Private ruling: Commissioner's discretion - franking deficit tax offset
Date of advice: 16 January 2026
Published: 9 March 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his discretion in subsection 205-70(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the full franking deficit tax offset for the tax paid in the franking account tax return? | A1: No.

Relevant facts and circumstances: The shareholders in Company A were in negotiations with Company B to sell their shares as at the end of the relevant financial year. As part of the due process for selling the shares on a cash free debt free basis, there was a need for Company A to pay out dividends to the shareholders. Two dividends were paid during the year with franking credits attached. In calculating the franking account balance as at the end of the relevant financial year, the accountant for Company A mistakenly included a PAYG instalment in the franking account calculation for the relevant year, when it should have rather been included in the calculation for the following year because it was paid in the following year. This calculation resulted in a franking credit balance in the franking account rather than a deficit. This was not picked up until after Company A had been acquired and Company B requested advice regarding franking a dividend in the following financial year. Company B's accountant reconstructed the franking account and discovered the error and advised that an FDT return needed to be lodged. The income tax return for the relevant financial year was lodged by the previous tax agent for Company A, and payment was made. As the return indicated a franking credit, no FDT issues were identified at that date. Company B instructed the preparation and lodgement of a franking account tax return to advise the ATO of the error and request the Commissioner to exercise his discretion to allow the full offset for the tax paid, albeit the franking deficit represents more than 10% of the credits arising in the franking account for the relevant year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 205-45 | Income Tax Assessment Act 1997 section 205-70

Reasons for decision: Summary: No, the Commissioner will not exercise the discretion in subsection 205-70(6) of the ITAA 1997 to allow the full franking deficit tax offset for the tax paid in the franking account tax return, because the Commissioner does not consider the error made by the accountant in calculating the franking account balance, and any decisions made based on that erroneous calculation, to be events outside the control of the Company. | Detailed Reasoning - Detailed reasoning: If an entity's franking account is in deficit at the end of an income year, subsection 205-45(2) of the ITAA 1997 provides that the entity is liable to pay franking deficit tax. Franking deficit tax is an amount equal to the amount of the deficit in the franking account. The object of applying franking deficit tax is to prevent entities relying on franking credits that they anticipate arising, for an indefinite period into the future. Subsection 205-70(1) of the ITAA 1997 provides that a corporate tax entity is entitled to a tax offset arising from a franking deficit tax liability for an income year for which it meets certain residency requirements if at least one of the following applies: • the entity has incurred a liability to pay franking deficit tax in that year • the entity incurred a liability to pay franking deficit tax in a previous income year for which it did not satisfy the residency requirements, and the entity has not already received a tax offset in relation to it, or • when the entity was last entitled to a tax offset under the section for a previous income year, that offset exceeded the amount that would have been its income tax liability for that year if it did not have that offset (but had all its other tax offsets). Subsection 207-70(2) of the ITAA 1997 provides the method statement for working out the amount of the tax offset for the relevant year. The amount of the franking deficit tax liability is the starting point for the calculation of the offset amount, and then the offset amount will be reduced by 30% in certain circumstances. The 30% reduction applies where the franking deficit tax liability attributable to certain debits that arose in the franking account for a year is greater than 10% of the total franking credits that arose in the franking account for that year. Subsection 205-70(6) of the ITAA 1997 provides that the 30% offset reduction will not apply in working out the amount of the tax offset if the Commissioner determines that the excess (debits greater than 10% of the total franking credits) was due to events outside of the control of the entity. The Commissioner will generally consider a franking deficit to have arisen due to events outside of an entity's control if the events that gave rise to the deficit were not readily foreseeable and could not be influenced by that entity. For a circumstance to be outside of an entity's or their agent's control or unanticipated, there must have been an event or circumstance which: • was unforeseeable or unexpected • operated alone or together with other circumstances (unusual or not) • was beyond the control of the taxpayer or their agent, and • could not have been avoided by compliance with accepted standards of business organisation and professional conduct. Examples of circumstances that are unanticipated or outside the control of the entity are: • Where an entity pays a fully franked dividend part way through an income year on the expectation that its future quarterly PAYG instalment payments will be sufficient to bring its franking account into surplus. However, an unexpected downturn in business results in its future quarterly PAYG instalment payments being less than anticipated, leading to a franking account deficit. • Where retrospective changes to consolidation legislation result in a tax consolidated group receiving refunds of tax paid in earlier income years, leading to a franking account deficit. For example, the Tax Laws Amendment (2010 Measures No 1) Act 2010 whichintroduced many changes which applied retrospectively from the commencement of the consolidation regime on 1 July 2002. The following do not meet the legislative requirements of events outside the entity's control: • improper tax planning • bad management • inadvertent errors • expansion of business. | Detailed Reasoning - Application to your circumstances: We acknowledge that the Company has taken immediate action report the franking account deficit as soon as it was discovered, however, the Commissioner's discretion in subsection 205-70(6) of the ITAA 1997 is limited to deciding whether the event or events which caused the excess were outside the control of the Company. In this case, the excess was caused by the incorrect inclusion of a PAYG instalment in the franking account balance calculations for the relevant financial year, which lead to the belief that the franking account had a credit balance as opposed to a deficit. This was an inadvertent error by the accountant for Company A and is not considered to be an event outside the control of the Company. The Company's situation can be distinguished from example 1 above, because rather than the PAYG instalment amount being less than expected caused by events outside of the Company's control, the expected amount was included in the franking account balance calculations in the wrong year. Therefore, the Commissioner will not exercise the discretion to allow the full franking deficit tax offset.