New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 (117 of 2002)

Schedule 17   Changes to the imputation system

Income Tax Assessment Act 1997

4   After section 215-1

Insert:

Subdivision 215-B - Non-share dividends that are unfrankable to some extent

Guide to Subdivision 215-B

215-5 What this Subdivision is about

While non-share dividends are, as a general rule, frankable, all or part of some non-share dividends are taken to be unfrankable by virtue of these rules.

Table of sections

215-10 Certain non-share dividends by ADIs unfrankable

215-15 Non-share dividends are unfrankable if profits are unavailable

215-20 Working out the available frankable profits

215-25 Anticipating available frankable profits

215-10 Certain non-share dividends by ADIs unfrankable

(1) A*non-share dividend paid by an ADI (an authorised deposit-taking institution) for the purposes of theBanking Act 1959is unfrankable if:

(a) the ADI is an*Australian resident; and

(b) the non-share dividend is paid in respect of a*non-share equity interest that:

(i) by itself; or

(ii) in combination with one or more schemes that are*related schemes to the scheme under which the interest arises;

forms part of the ADI's Tier 1 capital either on a solo or consolidated basis (within the meaning of the prudential standards); and

(c) the non-share equity interest is issued at or through a permanent establishment of the ADI in a broad-exemption listed country (within the meaning of Part X of theIncome Tax Assessment Act 1936); and

(d) the funds from the issue of the non-share equity interest are raised and applied solely for one or more purposes permitted under subsection (2) in relation to the non-share equity interest.

(2) The permitted purposes in relation to the*non-share equity interest (the relevant interest ) are the following:

(a) the purpose of the business of the ADI carried on at or through the permanent establishment other than the transfer of funds directly or indirectly to:

(i) the Australian head office of the permanent establishment; or

(ii) any connected entity of the ADI that is an*Australian resident; or

(iii) a permanent establishment of the ADI, or of a connected entity of the ADI, located in Australia;

(b) the purpose of redeeming:

(i) a*debt interest; or

(ii) a non-share equity interest;

that is issued, before the relevant interest is issued, at or through the permanent establishment and is held by a connected entity of the ADI that is an Australian resident;

(c) the purpose of returning funds to:

(i) the Australian head office of the permanent establishment; or

(ii) a permanent establishment of the ADI or of a connected entity of the ADI, located in Australia;

if the funds are contributed, before the relevant interest is issued, for use in the business of the ADI carried on at or through the permanent establishment.

215-15 Non-share dividends are unfrankable if profits are unavailable

(1) If:

(a) a*corporate tax entity pays a*non-share dividend; and

(b) immediately before the payment, the amount of the*available frankable profits of the entity is nil, or less than nil;

the non-share dividend is unfrankable .

(2) If:

(a) a*corporate tax entity pays a*non-share dividend that is not one of a number of non-share dividends paid at the same time; and

(b) immediately before the payment, the amount of the*available frankable profits of the entity, although greater than nil, are less than the amount of the non-share dividend;

the entity is taken to have made a frankable distribution equal to the amount of the available frankable profits. The remainder of the dividend is taken to be an unfrankable distribution.

(3) If:

(a) a*corporate tax entity pays a*non-share dividend that is one of a number paid at the same time; and

(b) immediately before the payment, the amount of the*available frankable profits of the entity, although greater than nil are less than the sum of the amounts of the non-share dividends;

the entity is taken to have made a frankable distribution equal to the amount worked out using the formula:

(Amount of the non-share dividend / Sum of the amounts of all the non-share dividends) * Available frankable profits

The remainder of the dividend is taken to be an unfrankable distribution.

215-20 Working out the available frankable profits

(1) Use the following formula to work out the amount of a*corporate tax entity's available frankable profits at a particular time:

Maximum frankable amount - [Committed share dividends + Undebited non-share dividends]

where:

committed share dividends means the sum of:

(a) the amounts of any*distributions that are not*non-share dividends and are paid by the entity at that time; and

(b) if the entity has announced that it will pay distributions that are not non-share dividends at a later time, or is committed or has resolved (formally or informally) to paying such distributions at a later time - the amounts of those distributions.

maximum frankable amount means the maximum amount of*frankable*distributions (other than*non-share dividends) that the*corporate tax entity could pay at that time having regard to its available profits at that time.

undebited non-share dividends means the sum of the amounts of the franked parts of the*non-share dividends (worked out under subsection (2)) that:

(a) were not debited to available profits; and

(b) were paid within the preceding 2 income years or were paid under the same scheme under which the entity pays the non-share dividend.

(2) The amount of the franked part of a*non-share dividend is worked out using the following formula:

Franking credit on the dividend * ([1 - Corporate tax rate] / Corporate tax rate)

215-25 Anticipating available frankable profits

(1) A*corporate tax entity that pays a*non-share dividend may anticipate*available frankable profits if:

(a) the entity:

(i) has announced the payment of; or

(ii) is committed or has resolved (formally or informally) to pay;

*distributions other than non-share dividends (the committed distributions ) after payment of the non-share dividend; and

(b) but for this subsection, section 215-15 would apply to the non-share dividend; and

(c) the entity's available frankable profits would be greater than nil at the relevant time if the committed distributions were ignored; and

(d) it is reasonable to expect that available profits will arise after payment of the non-share dividend and before payment of the committed distributions.

The available frankable profits immediately before the entity pays the non-share dividend are then the amount estimated by the entity, having regard to the expected profits referred to in paragraph (c).

(2) The amount estimated under subsection (1) must not exceed:

Actual available frankable profits + Adjusted expected profits

where:

actual available frankable profits is the*available frankable profits the entity would have immediately before paying the*non-share dividend apart from subsection (1).

adjusted expected profits is the lesser of:

(a) the available profits that it is reasonable to expect will arise after payment of the*non-share dividend and before payment of the committed distributions; and

(b) the difference between:

(i) in a case where the single non-share dividend is the only one paid at a particular time - the amount of the non-share dividend that would, apart from subsection (1), be*frankable under section 215-15 and the amount of the non-share dividend that would, apart from subsection (1), be frankable under that section if the committed distributions were ignored; and

(ii) in a case where the non-share dividend is one of a number of non-share dividends made at the same time - the sum of the amounts of the non-share dividends that would, apart from subsection (1), be frankable under section 215-15 and the sum of the amounts of the non-share dividends that would, apart from subsection (1), be frankable under that section if the committed distributions were ignored.

(3) A*franking debit arises for the entity if:

(a) the entity anticipates*available frankable profits under subsection (1); and

(b) the available frankable profits of the entity are less than nil:

(i) when the last of the committed distributions is made; or

(ii) immediately before the end of the income year following the income year in which the*non-share dividend is paid;

whichever is earlier.

(4) The*franking debit is equal to the lesser of:

(a) the amount by which the*available frankable profits is below nil; and

(b) the amount of the franked part of the*non-share dividend (worked out using subsection 215-20(2)) or, if more than one non-share dividend is made at the relevant time, the sum of the amounts of the franked parts of those non-share dividends.

(5) In working out the entity's*available frankable profits for the purposes of subsection (3) or (4), disregard:

(a) any*distributions that:

(i) the entity announces, or becomes committed to or resolves (formally or informally) to pay after the payment of the*non-share dividend; and

(ii) have not been paid; and

(b) any estimate made by the entity under subsection (1) after the non-share dividend is paid.