Private ruling: Commissioner's discretion - franking deficit tax
Date of advice: 30 March 2022
Published: June 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 205-70(6) of the Income Tax Assessment Act 1997 (ITAA 1997) not to apply the Franking Deficit Tax (FDT) offset penalty? | A1: No.

Relevant facts and circumstances: A FDT liability arose in the 20XX income year for $X. The deficit arose due to an error made in calculating the franking account balance. This was due to the treatment of the Research and Development refundable tax offset. Your agent advised that there was a credit balance in the company franking account. The company then declared a dividend. Your agent sought advice from the ATO to understand the correct treatment. It took a considerable amount of time for the ATO to provide advice. Your agent approached the National Tax and Accountants Association for advice and they could not provide assistance. The error was not picked up during audit and your agent sought to rectify the issue by their own accord.

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 taxpayers 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 taxpayers or their agents 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 outside of the control or unanticipated are: 1. A down turn 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 Tax 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 entities 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 due to an inadvertent error made in relation to the treatment of the R&D tax offset. While we appreciate that your agent sought to rectify the error without prompting, the Commissioner is unable to exercise the discretion in the circumstances. An error made in relation to a complex area of the law does not meet the legislative requirements of unanticipated circumstances or circumstances beyond your control.