• When will the Commissioner's discretion be exercised for consolidation specific legislative amendments?

    Where an FDT liability arose due to circumstances outside the entity's control, the Commissioner has discretion to allow the full tax offset.

    The Commissioner will generally consider a franking deficit to have arisen due to circumstances outside the taxpayer's control if the events that gave rise to the deficit were not readily foreseeable and could not be influenced by the company. This would generally cover the situation of those consolidated entities that receive refunds of tax paid in earlier years due to the applications of the retrospective changes made by the Tax Laws Amendment (2010 Measures No.1) Act 2010. However, it would not cover the situation of consolidated groups that allocate franking credits that they no longer have (or are capable of anticipating that they will no longer have) to later distributions if their franking account balance has been reduced or placed into deficit due to refunds received as a result of the legislative amendments.

    For example, a consolidated entity franks a distribution part way through an income year in the reasonable expectation that its existing balance of franking credits would be sufficient to ensure that it would not have a deficit in its franking account at the end of the year. At the time franking credits were allocated to the distribution, the consolidated entity did not have a reasonable expectation that its franking account would be subject to Item 2 of s205-30 ITAA 1997 debits in the current franking period due to the retrospective consolidation amendments. Some time after franking the distribution, a refund related to the retrospective consolidation amendments results in the consolidated entity's franking account balance going into deficit. In these circumstances, it would be expected that the Commissioner would allow the full FDT tax offset, as the enactment of the legislation that created the entitlement to the refund was not within the taxpayer's control.

    By contrast, if a consolidated entity, whose franking account balance has been reduced by receipt of refunds of income tax pursuant to item 2 of s205-30 ITAA 1997 due to the retrospective consolidation amendments (or the refund had not yet been received but the quantum of the expected refund was known to the consolidated group in circumstances where the group had a reasonably arguable position in respect of their refund entitlement) were to allocate franking credits to a later distribution and put its franking account into deficit, it could be expected that the Commissioner would (in the absence of other mitigating circumstance) not allow the full FDT tax offset. This circumstance would be considered to be within the entity's control.

    Further, for some taxpayers, the impact of the legislative amendments may not give rise to a reasonably arguable position such that the taxpayer believes the best way to determine the impact of the consolidation amendments is to request a private binding ruling from the Commissioner. Any subsequent refunds would be based upon the outcome of the PBR process. In these circumstances, the timing of a response and the ultimate outcome of the response is not within the control of the taxpayer, and would be considered outside the control of the taxpayer for the purposes of the Commissioner's discretion.

    Applications for the Commissioner to exercise his discretion must be made in writing. The request must include:

    • entity name and tax file number
    • income year the FDT liability arose and the amount of the franking deficit,
    • detailed reasons why the deficit arose due to circumstances that were outside the control of the entity.

    Ensure the request is clearly titled Franking deficit tax (FDT) - request for exercise of Commissioner's discretion and is signed by an authorised person - that is, the public officer of the company or an agent duly authorised by the company.

      Last modified: 02 Dec 2016QC 25289