Private ruling: Frankability of distribution
Date of advice: 24 July 2015
Published: July 2015
Ruling period: XXXX to XXXX
Date scheme commenced: During the income year ended XXXX

Ruling: Q1: Will the payment by Company A of a dividend constitute a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The scheme, the subject of this ruling, is set out below. 1. Company A is an Australian resident company listed on the Australian Securities Exchange (ASX). 2. Company A is not a controlled foreign company (CFC). 3. Company A will pay the dividend to its shareholders provided that: (a) the dividend is to be declared at least 5 business days before the record date for the dividend consistent with Appendix 6A of the official listing rules of ASX Limited; (b) the payment date for the dividend will be determined by Company A at its discretion; (c) the dividend will be franked to the maximum extent possible, subject to the franking account of Company A not being in deficit after the payment of the dividend; and (d) the dividend must be paid from accumulated profits of Company A and its subsidiaries existing immediately prior to the declaration of the dividend and such that the retained earnings balance of the Company A Group is not extinguished. 4. The dividend will be sourced entirely from Company A's profits, which are recorded in the financial accounts of Company A on a stand-alone basis on or before the date the dividend is declared. 5. Company A will not debit the dividend against its share capital account. The share capital account of Company A is untainted for the purposes of Division 197 of the ITAA 1997. 6. The dividend will comply with the requirements of the Corporations Act 2001 , including section 254T. 7. The dividend will be an authorised dividend under the Company A Constitution. 8. The declaration of the dividend will not constitute an unauthorised reduction of Company A's share capital.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 202-40

Reasons for decision: Detailed Reasoning - Detailed reasoning: In this 'Reasons for decision' all legislative references are to the ITAA 1997 unless otherwise stated. Subsection 202-40(1) provides that a distribution is a frankable distribution to the extent that it is not unfrankable under section 202-45. It is considered that the dividend that is to be paid by Company A to Company A shareholders is a 'dividend' as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and is thus a distribution per item 1 of the table in subsection 960-120(1). Therefore, the dividend will be a frankable distribution unless it is an unfrankable distribution under section 202-45. | Detailed Reasoning - Unfrankable distribution: An unfrankable distribution is one that satisfies section 202-45. A distribution to which paragraph 24J(2)(a) of the ITAA 1936 applies, that is taken under section 24J of the ITAA 1936 to be derived from sources in a prescribed Territory, as defined in subsection 24B(1) of the ITAA 1936 (distributions by certain corporate tax entities from sources in Norfolk Island) - paragraph 202-45(b) Paragraph 24J(2)(a) of the ITAA 1936 applies to deem income consisting of a dividend to be derived from a source in a prescribed Territory, if the dividend is paid by a company that is a Territory company, or the company was incorporated in a prescribed Territory, but is not a Territory company in the year of income in which the dividend is paid. A Territory company is defined in section 24D of the ITAA 1936. Pursuant to paragraph 24D(1)(a) of the ITAA 1936, a condition for the definition of Territory company is that the company was incorporated in a prescribed Territory. A prescribed Territory is defined in subsection 24B(1) of the ITAA 1936 as meaning Norfolk Island. As Company A is not a Territory company there is no distribution to which paragraph 24J(2)(a) of the ITAA 1936 applies. As such, paragraph 202-45(b) does not apply to make the dividend an unfrankable distribution. Where the purchase price on the buy-back of a share by a company from one of its members is taken to be a dividend under section 159GZZZP of that Act - so much of that purchase price as exceeds what would be the market value (as normally understood) of the share at the time of the buy-back if the buy-back did not take place and were never proposed to take place - paragraph 202-45(c) Section 159GZZZP of the ITAA 1936 applies in the circumstances where there is a buy-back of a share or non-share equity interest by a company in an off-market purchase. The payment of the dividend is not a buy-back of shares and therefore this paragraph will not apply to make the dividend an unfrankable distribution. | Detailed Reasoning - A distribution in respect of a non-equity share - paragraph 202-45(d): Subsection 995-1(1) provides that a non-equity share means a share that is not an equity interest in the company. The shares in Company A are equity interests in the hands of the Company A shareholders and therefore the payment of the dividend to the shareholders in respect of the Company A shares will not be a distribution in respect of non-equity shares. | Detailed Reasoning - A distribution that is sourced, directly or indirectly, from a company's share capital account - paragraph 202-45(e): The dividend is a distribution that will be sourced from Company A's profits, which are recorded in the financial accounts of Company A on a stand-alone basis on or before the date the dividend is declared. Furthermore, no amount of the dividend will be debited to the share capital account of Company A, which is not tainted for the purposes of Division 197. Therefore, the dividend will not be sourced, directly or indirectly, from its share capital account. | Detailed Reasoning - An amount that is taken to be an unfrankable distribution under section 215-10 or 215-15 - paragraph 202-45(f): Paragraph 202-45(f) will not apply to make the dividend unfrankable as the dividend is not a non-share dividend. | Detailed Reasoning - An amount that is taken to be a dividend for any purpose under any of the following provisions - paragraph 202-45(g): Unless subsection 109RB(6) or 109RC(2) applies in relation to the amount - Division 7A of Part III of the ITAA 1936 (distributions to entities connected with a private company) - subparagraph 202-45(g)(i) Division 7A of the ITAA 1936 relates to distributions to entities connected with a private company. Section 103A of the ITAA 1936 sets out criteria used to identify when there is a private company. Subsection 103A(1) of the ITAA 1936 provides that a company is a private company if the company is not a public company in the relevant year of income. Paragraph 103A(2)(a) of the ITAA 1936 provides that a company is a public company if shares in the company, not being shares entitled to a fixed rate of dividend, were listed for quotation in the official list of a stock exchange in Australia or elsewhere. Company A has its shares listed on the ASX and is a public company. As Company A is not a private company, Division 7A of the ITAA 1936 is not applicable and therefore subparagraph 202-45(g)(i) is not relevant. Section 109 of the ITAA 1936 (excessive payments to shareholders, directors and associates) - subparagraph 202-45(g)(iii) Section 109 of the ITAA 1936 is considered when a private company pays or credits an amount to an associated person. As Company A is not a private company, section 109 of the ITAA 1936 is not applicable and therefore subparagraph 202-45(g)(iii) is not relevant. Section 47A of the ITAA 1936 (distribution benefits - CFCs) - subparagraph 202-45(g)(iv) Section 47A of the ITAA 1936 is applicable when a company distributes an amount after 3 June 1990 and is a CFC and resident of an unlisted country at the distribution time. As Company A is not a CFC, section 47A is not applicable and therefore subparagraph 202-45(g)(iv) is not relevant. | Detailed Reasoning - An amount that is taken to be an unfranked dividend for any purpose - paragraph 202-45(h): Under section 45 of the ITAA 1936 (streaming bonus shares and unfranked dividends) - subparagraph 202-45(h)(i) Section 45 of the ITAA 1936 applies when a company streams the provision of shares (other than shares to which subsection 6BA(5) of the ITAA 1936 applies) and the payment of minimally franked dividends, in a way that results in the shares being received by some but not all shareholders, and some or all of the shareholders who did not receive those shares receive or will receive minimally franked dividends. Minimally franked dividends are dividends that are not franked, or are franked to less than 10% in accordance with section 202-5 or 208-60. Company A expects to frank the dividend to the maximum extent possible, subject to the franking account of Company A not being in deficit after the payment of the dividend. Further, the dividend is expected to be paid to all shareholders of Company A, which does not indicate that streaming will occur in relation to the payment of the dividend. Accordingly, section 45 of the ITAA 1936 is not applicable. Because of a determination of the Commissioner under section 45C of the ITAA 1936 (streaming dividends and capital benefits) - subparagraph 202-45(h)(ii) Section 45C of the ITAA 1936 applies when the Commissioner makes a determination under subsection 45A(2) or 45B(3) of the ITAA 1936. Section 45A of the ITAA 1936 applies in respect of a company that streams the provision of capital benefits and the payment of dividends to its shareholders, in a way that results in the capital benefits being received by shareholders who derive a greater benefit from capital benefits than other shareholders, and it is reasonable to assume that the other shareholders have or will receive dividends. As the dividend is to be paid to all shareholders, there are no advantaged or disadvantaged shareholders as contemplated by subsection 45A(1) of the ITAA 1936. Accordingly, section 45A of the ITAA 1936 will not be applicable and the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies. Section 45B of the ITAA 1936 applies if: (a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; (b) under the scheme a taxpayer (relevant taxpayer), who may or may not be the person provided with the demerger benefit or capital benefit, obtains a tax benefit; and (c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme for a purpose (other than an incidental purpose) of enabling the relevant taxpayer to obtain a tax benefit. Under the scheme the Company A shareholders will not receive a demerger benefit or capital benefit, but will receive a dividend. Therefore, the requirements in subsection 45B(2) of the ITAA 1936 are not satisfied. Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole, or any part, of the dividend paid to Company A shareholders. | Detailed Reasoning - A demerger dividend - paragraph 202-45(i): This paragraph is not relevant as it applies to demerger dividends. | Detailed Reasoning - A distribution that section 152-125 or 220-105 says is unfrankable - paragraph 202-45(j): This paragraph is not relevant since Company A does not satisfy the conditions to receive small business relief under section 152-125, nor is it a 'NZ franking company' as defined in section 220-30 for the purposes of section 220-105. | Detailed Reasoning - Conclusion: Based on the above analysis, the dividend to be paid by Company A is not considered to be an unfrankable distribution pursuant to section 202-45. Accordingly, the dividend to be paid by Company A is a frankable distribution under section 202-40.