Private ruling: Frankable distributions.
Published: September 2011
Ruling period: The year ended 30 June 2012.

Ruling: Q1: Will the dividend constitute a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that the dividend does not exceed the balance of the retained earnings account of the company, such that its net assets is greater than or equal to its share capital, at the time the dividend is paid? | A1: Yes. | Q2: Will the dividend constitute a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that the dividend exceeds the balance of the retained earnings account of the company, such that its net assets is less than its share capital, at the time the dividend is paid? | A2: No.

Relevant facts and circumstances: The company is an Australian resident for income tax purposes. The company and its wholly owned subsidiaries have formed a tax consolidated group for income tax purposes. The dividend will be paid to the company's shareholders in the income year ended 30 June 2012. The dividend is sourced from surplus cash and borrowings from the company's wholly-owned companies. The company will frank the distribution to the extent of available franking credits. Where the amount of the dividend does not exceed the balance in the retained earnings account of the company, the company's net assets exceed its share capital by at least the total amount of the dividend. Where the amount of the dividend exceeds the balance in the retained earnings account of the company, the company's net assets is less than its share capital.

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

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. A dividend paid under section 254T of the Corporations Act 2001 (Cth) will be subject to taxation as an assessable, franked dividend if it is paid out of profits or out of an amount other than profits, where the company's net assets exceed its share capital before and after the dividend payment, and it is not otherwise sourced, directly or indirectly, from a company's share capital account. Based on the facts provided, the dividend will constitute a frankable distribution under section 202-40 of the ITAA 1997 to the extent that the dividend does not exceed the balance in the company's retained earnings account.

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