House of Representatives

New Business Tax System (Miscellaneous) Bill 1999

New Business Tax System (Venture Capital Deficit Tax) Bill 1999

New Business Tax System (Venture Capital Deficit Tax) Act 2000

Explanatory Memorandum

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

Chapter 4 - Venture capital franking rebates

Outline of Chapter

4.1 This Chapter explains the measure in Schedule 5 to this Bill, which is designed to encourage venture capital investment in Australia. The measure allows resident complying superannuation funds (and like entities) a special franking rebate the venture capital franking rebate which enables them to receive venture capital gains free of tax through PDFs.

4.2 The Chapter explains who is eligible for the measure and how the venture capital franking rebate is calculated. It also explains the requirements and administrative procedures for PDFs that wish to venture capital frank dividends and thereby provide the concessional tax treatment for their superannuation fund (and like entity) investors.

4.3 The Chapter also explains the operation of the New Business Tax System (Venture Capital Deficit Tax) Bill 1999, a complementary Bill under which venture capital deficit tax is imposed to ensure that a PDF does not venture capital frank its dividends beyond its permissible limit.

Context of Reform

4.4 Under the current law, tax incentives are provided for investors in PDFs to encourage investment in innovative Australian firms. This measure further promotes investment in these entities by specifically encouraging superannuation funds (and like entities) to invest in PDFs.

4.5 Currently, unfranked dividends paid by a PDF are exempt from income tax. The franked portion of the dividend is also exempt unless the recipient elects to include the dividend in assessable income to obtain the franking rebate. Exempting venture capital gains received through PDFs will further encourage Australian superannuation funds to invest in venture capital.

Summary of new law

4.6 Eligible superannuation entities will receive a rebate for CGT paid by a PDF on venture capital investments.

4.7 To trace the CGT paid by the PDF through to its shareholders, the concept of venture capital franked dividends has been introduced. In order to provide a rebate for the CGT paid and exempt the underlying income, it is necessary for the PDF to identify tax paid on venture capital gains as venture capital credits. To distribute these credits, the PDF must record and keep account of its available venture capital franking credits in a venture capital sub-account, which is a sub-account of its class C franking account.

4.8 Venture capital credits are allocated equally to all shareholders when the PDF uses those credits to venture capital frank a dividend.

4.9 For eligible superannuation funds (and like entities) that receive a venture capital franked dividend, the dividend will be exempt income. However, the shareholder will also receive a rebate for the attached venture capital credits which effectively exempts from tax the underlying venture capital gain.

4.10 To prevent a PDF from over-distributing venture capital credits, a tax is imposed on deficits in venture capital sub-accounts at the end of a franking year. This tax, venture capital deficit tax , is imposed by a separate Bill the New Business Tax System (Venture Capital Deficit Tax) Bill 1999.

Comparison of key features of new law and current law

4.11 This measure allows PDFs to provide a rebate for CGT paid on venture capital investments to their superannuation fund (and like entities) shareholders. There is currently no comparable measure available for these investors.

New Law Current Law
Eligible shareholders in a PDF are entitled to a rebate for capital gains tax paid by the PDF on venture capital investments. CGT paid by a PDF is not refunded to its shareholders.
Venture capital franked dividends:

·
are exempt from income tax; and
·
provide a venture capital rebate, for eligible shareholders.

Currently PDF dividends are only identified as franked or unfranked.
Unfranked dividends are exempt from income tax and franked dividends are either exempt or assessable at the election of the taxpayer. If assessable, the taxpayer receives a rebate.
The dividend never produces a rebate whilst being exempt income.
A PDF may keep a venture capital sub-account in its class C franking account if it so chooses, which enables it to accrue venture capital credits and pay venture capital franked dividends. PDFs keep only a class C franking account and do not separately identify tax paid on venture capital gains.
The PDF is liable to pay venture capital deficit tax on a deficit in its venture capital sub-account at the end of the franking year. There is no corresponding measure.

Detailed explanation of new law

How does the measure apply to shareholders of a PDF?

4.12 Shareholders in a PDF who are eligible for the venture capital franking rebate receive concessional tax treatment on venture capital franked dividends. These shareholders are superannuation funds (and like entities) listed at paragraphs 4.18 and 4.20.

4.13 A venture capital franked dividend is a dividend that has been declared as such by the PDF [section 160ASEL] . When the shareholder is paid a dividend, they will receive a distribution statement that will identify the class C and the venture capital franked amounts of the dividend [subparagraph 160AQH(1)(b)(vii)] .

4.14 The venture capital franked amount of the dividend is only relevant for shareholders who are eligible for the venture capital rebate. Therefore, if the shareholder is not an eligible shareholder they simply ignore the venture capital franked amount of the dividend.

4.15 If the shareholder is an eligible shareholder the dividend will receive the tax treatment indicated in Table 4.1.

Table 4.1: The tax treatment of dividends paid to eligible shareholders
Dividend amount Tax treatment Rebate
Unfranked amount. Exempt income [subsection 124ZM(1)] . No rebate.
Ordinary class C franked amount. Exempt income [subsection 124ZM(2)] ; or May be included in assessable income at the taxpayers election [subsection 124ZM(3)] . No rebate; or Franking rebate if included in assessable income [section 160AQU] .
Venture capital franked amount for which the eligible entity may obtain a venture capital franking rebate. Exempt income [subsections 124ZM(1C) and (1D)] . Venture capital rebate* [section 160ASEP] .
* The amount of the venture capital rebate may vary depending on the category of eligible shareholder.

4.16 For the purposes of Table 4.1, the ordinary class C franked amount of a dividend is the class C franked amount reduced by the venture capital franked amount, and increased by any venture capital franked amount for which the shareholder does not receive a rebate.

4.17 The class C franked amount of the dividend is reduced by the venture capital franked amount of the dividend to prevent the taxpayer from obtaining both a venture capital franking rebate and class C franking rebate in relation to the same portion of the dividend. [Subsection 160AQT(6)]

Who is an eligible shareholder?

4.18 The following resident shareholders are eligible for venture capital rebates:

·
complying superannuation funds [paragraph 160ASEO(1)(a)] ;
·
complying ADFs [paragraph 160ASEO(1)(b)] ; and
·
pooled superannuation trusts [paragraph 160ASEO(1)(c)] .

4.19 A complying superannuation fund or complying ADF is not eligible if the fund is a self managed superannuation fund (within the meaning of the Superannuation Industry Act 1993 ). [Subsection 160ASEO(2)]

4.20 Life assurance companies and registered organisations may engage in some superannuation business. Consequently they are also eligible for the venture capital franking rebate [paragraphs 160ASEO(1)(d) and(e)] . However, the amount of the rebate available for these eligible shareholders may be limited. The rebate will be adjusted to reflect the extent to which the share on which the venture capital franked dividend was paid is referable to their superannuation business.

4.21 The rebate is not available if the dividend is received by the eligible shareholder through a partnership or trust or, for example, if the dividend is part of a dividend stripping operation. [Paragraphs 160ASEP(1)(d) and (g)]

How is the venture capital franking rebate calculated?

4.22 How the rebate is calculated varies according to the category of eligible shareholder. For example, the rebate is calculated differently for life assurance companies and registered organisations. Therefore, to correctly calculate the rebate it is first necessary to identify the category of eligible shareholder.

Complying superannuation funds, complying ADFs and pooled superannuation trusts

4.23 The rebate is calculated in the same way for:

·
complying superannuation funds;
·
complying ADFs; and
·
pooled superannuation trusts.

4.24 For these taxpayers, the rebate is:

venture capital franked amount of the dividend * (company tax rate / 1 - company tax rate)

[Subsection 160ASEP(1)]

4.25 This formula identifies the tax paid by the PDF in relation to the venture capital franked portion of the dividend.

4.26 This method of calculating the venture capital rebate is consistent with that for franking rebates for ordinary class C franked dividends.

Example 4.1: Calculating the venture capital rebate An eligible shareholder receives a total of $400 venture capital franked dividends in the income year. Assume the company tax rate is 30 %.The amount of the rebate is:

$400 * (30% / (100% - 30%))
= $400 * (30% / 70%)
= $171.43

Life assurance companies

4.27 The rebate for life assurance companies is initially calculated in the same way as the rebate for other eligible shareholders other than registered organisations. This amount is then adjusted to reflect that portion of the rebate that is referable to the superannuation business of the company. [Subsection 160ASEP(2)]

4.28 Under the current tax law life assurance companies allocate their assessable income to 4 classes of income, one of which is its complying superannuation/roll-over annuity class, or CS/RA class. This class of income represents the income from the superannuation business of the company.

4.29 Therefore, for life assurance companies, the rebate is:

venture capital franked amount of the dividend * (company tax rate / 1 - company tax rate) * (CS/RA income / total income)

Example 4.2: Calculating the venture capital rebate for life assurance companies A life assurance company receives $100,000 of venture capital franked dividends in a year of income. The CS/RA income of the company is $500,000 and the total income of the company is $1,000,000 for that year. Assume the company tax rate for the year in question is 30%.The rebate is calculated as follows:

$100,000 * (30% / (100% - 30%)) * ($500,00 / $1,000,000)
= $100,000 * (30% / 70%) * (1/2)
= $42,857.14 * (1/2)
= $21,428.57

Registered organisations

4.30 If the eligible taxpayer is a registered organisation it will receive the rebate only if the venture capital franked dividend is income derived from its CS/RA business. [Subsection 160ASEP(3)]

4.31 Income from the CS/RA business of the registered organisation is income that flows from its CS/RA assets. Therefore, the registered organisation must trace the relevant shareholding under which the venture capital franked dividend is paid to a CS/RA asset.

4.32 If the venture capital franked dividend is income from its CS/RA business, the rebate will be calculated as for other eligible shareholders other than life assurance companies in accordance with the following formula:

venture capital franked amount of the dividend * (company tax rate / 1 - company tax rate)

How does the measure apply to the PDF?

4.33 To encourage investment by eligible shareholders, PDFs may pay venture capital franked dividends. This allows them to provide a rebate to their shareholders for CGT they have paid on venture capital gains.

What is a venture capital gain?

4.34 Venture capital gains are those gains to which the concessional tax treatment applies. They are capital gains triggered by a CGT event as defined in Division 104 of the ITAA 1997 made by a PDF on qualifying SME investments.

4.35 A qualifying SME investment is an investment made by a PDF in accordance with the Pooled Development Funds Act 1992 other than an unregulated investment [section 160APA] . Broadly speaking, it is an investment that injects new equity into an Australian small or medium enterprise engaged in innovative business.

4.36 Tax paid on these gains produce venture capital credits which are used to venture capital frank dividends. Venture capital credits and debits are recorded in a venture capital sub-account kept by the PDF.

The venture capital sub-account

4.37 PDFs are not required to keep a venture capital sub-account. [Section 160ASEB]

4.38 However, the PDF must keep a venture capital sub-account if it wishes to pay venture capital franked dividends. [Section 160ASEL]

4.39 The venture capital sub-account is so called as it represents a sub-account of the class C franking account. It is not a separate franking account.

How do you calculate the balance in the venture capital sub-account?

4.40 The balance in the venture capital sub-account at any point in time is the difference between:

·
all venture capital credits to the sub-account during the franking year up to the particular point in time; and
·
all venture capital debits to the sub-account during the franking year up to the particular point in time.

4.41 Where there have been more venture capital credits than debits to the account during the franking year up to the particular point in time (i.e.there is an excess of venture capital credits over venture capital debits) the account will be in surplus to the extent of the excess. [Subsection 160ASEC(1)]

4.42 Where there have been more venture capital debits than credits to the account during the franking year up to the particular point in time (i.e.there is an excess of venture capital debits over venture capital credits) the account will be in deficit to the extent of the excess. [Subsection 160ASEC(2)]

4.43 There is not necessarily a correlation between an amount of deficit in the venture capital sub-account and a surplus in the class C franking account, or vice versa . It is quite possible for one to be in deficit whilst the other is in surplus. [Subsection 160ASEC(3)]

4.44 However, deficits in both the venture capital sub-account and the class C franking account may be related. Both may have been created by the one event.

Venture capital deficit tax

4.45 If a PDFs venture capital sub-account is in deficit at the end of the franking year, the PDF is liable to pay venture capital deficit tax. [Section 160ASEN]

How is the venture capital deficit tax determined?

4.46 The balance of the PDFs venture capital sub-account at the end of the franking year for the purposes of determining liability to venture capital deficit tax is calculated differently from the manner in which the balance is ordinarily ascertained.

4.47 The balance at the end of the year is calculated as follows:

Step 1 - the total of all venture capital franking credits to the venture capital sub-account in the franking year;

minus

Step 2 - the total of all venture capital debits to the venture capital sub-account during the franking year;

minus

Step 3 - any venture capital debits that would arise in relation to a refund or refunds of income tax received within 6months of the end of the franking year.

[Subsection 4(2) of the New Business Tax System (Venture Capital Deficit Tax) Bill 1999]

4.48 Including debits received within 6 months of the end of a franking year in determining the balance of the sub-account at the end of that year is a simple method of implementing a type of deficit deferral tax. That tax is designed to prevent a company bringing forward tax payments, and consequently franking credits, to avoid franking deficit tax for a year, only to have the brought-forward tax refunded at the beginning of the following year.

How much venture capital deficit tax is payable?

4.49 The amount of the deficit tax payable will vary depending on the relative size of the deficit and the amount of venture capital credits for that franking year.

4.50 If the deficit is equal to or less than 10% of the PDFs total venture capital credits for the franking year, the debit is calculated in accordance with the following formula (the 100% formula):

venture capital franked amount of the dividend * (company tax rate / 1 - company tax rate)

[Subsection 5(1) of the New Business Tax System (Venture Capital Deficit Tax) Bill 1999]

4.51 If the deficit is greater than 10% of the PDFs total venture capital credits for the franking year, the debit is calculated in accordance with the following formula (the 130% formula):

130% * (venture capital sub-account deficit * (company tax rate / 1 - company tax rate))

[Subsection 5(2) of the New Business Tax System (Venture Capital Deficit Tax) Bill 1999]

4.52 The 130% formula incorporates an equivalent to FAT in relation to ordinary franking deficits. As with FAT, the additional 30% can be remitted in appropriate cases. [Subsection 160ASEN(2)]

Interaction between venture capital deficit tax and class C franking deficit tax

4.53 Where both the PDFs venture capital sub-account and class C franking account are in deficit, the amount of the class C franking deficit tax in relation to the class C franking deficit is reduced. [Subsection 160AQJ(1C)]

4.54 If the venture capital deficit tax is calculated using the 100% formula, the class C franking deficit tax is reduced by the amount of the venture capital deficit tax. This ensures the PDF does not pay deficit tax twice.

4.55 If the venture capital deficit tax is calculated using the 130% formula, the class C franking deficit tax will be reduced by the amount of venture capital deficit tax that would have been payable if it were calculated using the 100% formula. That is:

venture capital sub-account deficit * (company tax rate / 1 - company tax rate)

4.56 This ensures that the extra 30% payable remains a penalty equivalent to FAT.

4.57 If the class C franking deficit tax is reduced to below zero, no class C franking deficit tax is payable, but no refund is available.

Interaction between venture capital deficit tax and class C deficit deferral tax

4.58 As noted in Step 3 at paragraph 4.47, refunds received within 6 months of the end of the franking year are used to calculate the venture capital deficit at the end of that year. These refunds may also have the effect of producing a class C franking deficit deferral tax liability.

4.59 To prevent the PDF from incurring 2 liabilities in relation to the one event, the amount of the deficit deferral tax is reduced. The amount of the reduction is the amount by which the refund or refunds created or increased the venture capital deficit less the amount to which the reduction has already been applied to reduce any class C franking deficit tax. [Subsection 160AQJC(2A)]

Payments of venture capital deficit tax

4.60 When the PDF pays an amount of venture capital deficit tax it receives a class C franking credit. The credit arises on the day the payment is made. [Section 160APVI]

4.61 The reason for allowing a franking credit is because the payment of venture capital deficit tax is effectively a payment of tax already imputed to the shareholder of the company by way of a class C franking credit. That imputation of tax resulted in a class C franking debit and it is necessary to recognise that debit by allowing a compensatory credit when the venture capital deficit tax is paid.

4.62 Where the venture capital deficit tax has been calculated using the 100% formula, the amount of the franking credit is the amount of the venture capital deficit tax paid. [Paragraph 160APVI(1)(a)]

4.63 Where the venture capital deficits tax has been calculated using the 130% formula, the franking credit is:

venture capital tax paid * (100/130)

[Paragraph 160APVI(1)(b)]

4.64 This preserves the 30% penalty equivalent to FAT.

4.65 The amount of franking credits otherwise available consequent on the payment of venture capital deficit tax is reduced by the class C franking deficit at the end of the year [subsection 160APVI(2)] . This is because the class C franking debits that resulted in the deficit have already been effectively reinstated by the fact that deficits are not carried forward from one franking year to the next.

Example 4.3: Class C franking credit for the payment of venture capital deficit tax On the last day of the franking year a PDF has a class C franking deficit tax liability of $100 and no venture capital deficit. The PDF receives a refund 2 months after the end of its franking year that creates a $50 venture capital deficit tax liability. The refund also creates a class C deficit deferral tax liability of $50.The amount of the class C franking deficit tax is reduced by the amount of the venture capital deficit tax to $50.The amount of the class C deficit deferral tax is not reduced as the amount of venture capital deficit tax that was referrable to the refund has already been offset against the class C franking deficit tax (see paragraph 4.59).

Credits to the venture capital sub-account

4.66 The PDF credits its venture capital sub-account in accordance with Table 4.2.

Table 4.2: Venture capital credits
Section Credit event Time of the credit Amount of the credit
Subsections 160ASED(1) to (4) A class C franking credit reasonably attributable to tax paid on a qualifying SME investment capital gain. The day the class C franking account is credited with the corresponding franking credit. The reasonably attributable amount of the class C franking credit.
Subsection 160ASED(4) Election to defer reasonably attributable venture capital credits arising until the assessment day. Assessment day. The reasonably attributable amount of the class C franking credit as determined on the assessment day.
Section 160ASEE Carry over surplus from previous franking year. The beginning of the franking year. The amount of the surplus immediately prior to the end of the previous franking year.
Section 160ASEF Lapsing of estimated venture capital debit determination. The termination time of the determination or the day a substituted debit determination is served on the PDF. The amount of the determination.
Subsection 160ASEN(3) Refund used in calculating venture capital deficit tax. The day the refund is received. The extent to which the refund created or increased the venture capital deficit.

Class C franking credits reasonably attributable to CGT on a qualifying SME investment

4.67 The venture capital credits which are reasonably attributable to class C franking credits arise either at the time the franking credit arises (upon payment of the tax) or on assessment [section 160ASED] . Even though tax instalments paid for a year of income that give rise to class C franking credits may not be calculated by reference to the CGT liability for the year, it is nevertheless possible to impute a tax instalment to a CGT liability because the instalment may satisfy the total tax liability (including CGT) for the year. However, in order to do so, the attribution must be reasonable.

4.68 A venture capital credit arises at the time the class C franking credit arises (unless the PDF elects to have the credit arise on assessment). The amount of the credit is equal to the extent to which the class C franking credit may be reasonably attributed to the payment of tax by the PDF in relation to a qualifying SME investment capital gain (as defined at paragraphs 4.34 and 4.35). [Subsection 160ASED(1)]

4.69 A payment of tax will not be reasonably attributable to a qualifying SME investment capital gain unless at the time the payment is made:

·
the PDF has made a capital gain from a qualifying SME investment in the income year prior to the payment being made (or such a gain in the year is certain, e.g. because a forward contract has been entered into);
·
there is no reason to suppose that the gain will be offset by carry forward losses or other capital losses;
·
there is no reason to suppose that the PDF will not have an income tax liability upon assessment at least equal to the CGT on that gain; and
·
a reasonable person with full information available to the PDF would consider the payment reasonably attributable to the tax on a qualifying SME investment capital gain.

4.70 Subsequent events that might make the attribution unreasonable do not affect the venture capital credit. However, an offsetting venture capital debit will arise at the end of the year to neutralise the credit (see paragraphs 4.94 to 4.98). [Section 160ASEH]

4.71 However, rather than making an assessment at the time a tax instalment is paid as to whether it relates to a qualifying SME investment CGT liability or not, a PDF may prefer to wait until the end of the income year when its CGT liability will be certain. In which case, the PDF may elect to have venture capital credits arise on the assessment day. [Subsections 160ASED(3) and (4)]

4.72 The assessment day is the earlier of:

·
the day the PDF lodges its income tax return for the year (the usual case); or
·
the day the Commissioner makes an assessment under section 166 of the ITAA 1936.

[Subsection 160ASED(5)]

4.73 The amount of the credit that arises at this time is equal to the extent to which class C franking credits for the year may be reasonably attributed on the assessment day to the payment of tax in relation to a qualifying SME investment capital gain. [Subsections 160ASED(1) and (4)]

4.74 A payment of income tax will not be reasonably attributable to a qualifying SME investment capital gain unless at the time of assessment:

·
the PDF has made a net capital gain from qualifying SME investments in the income year at least equal to that gain;
·
the PDF has a SME assessable income liability in relation to the income year at least equal to the gain; and
·
a reasonable person with full information available to the PDF would consider the tax paid reasonably attributable to a qualifying SME investment capital gain.

Carry forward surplus

4.75 When identifying the balance of the venture capital account, only venture capital credits and debits arising during the franking year are taken into account. Therefore, to ensure any venture capital surplus at the end of a franking year is not lost, a credit is provided at the commencement of the next franking year.

4.76 If at the end of the franking year the venture capital account is in surplus, a venture capital credit arises at the beginning of the next franking year equal to the amount of that surplus. [Section 160ASEE]

Debit determination

4.77 If a PDF has a surplus in its venture capital sub-account at the time it declares a franked dividend it is required to venture capital frank the dividend to the maximum extent possible (see paragraphs 4.90 to 4.93). [Section 160ASEM]

4.78 To allow the PDF to take into account an anticipated debit, it may make a venture capital debit determination in certain circumstances, which will produce a debit to its venture capital sub-account before the actual debit arises [sections 160ASEI and 160ASEK]. This operates in the same way that franking debits arise for estimated debit determinations.

4.79 The venture capital debit produced by a debit determination is no longer required after the termination time of the determination or when the determination is replaced by a subsequent determination. Therefore, to offset the debit applied to the venture capital account, a corresponding credit is produced on the day:

·
of the termination time of the determination [subsection 160ASEF(1)] ;or
·
a notice of a debit determination that is in substitution for an earlier debit determination is served on the taxpayer [subsection 160ASEF(2)] .

Refund used in calculating venture capital deficit tax

4.80 Venture capital deficit tax is calculated taking into account certain refunds received in the following franking year. This method of calculating the venture capital deficit tax incorporates an equivalent to deficit deferral tax.

4.81 Notionally including a debit that is actually received in one franking year in the prior franking year may potentially lead to the PDF incurring 2 debits in relation to the one refund.

4.82 To prevent this outcome a credit arises when a refund that is received within 6 months after the end of the franking year creates or increases the venture capital deficit tax. This is equivalent to the franking credit that arises under current section 160APMAB in relation to deficit deferral tax. [Subsection 160ASEN(3)]

4.83 The time the credit arises is the time the refund is received. The amount of the credit is the amount by which the refund created or increased the venture capital deficit tax.

Example 4.4: Calculating the venture capital credit for a refund that produces or increases a venture capital deficit tax On the last day of the franking year a PDF has neither a class C franking deficit nor a venture capital deficit.Within 6 months of the end of that year the PDF receives a refund that creates a $50 venture capital deficit tax liability and a $50 class C deficit deferral tax liability.The refund produces a $50 increase in venture capital deficit tax. Consequently, when the refund is received, a $50 venture capital credit arises.

Debits to the venture capital sub-account

4.84 The PDF debits its venture capital franking account in accordance with Table 4.3.

Table 4.3: Venture capital debits
Section Debit event Time of the debit Amount of the debit
Subsections 160ASED(6) to (9) Class C franking debit that is reasonably attributable to a reduction amount in relation to a venture capital credit. The time that the class C franking account is debited with the corresponding franking debit (unless the venture capital credit to which the debit relates arises on the assessment day). The reasonably attributable amount of the class C franking debit.
Section 160ASEH Amount previously attributed exceeds the limit for the year. The last day of the relevant income year. The amount by which the previously attributed amounts exceed the limit.
Section 160ASEG Declaration of venture capital franked dividend. The day the declaration is made. Venture capital franked amount of the dividend.
Section 160ASEI Estimated venture capital debit determination. The day notice of the debit determination is served on the PDF. The amount specified in the notice.
Subsection 160ASEM(2) Failure to empty sub-account. The day the venture capital dividend is paid. The lesser of:

·
the surplus in the sub-account at that time; and
·
the extent to which the dividend is class C franked, but not venture capital franked.

Sections 160ASEJ and 160AQCBA Streaming venture capital rebate benefits. The day notice of determination under section 160AQCBA is served in writing on the PDF. As calculated under paragraph 160AQCBA (8)(b).

Reasonably attributable to reduction amount

4.85 A venture capital debit generally arises at the time of a class C franking debit to the extent that the class C franking debit is reasonably attributable to a reduction amount in relation to a venture capital credit. However, if the PDF made an election to defer the relevant venture capital credit until the assessment day, and the debit would otherwise arise before that day, then the debit arises at the same time as the credit. [Subsection 160ASED(6)]

4.86 A reduction amount in relation to a venture capital credit is effectively an amount of tax which gave rise to a venture capital credit which is subsequently refunded. [Subsection 160ASED(7)]

4.87 The events which produce reduction amounts are:

·
the refund of a payment of tax;
·
the crediting of an income tax instalment or refund against a tax liability that does not produce a franking credit (e.g. fringe benefits tax); and
·
the serving of an amended company tax assessment reducing the company tax of the PDF.

Declaration of venture capital franked dividend

4.88 A PDF imputes venture capital credits to its shareholders when it pays a venture capital franked dividend. To reflect this in the venture capital sub-account, the account will be debited by the venture capital franked amount of the dividend. [Section 160ASEG]

4.89 The debit arises at the time the declaration is made.

Failure to empty sub-account

4.90 The PDF is required to reduce its venture capital sub-account when it pays a class C franked dividend under a resolution to all shareholders if it has a surplus in its venture capital sub-account immediately before the declaration. [Section 160ASEM]

4.91 The amount by which the sub-account must be reduced is the lesser of:

·
the balance of its venture capital sub-account immediately before the dividend is declared [paragraph 160ASEM(1)(e)] ; and
·
the class C franked amount of the dividend [paragraph 160ASEM(1)(d)] .

4.92 This measure is to prevent the PDF from accumulating venture capital credits until a time when it has shareholders better able to benefit from the credits.

4.93 If the PDF fails to comply with this requirement, the venture capital sub-account will be debited [subsection 160ASEM(2)] . The amount of the debit is the lesser of:

·
the remaining surplus in the sub-account; and
·
the amount to which the dividend was class C franked but not venture capital franked.

Limit on venture capital credits for the franking year

4.94 There is a limit on the net amount of venture capital credits that may arise in an income year which relate to tax for that year. For these purposes, the net amount of venture capital credits which relate to tax for a year of income is the total of venture capital credits relating to tax paid on taxable income for the year (whether paid during the year or after the end of the year) reduced by any venture capital debits attributable to that tax (e.g. because it is refunded) [subsection 160ASEH(2)] . This limit is necessary to ensure that the credits that arise during the year that are reasonably attributable to the payment of tax in relation to a qualifying SME investment are also reasonably attributable at the end of the year. [Section 160ASEH]

4.95 A venture capital debit arises to the extent that the net amount of venture capital credits that have arisen during the year is not reasonably attributable to the payment of tax in relation to a qualifying SME investment capital gain.

4.96 The debit arises on the last day of the income year.

4.97 The amount of the debit is the net amount of venture capital credits in relation to tax for the income year reduced by the lesser of:

·
the adjusted amount of notional tax payable on capital gains from qualifying SME investments (i.e. the maximum value of franking credits obtainable from CGT paid by the PDF on relevant capital gains of the PDF); and
·
the adjusted amount of tax paid (after allowing credits and rebates) by the PDF on taxable income from SME investments (i.e. the maximum value of franking credits obtainable from total tax paid by the PDF on relevant taxable income).

4.98 The amount of notional tax payable on capital gains from qualifying SME investments is:

(total qualifying SME investment capital gains / total SME investment capital gains) * assessable income from capital gains on SME investments * SME tax rate

Where:

·
total qualifying SME investment capital gains are all qualifying venture capital gains made during the income year;
·
total SME investment capital gains are all capital gains made during the year on all investments excluding unregulated investments;
·
assessable income from capital gains on SME investments is the amount of assessable income made by the PDF in the income year from capital gains on SME investments; and
·
SME tax rate is the current rate of tax a PDF must pay on its SME income (currently 15%).

Example 4.5: Calculating the limit on venture capital credits for the income year Throughout the course of the franking year a PDF received $250 of venture capital credits.Assume a SME tax rate of 15% and a company tax rate of 30%.At the end of the year, the PDF has the following income:

qualifying SME investment capital gains $1,000
total SME investment capital gains $1,000
assessable income from capital gains on SME investment $800
After deductions, the PDF has a SME taxable income of $700, and the tax liability (at 15%) of $105 is paid in full.The notional tax payable on capital gains from qualifying SME investments is:

($1,000/$1,000) * $800 * 15% = $120

The adjusted amount is:

$120 * (70%/30%) = $280

The tax paid by the PDF on taxable income from SME investments is $105.The adjusted amount is:

$105 * (70%/30%) = $245

A debit will be posted to the PDFs venture capital account on the last day of the income year equal to:

$250 - $245 = $5

Note that the debit is calculated using the adjusted amount of tax paid by the PDF on taxable income from SME investment as it is lower than the adjusted amount of the notional tax payable on capital gains from qualifying SME investments.

Estimated venture capital debit determination

4.99 The requirement to distribute venture capital credits to reduce the venture capital sub-account when paying certain dividends may result in the sub-account going into deficit. This is demonstrated in Example 4.6.

Example 4.6: Circumstances in which an estimated venture capital debit determination is required A PDF is expecting a $36 refund of tax paid that will produce a $64 debit to the sub-account and it wants to pay a $64 fully franked dividend under a resolution to all its shareholders.If the PDF has a $64 surplus in its sub-account when it declares the dividend it would have to venture capital frank it to $64 or a penalty debit will be applied to the account to reduce the balance (in these circumstances to zero). However, when the refund is received it will incur a $64 venture capital debit putting the account into deficit of $64.

4.100 To avoid forcing PDFs into deficit in situations like this, under certain circumstances the PDF may obtain an estimated venture capital debit determination from the Commissioner. The debit determination produces a venture capital debit. [Section 160ASEI]

4.101 In Example 4.6, if the PDF obtained a debit determination before declaring the dividend, the balance of its sub-account would be reduced to zero and the sub-account would not ultimately be forced into deficit.

Streaming venture capital rebate benefits

4.102 The anti-streaming rules that operate to prevent companies from streaming dividends to their shareholders will also apply to the streaming of benefits from venture capital rebates by a PDF.

4.103 If a PDF does stream benefits from venture capital rebates and the Commissioner makes a determination under paragraph 160AQCBA(3)(a) of the ITAA 1936, it will receive a class C franking debit and a venture capital debit. [Sections 160AQCBA and 160ASEJ]

4.104 The amount of each debit is the same and is calculated in accordance with paragraph 160AQCBA(8)(b) of the ITAA 1936.

4.105 Alternatively, the Commissioner may make a determination under paragraph 160AQCBA(3)(b) of the ITAA 1936 that no venture capital franking rebate arises for the recipient of the streamed benefit.

How does a PDF pay a venture capital franked dividend?

4.106 A PDF may only venture capital frank certain dividends. Dividends that may be venture capital franked (eligible dividends) are dividends that are:

·
class C franked;
·
paid under a resolution under which;

-
the dividends are to be paid to all shareholders; and
-
the amount of the dividend per share is the same.

This requirement is necessary to limit opportunities for a PDF to stream venture capital franking benefits to their eligible shareholders. [Subsection 160ASEL(1)]

4.107 To frank one of these dividends the PDF must make a venture capital franking declaration. The declaration has to be made in the class C franking declaration and must provide that each dividend paid under the resolution is venture capital franked to the same extent. [Subsection 160ASEL(2)]

4.108 The extent to which the PDF may venture capital frank the dividend is limited to the extent the dividend is class C franked. [Subsection 160ASEL(4)]

Example 4.7: Calculating the venture capital franked amount of a dividend A PDF pays a $100 dividend that is 50% class C franked and in the declaration purports to 60% venture capital frank it. The extent to which the dividend is venture capital franked is:

$100 * 50% = $50

Application and transitional provisions

4.109 The amendments apply to venture capital gains of PDFs derived after the Capital Gains Tax Bill receives Royal Assent.

Consequential amendments

4.110 There are no consequential amendments relating to these measures other than those described in this Chapter.


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