the amount of the credit. The credit is called a franking credit . | Detailed Reasoning - Arises:: 1 the entity *pays a PAYG instalment; and the entity satisfies the *residency requirement for the income year in relation to which the PAYG instalment is paid; and the entity is a *franking entity for the whole or part of the relevant *PAYG instalment period that part of the payment that is attributable to the period during which the entity was a franking entity, less any reduction under subsection (4) on the day on which the payment is made 2 the entity *pays income tax; and the entity satisfies the *residency requirement for the income year for which the tax is paid; and the entity is a *franking entity for the whole or part of that income year that part of the payment that is attributable to the period during which the entity was a franking entity, less any reduction under subsection (4) on the day on which the payment is made 3 a *franked distribution is made to the entity; and the entity satisfies the *residency requirement for the income year in which the distribution is made; and the entity is a *franking entity when it receives the distribution; and the entity is entitled to a *tax offset because of the distribution under Division 207 the *franking credit on the distribution on the day on which the distribution is made 4 a *franked distribution *flows indirectly to the entity through a partnership or the trustee of a trust; and the entity is a *franking entity when the franked distribution is made; and the entity is entitled to a *tax offset because of the distribution under Division 207 the entity's share of the *franking credit on the distribution at the time specified in subsection (2) 5 the entity incurs a liability to pay *franking deficit tax under section 205-45 or 205-50 the amount of the liability immediately after the liability is incurred 6 a *franking credit arises under section 316-275 for the *friendly society or one of its *wholly-owned subsidiaries because the society or subsidiary *receives a refund of income tax the amount of the debit specified in subsection 316-275(3) at the time provided by subsection 316-275(4) Subsection 205-30 of the ITAA 1997 provides: The following table sets out when a debit arises in the *franking account of an entity and the amount of the debit. The debit is called a franking debit . | Detailed Reasoning - Arises:: 1 the entity *franks a *distribution the amount of the *franking credit on the distribution on the day on which the distribution is made 2 the entity *receives a refund of income tax; and the entity satisfies the *residency requirement for the income year to which the refund relates; and the entity was a *franking entity during the whole or part of the income year to which the refund relates that part of the refund that is attributable to the period during which the entity was a franking entity on the day on which the refund is received 2A the entity *receives a *tax offset refund; and the entity does not satisfy the *residency requirement for the income year to which the refund relates; and the entity was a *franking entity during the whole or part of the income year to which the refund relates; and the entity's *franking account is in *surplus on the day on which the refund is received the lesser of: (a) that part of the refund that is attributable to the period during which the entity was a franking entity; and (b) the amount of the *franking surplus on the day on which the refund is received 3 a *franking debit arises for the entity under paragraph 203-50(1)(b) (the entity *franks a *distribution in contravention of the *benchmark rule) the franking debit worked out under paragraph 203-50(2)(b) on the day specified in subsection 203-50(4) 4 the entity ceases to be a *franking entity; and the entity's *franking account is in *surplus immediately before ceasing to be a franking entity the amount of the *franking surplus on the day on which the entity ceases to be a franking entity 5 a *franking debit arises for the entity under section 204-15 (linked distributions) the franking debit specified in subsection 204-15(3) on the day specified in subsection 204-15(4) 6 a *franking debit arises under section 204-25 (debit for substituting *tax-exempt bonus shares for *franked distributions) the amount of the debit specified in subsection 204-25(2) on the day specified in subsection 204-25(3) 7 the Commissioner makes a determination under paragraph 204-30(3)(a) giving rise to a *franking debit for the entity (streaming distributions) the amount of the debit specified in the determination on the day specified in section 204-35 7A a *franking debit arises under subsection 197-45(1) because an amount to which Division 197 applies is transferred to a company's *share capital account the amount of the debit specified in subsection 197-45(2) at the time provided by subsection 197-45(1) 7B a *franking debit arises under subsection 197-65(2) because a company chooses to untaint its *share capital account the amount of the debit specified in subsection 197-65(3) at the time provided by subsection 197-65(2) 8 (Repealed by No 79 of 2007) 9 an *on-market buy-back by a company of a *membership interest in the company an amount equal to the debit that would have arisen if: (a) the purchase of the interest were a *frankable distribution equal to the one that would have arisen if the company had purchased the interest *off-market; and (b) the distribution were *franked at the entity's *benchmark franking percentage for the *franking period in which the purchase was made or, if the entity does not have a benchmark franking percentage for the period, at a *franking percentage of 100% on the day on which the interest is purchased 10 a *franking debit arises under section 316-260 for the *friendly society or one of its *wholly-owned subsidiaries because the *franking account of the society or subsidiary is in *surplus the amount of the debit specified in subsection 316-260(2) at the time provided by subsection 316-260(3) 11 a *franking debit arises under section 316-265 for the *friendly society or one of its *wholly-owned subsidiaries because a *franking credit arises for the society or subsidiary the amount of the debit specified in subsection 316-265(3) at the time provided by subsection 316-265(4) 12 a *franking debit arises under section 316-270 for the *friendly society or one of its *wholly-owned subsidiaries because a *franking credit arises for the society or subsidiary the amount of the debit specified in subsection 316-270(3) at the time provided by subsection 316-270(4) | Detailed Reasoning - Note:: For completeness, the table refers to some franking debits that arise under other sections of the Act. This does not mean that separate franking debits arise both under the relevant section and this table. Section 202-15 of the ITAA 1997 defines a franking entity in the following way: An entity is a franking entity at a particular time if: (a) it is a *corporate tax entity at that time; and (b) it is not a *life insurance company that is a *mutual insurance company at that time; and (c) in a case where the entity is a company that is a trustee of a trust - it is not acting in its capacity as trustee of the trust at that time. The definition of corporate tax entity in 960-115 of the ITAA 1997 includes a company. The Company as an Australian resident proprietary limited company is a franking entity. We have reviewed the Company's payments of PAYG instalments, income tax paid and income tax refunded for the period 1 July XXXX to 31 August XXXX and can confirm that the total of the franking credits relating to PAYG instalments (Item 1 of the table in subsection 205-15(1) ITAA 1997) plus income tax paid (Item 2 of the table in subsection 205-15(1) of the ITAA 1997, less franking debits relating to refunds of income tax (Item 2 of the table in subsection 205-30(1) is $XXXX. | Detailed Reasoning - Question 2: Subsections 128B(1) and (4) of the Income Tax Assessment Act 1936 (ITAA 1936) imposes withholding tax on dividends paid by an Australian resident company to a non-resident. Withholding tax, which is deducted at the time a payment is made to a non-resident, represents the non-resident's final liability to Australian Income Tax. Paragraph 128B(3)(ga) of the ITAA 1936 exempts dividends from the withholding tax obligations in 128B(1) and (4) of the ITAA 1936 to the extent that they are franked. If The Company pays a fully franked dividend to its overseas parent company it will have met the exception in paragraph 128B(3)(ga) and the Company will not have an obligation to withhold any further amount from the fully franked dividend.