House of Representatives

New Business Tax System (Imputation) Bill 2002

New Business Tax System (Over-franking Tax) Bill 2002

New Business Tax System (Over-franking Tax) Act 2002

New Business Tax System (Franking Deficit Tax) Bill 2002

New Business Tax System (Franking Deficit Tax) Act 2002

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 4 - Franking accounts

Outline of chapter

4.1 The rules relating to franking accounts are set out in Subdivision 160-F. These rules essentially replicate the rules relating to franking credits and debits in the current law. The most significant departures from the current law include:

entries are to be recorded on a tax paid basis rather than an after-tax distributable profits basis; and
the franking account will operate on a rolling balance account rather than a yearly account with an annual balance transfer.

Summary of new law

4.2 In summary, franking credits will arise upon payment of income tax and PAYG instalments, and receipt of franked distributions. Franking debits will arise upon payment of franked distributions, and refunds of income tax. Franking deficit tax will be imposed if a franking account is in deficit at the end of the income year (i.e. if the sum of the franking debits in the franking account exceeds the sum of the franking credits).

Detailed explanation of new law

General rules

4.3 The franking account rules apply to all corporate tax entities rather than only to franking entities. A corporate tax entity that is not a franking entity will incur a liability for franking deficit tax if it purports to make a franked distribution (this is explained in more detail in paragraph 4.15). However, franking credits or debits will not otherwise arise for corporate tax entities that are not franking entities and, unless they purport to make a franked distribution, for practical purposes, these entities can disregard the franking account rules. [Schedule 1, item 1, section 205-10]

4.4 Franking credits for payment of PAYG instalments and corporate income tax, and franking debits for refunds of corporate income tax, arise only for resident entities. The residency criteria are contained in the sufficiently resident test, which is carried over from the current law.

4.5 The franking account will be a rolling balance account rather than a yearly account with an annual balance transfer. This is a simplification measure that removes the need for franking entries to effect the transfer of a credit balance to the following income year.

Franking credits

4.6 The circumstances in which a franking credit will arise are set out in the table in section 160-115. These circumstances are discussed in paragraphs 4.7 to 4.12.

Payment of a PAYG instalment or income tax

4.7 Payment of a PAYG instalment or income tax will give rise to a franking credit. The amount of the franking credit is reduced on an attribution basis if an entity is not a franking entity for the whole of the relevant instalment period in the case of PAYG instalments, or for the whole of the relevant income year in the case of corporate tax. The entity must also satisfy the residency requirementfor the income year in relation to which the PAYG instalment or income tax is paid. [Schedule 1, item 1, section 205-15, items 1 and 2 in the table]

4.8 Section 160-126 explains the residency requirement. For an entity that is a company or corporate limited partnership the entity must either be resident for more than one half of the year, or be resident at all times during the year when the company exists. If an entity is a corporate unit trust or public trading trust the entity must be a corporate unit trust or public trading trust for the income year. [Schedule 1, item 1, section 205-25]

4.9 Section 160-120 explains when a corporate tax entity is taken to have paid a PAYG instalment or income tax for the purpose of the imputation rules. Broadly speaking, an entity pays a PAYG instalment if:

the entity has a liability to pay the instalment; and
either:

-
the entity makes a payment to satisfy the liability; or
-
a credit is applied to discharge or reduce the liability.

This replicates section 160APBB of the ITAA 1936. [Schedule 1, item 1, section 205-20]

4.10 Under the new law, franking credits arising from income tax paid will be expressed on a tax paid basis. As a result, the tax offset received by a member will equal the face value of the franking credit allocated to that member. This is a departure from the current law where franking credits are expressed on an after-tax distributable profits basis.

Receipt of a franked distribution

4.11 Receipt of a franked distribution will also generally give rise to a franking credit. The franking credit equals the franking credit on the distribution [Schedule 1, item 1, section 205-15, item 3 in the table] . Receipt of a franked distribution can also flow indirectly through a partnership or trust. [Schedule 1, item 1, section 205-15, item 4 in the table]

Liability for franking deficit tax

4.12 A franking credit will arise if an entity incurs a liability for franking deficit tax. Section 160-135 explains when an entitys franking account is in deficit. The credit is triggered by liability for, rather than payment of, franking deficit tax to avoid the possibility of franking deficit tax being imposed in respect of outstanding franking deficit tax incurred for an earlier income year. Although a franking credit does not arise under the current law for a liability to pay franking deficit tax, in effect the same outcome is achieved because a franking deficit is not carried over to the following year. The effect of this provision is that the franking account will operate as a rolling balance account compared to the current imputation rules that essentially require companies to establish new franking accounts from one franking year to the next. [Schedule 1, item 1, section 205-15, item 5 in the table]

Franking debits

4.13 The circumstances in which a franking debit will arise are set out in the table in section 160-130. These circumstances are discussed below.

Making a franked distribution

4.14 A franking debit arises if a franking entity makes a franked distribution.

4.15 A franking debit also arises if a corporate tax entity that is not a franking entity purports to frank a distribution. This debit would result in the entity becoming liable to pay franking deficit tax because, not being a franking entity, it would not be able to obtain franking credits to offset the debit. However, no imputation credits would arise for the recipient of the distribution in this case because it would not be a franked distribution (only franking entities can make franked distributions). [Schedule 1, item 1, section 205-30, item 1 in the table]

4.16 The debit for making a distribution arises at the time the distribution is made.

Refund of income tax

4.17 A franking debit will arise if an entity receives a refund of income tax. The amount of the franking debit is reduced on an attribution basis if an entity is not a franking entity for the whole of the relevant income year. [Schedule 1, item 1, section 205-30, item 2 in the table]

4.18 The relevant parts of section 160APBD of the ITAA 1936 are replicated to provide when a refund of income tax is received. Broadly speaking, an entity receives a refund of income tax if:

either:

-
the entity receives an amount as a refund; or
-
the Commissioner applies a credit, or a running balance account surplus, against a liability or liabilities of the entity; and

the refund of the amount, or the application of the credit, represents in whole or in part a return to the entity of an amount paid or applied to satisfy the entitys liability to pay income tax.

[Schedule 1, item 1, section 205-35]

Underfranked distributions

4.19 A franking debit will arise if an entity makes an underfranked distribution, that is, a distribution with a franking percentage that is less than the entitys benchmark franking percentage for the franking period. This debit is explained in more detail in paragraphs 2.69 to 2.71 in the context of the benchmark rules. [Schedule 1, item 1, section 205-30, item 3 in the table]

Ceasing to be a franking entity

4.20 If an entity ceases to be a franking entity, a franking debit will arise to eliminate any franking surplus. The debit will ordinarily arise at the time the entity ceases to be a franking entity. [Schedule 1, item 1, section 205-30, item 4 in the table]

Linked distribution

4.21 A franking debit will arise if an entity makes a linked distribution. This debit is explained in more detail in the context of the anti-streaming rules in paragraphs 3.11 to 3.20. [Schedule 1 , item 1, section 205-30, item 5 in the table]

Tax-exempt bonus shares

4.22 A franking debit will arise if an entity issues tax-exempt bonus shares instead of making a distribution. This debit is explained in more detail in the context of the anti-streaming rules in paragraphs 3.21 to 3.25. [Schedule 1, item 1, section 205-30, item 6 in the table]

Streaming determination

4.23 A franking debit will also arise if the Commissioner makes a determination that a franking debit should arise because the entity is streaming imputation benefits to members most able to benefit from them. This debit is explained in more detail in the context of the anti-streaming rules in paragraphs 3.26 to 3.57. [Schedule 1, item 1, section 205-30, item 7 in the table]

Division 7A distributions

4.24 Consistent with the current law, a franking debit arises if an entity is taken to have paid a distribution under Division 7A of Part III of the ITAA 1936. The debit is equal to the debit that would have arisen had the amount of the distribution been a frankable distribution franked to the entitys benchmark franking percentage for the franking period in which the distribution is taken to have been made (or franked at 100% if there is no benchmark). This ensures that no benefits are available by streaming unfrankable distributions to certain members. [Schedule 1, item 1, section 205-30, item 8 in the table]

On-market buy-backs

4.25 Also consistent with the existing law, a franking debit arises if a company buys back a share on-market. The debit is equal to the debit that would have arisen had the buy-back been off-market. Again, this prevents streaming by companies buying back some shares off-market (giving rise to a frankable dividend) and other shares on-market (which results in no dividend). [Schedule 1, item 1, section 205-30, item 9 in the table]

Franking deficit tax

4.26 If a corporate tax entity has a deficit in its franking account at the end of an income year, it has imputed to its members more tax than it has paid. In these circumstances it needs to pay franking deficit tax to account for the over-imputation of tax.

4.27 An entity will be liable to pay franking deficit tax if its franking account is in deficit at the end of an income year or, if it ceases to be a franking entity, when it ceases to be a franking entity [Schedule 1, item 1, section 205-45] . An entitys franking account is in deficit at a particular time when the sum of the franking debits in the account exceeds the sum of the franking credits. The franking deficit is the amount of the excess.

4.28 Consistent with the current rules, franking deficit tax will continue to be offsetable against income tax.

4.29 If a franking deficit would have arisen but does not because of a payment of tax that is refunded in the following year (within 3 months of the end of the previous year), the refund that arises in the following year will be treated for the purpose of franking deficit tax as though it had been paid at the end of the preceding income year. This will result in a recalculation of franking deficit tax. The franking deficit tax, or additional amount of franking deficit tax, is payable within 14 days of the day the refund is paid or such later day as set by the ITAA 1997. [Schedule 1, item 1, section 205-45]

4.30 This rule is a disincentive for an entity that might overpay tax to avoid franking deficit tax. The rule achieves the same outcome as the deficit deferral tax that is imposed under the current law, but removes the need for a separate tax.

4.31 Additional franking deficit tax of 30% will be imposed where an entitys franking deficit is more than 10% greater than the total of the franking credits arising during the relevant income year. This additional tax will be imposed under subsection 5(2) of the New Business Tax System (Franking Deficit Tax) Bill 2000. [Schedule 1, item 1, section 205-45]


View full documentView full documentBack to top