The imputation rules include a number of rules for consolidated groups and multiple entry consolidated (MEC) groups. These rules apply to franking accounts, distributions and the treatment of franking deficit tax (FDT) and offsets. There are also modifications to the integrity rules for franking credit trading.
- For further information on consolidated groups or MEC groups, refer to the Consolidation reference manual.
A number of rules in the Income Tax Assessment Act 1997 (ITAA 1997) apply to the franking accounts of consolidated groups (subdivisions 709-A to subdivision 709-C) and multiple entry consolidated (MEC) groups (subdivision 719-H).
Forming or joining a consolidated group
At formation the head company (or provisional head company (PHC of a MEC group) maintains its franking account. All joining entity franking account balances are transferred to the head company.
If at the time they join, a subsidiary member’s franking account is in:
- surplus – transfer the balance to the head company, setting the subsidiary member’s franking account balance to zero
- deficit – the subsidiary member becomes liable for franking deficit tax (FDT). There is a corresponding credit in the franking account. This sets its franking account balance to zero. Any excess FDT offset entitlement is transferred to the head company.
You also need to make certain assumptions about the franking account balances when calculating the tax cost setting amounts for assets transferred to the group at the joining time:
- for consolidated groups – refer to Division 705 of the ITAA 1997.
- for further modifications for MEC groups – refer to subdivision 719-C of the ITAA 1997.
- for transitional groups with substituted accounting periods – refer to section 701-30 of the Income tax (Transitional Provisions) Act 1997.
During the consolidated period
While a group is consolidated, the head company of a consolidated group (or a provisional head company (PHC) of a MEC group) maintains and operates a single franking account for the group as a whole. The franking accounts of subsidiary members continue to exist with a nil balance but become inoperative (no debits or credits can arise).
Any activities that would have caused a franking credit or debit in the franking account of a subsidiary member will instead give rise to a franking credit or debit in the franking account of the head company (or PHC of a MEC group).
If the head company's franking account is in deficit at the end of an income year, the head company of the group would be liable for FDT. They can claim the FDT offset in later years. The FDT offset is not available where the 30% FDT offset reduction rule applies. Note: there are certain exclusions to the FDT offset reduction rule.
The head company of a consolidated group (or PHC of a MEC group) is the only member that can frank distributions payable during the consolidated period. See below for the special rules relating to franking distributions.
Leaving the consolidated group
When an entity leaves the consolidated group (or MEC group) it leaves behind all franking credits or debits resulting from transferred surpluses or excess franking deficits tax offsets.
The entity leaves with a nil balance at the leaving time. If a credit (due to a liability) or debit (due to a refund) arises after it leaves the group, it will arise in the franking account of the head company. This is because the credit or debit arose when they were jointly and severally liable as a subsidiary member of the 'old' group.
The head company (or PHC of a MEC group) is the only member of the consolidated group (or PHC of a MEC group) that can frank distributions.
However, there are special rules that allow a subsidiary member of a consolidated group (see subdivision 709-A of the ITAA 1997) and MEC group (see subdivision 719-H of the ITAA 1997) to make certain distributions. Distributions made by subsidiary members are treated as a frankable distribution made by the head company (or PHC of MEC group).
The special rules allow for a subsidiary member of a consolidated group to make a frankable distribution for shares or interests that relate to:
- disregarded employee shareholdings
- non-share equity interests
- membership interests in a foreign held subsidiary that are held by a non-resident.
The special rules, relating to distributions by a subsidiary member of a MEC group, provide for:
- the transfer of the franking account balance from a provisional head company (PHC) that ceases to be the PHC of a group to a newly appointed PHC of the group
- frankable distributions made by eligible tier-1 companies to be taken to have been made by the provisional head company of the group
- frankable distributions made by a foreign-held subsidiary member of a MEC group to an entity that is not a member of the MEC group. This is to be taken to have been made by the provisional head company of the group.
Existing anti-avoidance measures that counter abuse of the imputation system were extend to cover consolidated groups (see section 177EB, ITAA 1936). There are also modifications to Division 208 relating to exempting entities or former exempting entities (see subdivision 709-B, ITAA 1997).
To determine whether a consolidated group is an exempting entity (either subsidiary member or head company) or a former exempting entity (only a head company can be a former exempting entity), apply the tests in Division 208 ITAA 1997 to the head company of the group. There are some additional rules that can alter the way Division 208 applies to a consolidated group. These are set out in sections 709–160 to 709–175.
In applying those rules to the entity that is a member of a consolidate group:
- apply Division 208 before the additional rules.
- apply this division just after the entity became a member of the group. It is applied on the assumption that the subsidiary member was not a member of the group at that time.
Paragraph (b) above allows Division 208 to have application to a subsidiary member of a consolidated group at the joining time.
- Integrity rules for imputation
- Rules for exempting and former exempting entities
- Sections 709–160 to 709–175 of the ITAA 1997 for the special rules modifying Division 208