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Ruling
Subject: Franking account - refund of income tax for the 2008-09 financial year
Question 1
Is the Company taken to have received a refund of income tax for the 2008-09 financial year before the end of that year pursuant to section 205-50 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
Question 2
What is the amount of the Company's refund of income tax for the 2008-09 financial year?
Answer
The amount of the refund is equal to the amount of the Pay As You Go (PAYG) instalments paid for that year.
This ruling applies for the following period:
2008-09 financial year
The scheme commences on:
1 July 2008
Relevant facts and circumstances
The Company paid four PAYG instalments for the 2008-09 financial year. The first three instalments were paid during that year. The last instalment was paid in August 2009.
The Company's Notice of Assessment for the 2008-09 financial year issued during 2009. The assessment shows that the amount of the income tax refund it received was equal to the amount of the PAYG instalments it paid for that year.
The Company's Notice of Amended Assessment for the 2008-09 financial year issued later in 2009. The assessment shows that its gross tax was equal to its franking deficit tax offset for that year.
The Company provided a worksheet showing the details of its franking account for the 2008-09 financial year. The worksheet shows the balance of the account at the start of the year, the franking debits and credits made to the account during the year and the balance of the account at the end of the year. The worksheet shows that the Company had a franking deficit at the end of the year.
The first three PAYG instalments paid by the Company for the 2008-09 financial year have been included as franking credits in the franking account.
The income tax refund received by the Company for the 2008-09 financial year has not been included as a franking debit in the franking account.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 4-10(3)
Income Tax Assessment Act 1997 Section 205-30
Income Tax Assessment Act 1997 Section 205-35
Income Tax Assessment Act 1997 Section 205-40
Income Tax Assessment Act 1997 Subsection 205-45(2)
Income Tax Assessment Act 1997 Section 205-50
Taxation Administration Act 1953 Schedule 1 Section 45-1
Reasons for decision
Question 1
Summary
The Company is taken to have received a refund of income tax for the 2008-09 financial year before the end of that year pursuant to section 205-50 of the ITAA 1997.
Detailed reasoning
Section 205-50 of the ITAA 1997 provides:
(1) The object of this section is to ensure that an entity does not avoid franking deficit tax by deferring the time at which a franking debit occurs in its franking account.
(2) An entity is taken to have received a refund of income tax for a financial year immediately before the end of that year for the purposes of subsection 205-45(2) if:
(a) the refund is paid within three months after the end of that year; and
(b) the franking account of the entity would have been in deficit, or in deficit to a greater extent, at the end of that year if the refund had been received in that year.
Subsection 205-45(2) of the ITAA 1997 provides that an entity is liable to pay franking deficit tax if its franking account is in deficit at the end of a financial year.
Section 205-40 of the ITAA 1997 provides that an entity's franking account is in deficit at a particular time, if at that time, the sum of the franking debits in the account exceeds the sum of the franking debits in the account.
Application to your circumstances
The Company received a refund of income tax for the 2008-09 financial year. The refund was paid during 2009 which is within three months after the end of that year. If the Company had received the refund in the 2008-09 financial year, its franking account would have been in deficit.
Therefore, pursuant to section 205-50 of the ITAA 1997, the Company is taken to have received a refund of income tax for the 2008-09 financial year before the end of that year.
Question 2
Summary
The amount of the Company's refund of income tax for the 2008-09 financial year is equal to the amount of the PAYG instalments it paid for that year.
Detailed reasoning
Section 205-30 of the ITAA 1997 provides that if an entity receives a refund of income tax a debit arises in the franking account of the entity on the day on which the refund is received.
Section 205-35 of the ITAA 1997 provides:
(1) An entity receives a refund of income tax if and only if:
(a) either:
(i) the entity receives an amount as a refund; or
(ii) the Commissioner applies a credit or an RBA surplus against a liability of the entity; and
(b) the refund of the amount or the application of the credit represents in whole or in part a return to the entity of an amount paid or applied to satisfy the entity's liability to pay income tax.
(2) The amount of the refund is so much of the amount refunded or applied as represents the return referred to in paragraph (1)(b).
Subsection 4-10(3) of the ITAA 1997 indicates that an entity does not have a liability to pay income tax for a financial year if its tax offsets equal or exceed its basic income tax liability for that year.
Section 45-1 of Schedule 1 to the Taxation Administration Act 1953 indicates that PAYG instalments are paid by an entity towards its income tax liability.
Application to your circumstances
The Company paid four PAYG instalments for the 2008-09 financial year.
The Company does not have a liability to pay income tax for the 2008-09 financial year as its franking deficit tax offset equals its basic income tax liability for that year.
The Company received an amount as a refund for the 2008-09 financial year. The refund of the amount represents in whole a return to the Company of the PAYG instalments it paid for that year. The PAYG instalments were paid by the Company to satisfy its liability to pay income tax for the 2008-09 financial year. Hence, pursuant to section 205-35 of the ITAA 1997, the amount represents a refund of income tax received by the company for that year.
Therefore the amount of the Company's refund of income tax for the 2008-09 financial year is equal to the amount of the PAYG instalments it paid for that year.
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