ATO Interpretative Decision

ATO ID 2009/48

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

If the Commissioner exercises the discretion under paragraph 109RB(2)(a) of the Income tax Assessment Act 1936 (ITAA 1936) to disregard the operation of Division 7A of the ITAA 1936 in a previous income year, is the franking debit reversed in the income year in which the franking debit arose or the income year in which the Commissioner exercises the discretion?

Decision

Yes. The franking debit is reversed in the income year in which the franking debit arose by the Commissioner amending the franking assessment for that income year, subject to a four year time limit.

Facts

The taxpayer is an Australian resident private company.

A franking debit arose in the franking account of the taxpayer for the 2003-04 income year as a result of Division 7A of the ITAA 1936 applying.

The franking debit resulted in the taxpayer being liable for franking deficit tax in the 2003-04 income year.

In the 2007-08 income year the Commissioner decided, at the request of the taxpayer, that the operation of Division 7A should be disregarded pursuant to paragraph 109RB(2)(a) of the ITAA 1936.

Reasons for Decision

As a result of the insertion of Subdivision DB of Division 7A of the ITAA 1936 the Commissioner is conferred with the discretion to disregard the operation of Division 7A in certain circumstances.

Relevantly, subsection 109RB(1) of the ITAA 1936 provides:

1.

The Commissioner may make a decision under subsection (2) if:

a.

this Division (disregarding this section) operates with the result that:

i.

a private company is taken to pay a particular dividend to a particular entity (the recipient) under this Division; or

ii.

a particular amount is included, as if it were a dividend, in the assessable income of a particular entity (also the recipient) in relation to a private company under Subdivision EA; and

b.

the result mentioned in paragraph (a) arises because of an honest mistake or inadvertent omission by any of the following entities:

i.

the recipient;

ii.

the private company;

iii.

any other entity whose conduct contributed to that result.

Pursuant to paragraph 109RB(2)(a) of the ITAA 1936, the Commissioner may decide that the result mentioned in paragraph 109RB(1)(a) of the ITAA 1936 should be disregarded. Where the Commissioner exercises the discretion under this paragraph, the company is not 'taken to pay a particular dividend to a particular entity' under Division 7A of the ITAA 1936.

Prior to 1 July 2006, where a company was taken to pay a dividend as a result of Division 7A of the ITAA 1936 applying, the company suffered a franking debit to its franking account. Therefore, where the Commissioner decides to exercise his discretion under paragraph 109RB(2)(a) of the ITAA 1936 in respect of a deemed dividend that arose for income years prior to 1 July 2006, the Commissioner must also be conferred with the power to amend the franking assessment for the income year in which the debit arose in order to give effect to that decision.

A franking assessment is defined under subsection 214-60(1) of the Income Tax Assessment Act 1997 broadly as an assessment of:

•

a corporate tax entity's franking account balance at the end of the income year, and

•

the amounts (if any) of franking tax which the entity is liable to pay because of events that have occurred, or are taken to have occurred, during the income year.

Pursuant to paragraph 43(4)(d) of the Tax Laws Amendment (2007 Measures No. 3) Act 2007 (TLA 2007), which inserted section 109RB into the ITAA 1936, the Commissioner is conferred with the power to amend a franking assessment made before 21 June 2007 (the commencement of the item) for the purpose of giving effect to a decision under section 109RB of the ITAA 1936, if the amendment is made within four years after 21 June 2007.

Accordingly, where the Commissioner decides to exercise his discretion under paragraph 109RB(2)(a) of the ITAA 1936 to disregard the operation of Division 7A, in order to give effect to that decision, the Commissioner may amend the franking assessment for the income year in which the franking debit occurred accordingly, subject to the above four year time limit for franking assessments made prior to 1 July 2006.

It is noted that the Explanatory Memorandum to the TLA 2007 (the EM) makes the following reference to 're-crediting' the company's franking account at paragraph 1.40:

If a deemed dividend is disregarded because the Commissioner makes a decision under section 109RB, then had there previously been a debit to the private company's franking account because of the deemed dividend, the private company's franking account can be re-credited by the amount of the debit.

However, this 're-crediting' is achieved by the Commissioner amending the company's franking assessment for the income year in which the debit arose, as explained in the EM at paragraph 1.74:

Where the Commissioner exercises his discretion under section 109RB of the ITAA 1936 to disregard a deemed dividend from an earlier year of income, he will be able to amend the private company's franking assessment accordingly.

Accordingly, the Commissioner will amend the taxpayer's franking assessment for the 2003-04 income year.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   Division 7A
   section 109RB
   subsection 109RB(1)
   paragraph 109RB(2)(a)

Other References:
Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 3) Act 2007

Keywords
Commissioner's discretion
Franking accounts
Franking assessments

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  3 July 2009

ISSN: 1445-2782