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  • Deduction for non-portfolio dividends for resident company

    If a resident company wholly owned by a non-resident company receives unfranked non-portfolio dividends from other resident companies, it may be entitled to a deduction. The deduction is equal to the amount of any unfranked non-portfolio dividend that it pays on to its non-resident parent. This relies on meeting certain conditions and anti-avoidance rules.

    A non-portfolio dividend (as defined in section 317 of the Income Tax Assessment Act 1936 (ITAA 1936)) is a dividend paid to a company with a voting interest in the payee company. The voting interest must amount to at least 10% of the voting power (within the meaning of section 334A of the ITAA 1936) in the company paying the dividend.

    When a deduction applies

    The deduction will generally apply where:

    • a resident company (Company A) pays a non-portfolio unfranked or partly franked dividend to another resident company (Company B)
    • Company A and Company B are not members of the same wholly owned company group in the year in which the dividend is paid
    • Company A and Company B are not prescribed dual residents
    • Company B was entitled to a rebate under former section 46 of the ITAA 1936 for the unfranked amount of the original dividend before the amendment.

      (Note: This ignores the amendments made by Schedule 1 to the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006. The inter corporate dividend rebate was repealed except for subsections 46AB(1), 46AC(2) and subparagraph 46F(2)(a)(i) of the ITAA 1936. Hence, the rebate will still apply to the unfranked portion of the dividend.)
    • Company B on-pays that amount to its sole non-resident owner as an unfranked or partly franked dividend (the flow-on amount)
    • the flow-on amount does not exceed the amount in Company B's unfranked non-portfolio dividend account
    • the flow-on amount is not greater than the unfranked amount of the dividend on-paid
    • Company B makes the relevant declaration in writing before paying the dividend. This is the flow-on declaration. It specifies the amount to be on-paid under these provisions.

    Company B must be a resident company. It must be wholly owned by the same non-resident company at all relevant times. These times are when it receives the original dividend from Company A, makes the flow-on declaration, and pays the dividend to its non-resident parent.

    Where the requirements are met, Company B may claim the on-payment as a tax deduction. This frees the unfranked non-portfolio dividend from income tax.

    The amount you can claim as a tax deduction is the percentage of the dividend specified in the flow-on declaration multiplied by the unfranked amount of the dividend.

    The dividend will be directly freed from tax if the distribution is made in the same income year that Company B derives the dividend.

    As the distribution to the non-resident is unfranked, it will usually be subject to dividend withholding tax.

    When a resident company is wholly owned by a non-resident company

    A resident company (Company B) is wholly owned by a non-resident company if the non-resident company (Company C) directly owns all of the shares in Company B (both beneficially and legally). However, if a third party is in a position to affect rights between Company B and Company C, either now or in the future, then Company B is not wholly owned by a non-resident company.

    The definition of wholly owned by a non-resident company is based on the definition of 100% subsidiary in section 975-505 of the ITAA 1997.

    A person is in a position to affect rights of Company C in relation to Company B if, for any reason, they are able to acquire those rights, or to somehow prevent either Company B or Company C from exercising those rights as it chooses.

    Unfranked non-portfolio dividend account

    Generally, a resident company can claim a deduction for an unfranked non-portfolio dividend that it declares and pays to the non-resident parent company (who is not part of the same wholly owned group). This is where its non-portfolio dividend account is in surplus (the excess of total credits over total debits).

    If the amount in the declaration is more than the surplus in the unfranked non-portfolio dividend account (the account) when the declaration is made, a deduction is only allowed for the amount that is actually in the account. This is because the account cannot be in deficit.

    Once the declaration is made, the amount is debited to the unfranked non-portfolio dividend account.

    Unfranked non-portfolio dividend deduction and conduit foreign income choice

    Under the income tax provisions, incidences may arise where the Australian company wholly owned by a foreign company may be entitled to:

    • a deduction for the unfranked non-portfolio dividend it pays to the foreign parent company, while at the same time
    • the unfranked non-portfolio dividend is treated as non-assessable non-exempt income under the conduit foreign income rules.

    As a result of this potential double benefit, the company must make a choice. It can choose to either treat the dividend as non-assessable non-exempt income or claim a deduction when on-distributed. It cannot claim both.

    See also:

      Last modified: 01 Dec 2016QC 50656