House of Representatives

Tax Laws Amendment (2006 Measures No. 4) Bill 2006

Explanatory Memorandum

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

Chapter 3 Simplified imputation system: imputation for New Zealand resident companies

Outline of chapter

3.1 Schedule 3 to this Bill amends the income tax law to ensure that franking credits are available to an Australian company which receives a franked distribution that is non-assessable non-exempt income from a New Zealand company that has elected into the Australian imputation system.

Context of amendments

3.2 Under the trans-Tasman imputation provisions in Division 220 of the Income Tax Assessment Act 1997 (ITAA 1997), Australian franking credits flow through to an Australian shareholder who holds shares in a New Zealand company. The provisions apply only if the New Zealand company elects to maintain an Australian franking account reflecting Australian tax paid.

3.3 Generally, if a franked distribution is made from a New Zealand company to a shareholder that is an Australian company, the Australian company must include the distribution in its assessable income and is entitled to a tax offset. This causes a franking credit to arise in the Australian company's franking account (which can then be passed on to its shareholders).

3.4 The current law does not operate as intended if the franked distribution made from the New Zealand company is:

·
non-assessable non-exempt income of the Australian company because it is paid out of attributed income;
·
non-assessable non-exempt income of the Australian company because it is a non-portfolio dividend; or
·
non-assessable non-exempt income of the Australian company because it is paid out of attributed foreign investment fund income.

3.5 In these circumstances, because the distribution is non-assessable non-exempt income, a franking credit does not arise in the Australian company's franking account (even though the New Zealand company has paid Australian tax and attached franking credits to the relevant distribution).

Summary of new law

3.6 A franking credit will arise in the franking account of an Australian company that receives a franked distribution from a New Zealand company that has elected into the Australian imputation system where:

·
the distribution is non-assessable non-exempt income of the Australian company because it is paid out of attributed income;
·
the distribution is non-assessable non-exempt income of the Australian company because it is a non-portfolio dividend; or
·
the distribution is non-assessable non-exempt income of the Australian company because it is paid out of attributed foreign investment fund income.

Comparison of key features of new law and current law

New law Current law
A franking credit will arise in the franking account of an Australian company that receives a franked distribution from a New Zealand company that has elected into the Australian imputation system where:

·
the distribution is non-assessable non-exempt income of the Australian company because it is paid out of attributed income;
·
the distribution is non-assessable non-exempt income of the Australian company because it is a non-portfolio dividend; or
·
the distribution is non-assessable non-exempt income of the Australian company because it is paid out of attributed foreign investment fund income.

A franking credit does not arise in the franking account of an Australian company that receives a franked distribution from a New Zealand company that has elected into the Australian imputation system where:

·
the distribution is non-assessable non-exempt income of the Australian company because it is paid out of attributed income;
·
the distribution is non-assessable non-exempt income of the Australian company because it is a non-portfolio dividend; or
·
the distribution is non-assessable non-exempt income of the Australian company because it is paid out of attributed foreign investment fund income.

Detailed explanation of new law

Franking credit arises for an Australian company

3.7 Section 220-350 will apply if a New Zealand company that has elected into the Australian imputation system makes a franked distribution to an Australian company where:

·
the distribution is paid out of attributed income (and is therefore wholly or partly non-assessable non-exempt income under section 23AI of the Income Tax Assessment Act 1936 (ITAA 1936));
·
the distribution is a non-portfolio dividend (and is therefore non-assessable non-exempt income under section 23AJ of the ITAA 1936); or
·
the distribution is paid out of attributed foreign investment fund income (and is therefore wholly or partly non-assessable non-exempt income under section 23AK of the ITAA 1936).

[Schedule 3, item 1, subsection 220-350(1)]

3.8 In these circumstances, a franking credit will arise in the Australian company's franking account on the day that the distribution is made. [Schedule 3, item 1, subsection 220-350(2)]

3.9 If only part of the distribution is non-assessable non-exempt income, then a franking credit in relation to the distribution will arise under section 220-350 in relation to the part of the distribution that is non-assessable non-exempt income. Another franking credit will arise in respect of the remaining part of the distribution under item 3 in the table in subsection 205-15(1) due to the operation of subsection 207-90(2).

3.10 The amount of the franking credit that arises in the Australian company's franking account is:

·
if the whole of the distribution is non-assessable non-exempt income, the amount of the franking credit attached to the distribution by the New Zealand company; or
·
if only part of the distribution is non-assessable non-exempt income, so much of the amount of the franking credit attached to the distribution by the New Zealand company that is attributable to the non-assessable non-exempt part of the distribution.

[Schedule 3, item 1, subsection 220-350(3)]

Example 3.1 A New Zealand company that has elected into the Australian imputation system makes a distribution of $700 to an Australian company and attaches $300 of franking credits to that distribution.The whole of the distribution is a non-portfolio dividend and is therefore non-assessable non-exempt income of the Australian company under section 23AJ of the ITAA 1936.Section 220-350 will apply so that a franking credit of $300 will arise in the Australian company's franking account on the day that the distribution is made. Example 3.2 A New Zealand company that has elected into the Australian imputation system makes a distribution of $700 to an Australian company and attaches $300 of franking credits to that distribution.$420 of the distribution is paid out of attributed foreign investment fund income and is therefore non-assessable non-exempt income of the Australian company under section 23AK of the ITAA 1936.Section 220-350 will apply so that a franking credit of $180 (ie, $300 x $420/$700) will arise in the Australian company's franking account on the day that the distribution is made. An additional franking credit of $120 will arise under item 3 in the table in subsection 205-15(1).

Australian company's conduit foreign income reduced

3.11 Under Division 802 of the ITAA 1997 an Australian company is able to make an unfranked distribution to its foreign owners free of dividend withholding tax to the extent that the distribution is declared to be conduit foreign income.

3.12 The amount of the Australian company's conduit foreign income is reduced by the franked part of a distribution (paragraph 802-30(4)(c)). Therefore, if a franking credit arises in the franking account of an Australian company under section 220-350, the company's conduit foreign income will be reduced by the franked part of a distribution.

3.13 The conduit foreign income provisions in Division 802 commenced, broadly, from 1 July 2005. Those provisions replaced the foreign dividend account provisions in Division 11A of Part III of the ITAA 1936. As section 220-350 of the ITAA 1997 applies from 1 April 2003, a consequential amendment is made to the former foreign dividend account provisions so that, if a franking credit arises in the franking account of an Australian company under section 220-350, the company's foreign dividend account will be debited by the franked part of the distribution. [Schedule 3, items 3 and 4, paragraphs 128TB(1)(e) and (3)(e) of the ITAA 1936]

Application and transitional provisions

3.14 The amendments will apply from 1 April 2003 (ie, from the commencement of the trans-Tasman imputation measures). These amendments will ensure that the income tax law operates as intended and will benefit affected taxpayers. [Schedule 3, items 2 and 5]


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