Private ruling: Franking debit & film tax offset refund
Published: May 2015
Ruling period: 1 July 2014 to 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will a franking debit arise under item 2 of the table in subsection 205-30(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') in respect of a refund which results from an entitlement to a film tax offset? | A1: No.

Relevant facts and circumstances: The Taxpayer is an Australian private company that operates in the film industry. In the year ended 30 June 2014, the Taxpayer was entitled to the film tax offset, pursuant to Division 376 of the ITAA 1997. The film tax offset would exceed the Taxpayer's tax on taxable income, resulting in an income tax refund. The Taxpayer's franking account balance at 30 June 2014 was in credit with an amount less than the film tax offset refund.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 4-10(3) | Income Tax Assessment Act 1997 section 63-10 | Income Tax Assessment Act 1997 section 67-23 | Income Tax Assessment Act 1997 item 2 of the table in subsection 205-30(1) | Income Tax Assessment Act 1997 subsection 205-30(2) | Income Tax Assessment Act 1997 section 205-35 | Income Tax Assessment Act 1997 section 205-45 | Income Tax Assessment Act 1997 section 355-5 | Income Tax Assessment Act 1997 Division 376 | Income Tax Assessment Act 1997 section 376-1

Reasons for decision: Summary: No franking debit will arise under item 2 of the table in subsection 205-30(1) of the ITAA 1997. Where a film tax offset is applied against the Taxpayer's basic income tax liability, any refundable amount remaining does not result in the Taxpayer receiving a 'refund of income tax' for the purposes of section 205-35 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 205-30(1) of the ITAA 1997 sets out a table of circumstances where a franking debit will arise in the franking account of an entity. Item 2 of the table in subsection 205-30(1) states that a franking debit will arise, if: • an the entity 'receives a refund of income tax'; and, • an 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. Pursuant to subsection 205-35(1) of the ITAA 1997, the Taxpayer 'receives a refund of income tax' if: (a) either: (i) the entity receives an amount as a refund; or (ii) the Commissioner applies a credit, or an *RBA surplus, against a liability or liabilities of the entity; and (b) the refund of the amount, or the application of the credit, represents in whole or in part: (i) a return to the entity of an amount paid or applied to satisfy the entity's liability to pay income tax; or (ii) the amount remaining after applying a *tax offset that is subject to the refundable tax offset rules because of section 67-30 (about R&D) against the entity's basic income tax liability. | Detailed Reasoning - Refundable film tax offsets: Division 376 of the ITAA 1997 outlines a number of tax offsets in relation to Australian expenditure incurred in making films that a taxpayer may be entitled to ('film tax offsets'). In order for the Taxpayer to be considered to have a received a refund of income tax, for the purposes of subsection 205-35(1) of the ITAA 1997, a film tax offset must represent: (a) an amount received as a refund or a credit applied by the Commissioner against a liability of the Taxpayer (paragraph 205-35(1)(a)); and (b) a refund to the Taxpayer of an amount paid or applied to satisfy its liability to pay income tax (subparagraph 205-35(1)(b)(i)). Film tax offsets are not specifically included in subparagraph 205-35(1)(b)(ii) of the ITAA 1997 within the definition of 'receives a refund of income tax', and so subparagraph 205-35(1)(b)(ii) need not be considered. An amount received as a refund (paragraph 205-35(1)(a) of the ITAA 1997) Item 20 of the table in section 67-23 of the ITAA 1997 states that a film tax offset is a refundable tax offset. Item 40 of the table in section 63-10 of the ITAA 1997 allows a refund for any remaining amount of a tax offset that is subject to the refundable tax offset rules in Division 67 of the ITAA 1997. Thus, any remaining amount from the film tax offset is considered to be a refund, satisfying paragraph 205-35(1)(a)(i) of the ITAA 1997. A refund of an amount paid or applied to satisfy the Taxpayer's liability to pay income tax (subparagraph 205-35(1)(b)(i) of the ITAA 1997) Tax offsets, defined at step 3 of the method statement in subsection 4-10(3) of the ITAA 1997, reduce the amount of income tax a taxpayer is required to pay. Refunds as a result of tax offsets arise by operation of legislative provisions. Refunds of tax offsets are not payments made by the Taxpayer to satisfy its tax liability. As a result, any refund of a film tax offset cannot be said to be a return to the Taxpayer of an amount that was paid. In addition, step 4 of the method statement in subsection 4-10(3) of the ITAA 1997 states that a taxpayer's income tax liability (to be differentiated from a taxpayer's basic income tax liability) is calculated after tax offsets have been subtracted: Subtract your *tax offsets from your basic income tax liability. The result is how much income tax you owe for the *financial year. Therefore, a refund of a film tax offset cannot be considered to be a return of an amount applied to satisfy the Taxpayer's liability for income tax. This is because the Taxpayer's liability for income tax is determined after tax offsets are subtracted from its basic income tax liability. Consequently, where a film tax offset is applied against the Taxpayer's basic income tax liability, any refundable amount remaining does not result in the Taxpayer receiving a refund of income tax under section 205-35 of the ITAA 1997. Thus, no franking debit will arise under item 2 of the table in subsection 205-30(1) of the ITAA 1997. This interpretation also maintains the tax concessions intended by the film tax offset provisions, as outlined in section 376-1 of the ITAA 1997, and which would not be affected by the operation of the franking deficit tax provisions.