Private ruling: Commissioner's discretion - franking deficit tax
Date of advice: 27 June 2024
Published: 5 August 2024
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Will the Commissioner exercise discretion under subsection 205-70(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to not apply the 30% offset reduction in the 2023 financial year? | A1: No. The Commissioner is unable to exercise the discretion under subsection 205-70(6) because it is not considered that the circumstances that resulted in the franking deficit were due to events outside of the control of the company.

Relevant facts and circumstances: Company Pty Ltd (the Company) commenced trading on 1 July 20YY. For the income year ended 30 June 20YY, the Company had an income tax liability of $X. This payment of income tax was not due until May 20YY. The Company declared and paid a fully franked dividend in December 20YY, bringing its franking account into debit. The Company's income tax return for the income year ended 30 June 20YY was not lodged until after 30 June 20YY, and the income tax liability was not paid until after 30 June 20YY. The Company's franking account remained in debit as at 30 June 20YY and therefore a franking deficit of $Y arose in the income year ended 30 June 20YY.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 205-70(6)

Reasons for decision: Summary: Subsection 205-70(6) of the ITAA 1997 provides that the 30% offset reduction does not apply if the Commissioner exercises his discretion in the relevant year. The Commissioner will determine this in writing, after receiving an application by the entity. The 30% reduction will not be applied if the franking deficit occurred as a result of events that were outside of the control of the entity. The Commissioner will generally consider a franking deficit to have arisen due to events outside the taxpayer's control if the events that gave rise to the deficit were not readily foreseeable and could not be influenced or controlled by the company. For a circumstance to be outside of the taxpayer'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. | Detailed Reasoning - Examples of circumstances that are unexpected, or outside of the entity's control: 1. A downturn in business that is linked to the reduced offset. There must be evidence of behaviour on the part of the taxpayer that there was an attempt at mitigation, but that the result was unavoidable. 2. Unusual events which interrupt the ordinary course of business such as: • protracted audits undertaken by the Australian Taxation Office which may hinder the preparation, lodgement and payment of income tax • international reviews or objections in relation to specific taxation issues which cause unexpected or unavoidable refunds resulting in large franking debits to the franking account • situations resulting in unexpected or unavoidable refunds which trigger franking debits in the franking account • substituted accounting periods which have the effect of shortening the income year and hence shortening the period within which sufficient franking credits can be generated • liquidations, whether voluntary or not, which may shorten the income year and hence shorten the period within which sufficient franking credits can be generated, or • take-overs or consolidation of entities that trigger the consolidation rules obliging the joining entity to determine and pay any outstanding franking deficit tax at the joining time. 3. Circumstances which give rise to special consideration. The following examples do not meet the legislative requirements of unanticipated circumstances or circumstances beyond the entity's control: • improper tax planning • bad management • inadvertent errors, and • expansion of business. | Detailed Reasoning - Application to your circumstances: In this case, the franking deficit arose because of delays in paying an income tax liability which would have sufficiently credited the franking account prior to debiting it by way of paying fully franked dividends. Whilst we appreciate your circumstances, the Commissioner is unable to exercise the discretion in subsection 205-70(6) of the ITAA 1997. Improper tax planning does not meet the legislative requirements of unexpected circumstances, or circumstances beyond your control.