ATO Interpretative Decision
ATO ID 2005/31
Income tax
Streaming of franking credits: distribution to only one class of shareholderFOI status: may be released
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This ATO ID has been amended to improve clarity.
Status of this decision: Decision Current
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Will the Commissioner make a determination under paragraph 204-30(3)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) where Company B pays franked dividends to its A-class shareholder to the exclusion of its ordinary shareholder?
Decision
No, the Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 where it cannot be shown that the A class shareholder would derive a greater benefit from franking credits than the ordinary shareholder.
Facts
Company B is an Australian resident company with two shareholders, X and Y. X owns all the ordinary shares and Y owns an A class share in the company. They are both natural persons and Australian residents for taxation purposes. There have been no distributions made to X or Y since the company was incorporated.
Company B wishes to pay a franked dividend to its A class shareholder only. The holder of the ordinary shares is not going to be provided with any other benefits (including loans) in lieu of the franked distribution to be paid to the holder of the A class share.
X and Y are the only shareholders of the company. There are no other shares on issue.
Reasons for Decision
Section 204-30 of the ITAA1997 was introduced as a specific anti-avoidance provision to apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most, in preference to other shareholders.
As a resident recipient of a franked distribution from Company B, Y will be required to gross-up the distribution under section 207-20(1) of the ITAA 1997 and be entitled to a tax offset under section 207-20(2). Consequently, upon receipt of the distribution, Y will be taken to have received an imputation benefit under paragraph 204-30(6)(a) of the ITAA 1997.
Subsections 204-30(7) and 204-30(8) of the ITAA 1997 list instances in which a member of an entity will be taken to derive a greater benefit from franking credits than another member of the entity. Of the factors listed in section 204-30(8) of the ITAA 1997 only those listed in paragraphs (a), (b) and (c) will be of relevance in the context of distributions to shareholders that are natural persons.
As X and Y are natural persons and Australian residents, their residential status will not in itself confer greater benefits upon one to the exclusion of the other. Furthermore, as they will both be entitled to tax offsets in the event of receiving a franked distribution, one will not secure a greater benefit than the other from franking, on account of their entitlement to an offset. Consequently paragraphs (a) and (b) will not distinguish between X and Y insofar as the ability of one to secure a greater benefit from franking than the other is concerned.
Paragraph (c) of section 204-30(8) of the ITAA 1997 examines whether a distribution is being directed towards one member in preference to another based upon the member's ability to derive a greater benefit from the associated tax offset. As an example, the Explanatory Memorandum for the New Business Tax System (Imputation) Bill 2002 cites a corporate tax entity that is not entitled to a refund of excess imputation credits. While the introduction of the loss wastage measures reduces the circumstances in which excess franking credits are wasted, the focus of paragraph (c) is on instances where one member's tax profile limits the value of a tax offset to them.
However, both X and Y are entitled to refunds of excess imputation credits and consequently are able to utilize tax offsets associated with distributions to the same extent. To the extent that the amount of tax payable as a result of the distribution is less than the tax offset associated with the distribution, they will both be entitled to a refund equal to the excess.
Accordingly, it cannot be said that the entity has directed distributions in such a manner as to confer greater benefits from franking upon a member that is able to derive a greater benefit from franking credits to the exclusion of a member that is unable to do so. Consequently, the Commissioner will not make a determination under paragraph 204-30(3)(c)of the ITAA 1997 where Company B pays franked dividends to it's A-class shareholder to the exclusion of its ordinary shareholder.
Date of decision: 20 December 2004Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
section 204-30
section 207-20
ATO ID 2002/622
Other References:
Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002
Keywords
Dividend streaming arrangements
Franked dividends
Imputation system
Shareholders
Date reviewed: 27 November 2017
ISSN: 1445-2782
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