1012410542440 | Legal database

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Authorisation Number: 1012410542440

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Ruling

Subject: Dividends and Frankable Distribution

Question 1

Is the distribution by A Ltd to B Ltd a 'dividend' under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is the distribution by A Ltd to B Ltd a frankable distribution for the purposes of Division 202 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

1 July 2012 - 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

B Ltd is a 100% owned subsidiary of A Ltd. A Ltd is an Australian tax resident company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 202 and

Income Tax Assessment Act 1936 Subsection 6(1).

Reasons for decision

Question 1:

The distribution is paid to a shareholder from current year profits. The amounts are not paid from A Ltd's share capital account. Accordingly, the distribution will be a 'dividend' under subsection 6(1) of the ITAA 1936.

Question 2:

Subsection 202-40(1) of the ITAA 1997 provides that a distribution is a frankable distribution, to the extent that it is not unfrankable under section 202-45 of the ITAA 1997. This means that, to determine the extent to which a distribution or non-share dividend is frankable, one must first determine the extent (if any) to which it is unfrankable.

The purpose of Subdivision 202-C of the ITAA 1997 is to ensure that only distributions (by a corporate tax entity) equivalent to realised taxed profits can be franked.

Section 202-45 of the ITAA 1997 lists the kinds of distributions which are unfrankable:

202-45 The following are unfrankable :

(a) (Repealed by No 101 of 2003)

(b) a distribution to which paragraph 24J(2)(a) of the Income Tax Assessment Act 1936 applies that is taken under section 24J of the Income Tax Assessment Act 1936 to be *derived from sources in a prescribed Territory, as defined in subsection 24B(1) of the Income Tax Assessment Act 1936 (distributions by certain *corporate tax entities from sources in Norfolk Island);

(c) where the purchase price on the buy-back of a *share by a *company from one of its *members is taken to be a dividend under section 159GZZZP of that Act - so much of that purchase price as exceeds what would be the market value (as normally understood) of the share at the time of the buy-back if the buy-back did not take place and were never proposed to take place;

(d) a distribution in respect of a *non-equity share;

(e) a distribution that is sourced, directly or indirectly, from a company's *share capital account;

(f) an amount that is taken to be an unfrankable distribution under section 215-10 or 215-15;

(g) an amount that is taken to be a dividend for any purpose under any of the following provisions:

(i) unless subsection 109RB(6) or 109RC(2) applies in relation to the amount - Division 7A of Part III of that Act (distributions to entities connected with a *private company);

(ii) (Repealed by No 79 of 2007)

(iii) section 109 of that Act (excessive payments to shareholders, directors and associates);

(iv) section 47A of that Act (distribution benefits - CFCs);

(h) an amount that is taken to be an unfranked dividend for any purpose:

(i) under section 45 of that Act (streaming bonus shares and unfranked dividends);

(ii) because of a determination of the Commissioner under section 45C of that Act (streaming dividends and capital benefits);

(i) a *demerger dividend;

(j) a distribution that section 152-125 or 220-105 says is unfrankable.

None of the paragraphs contained in section 202-45 of the ITAA 1997 applies to make the distribution an unfrankable distribution.

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