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Edited version of your written advice
Authorisation Number: 1013026984159
Date of advice: 17 June 2016
Ruling
Subject: Funding arrangement
Question 1
Will the Commissioner make a determination pursuant to subsection 204-30(3) of the ITAA 1997 in respect of Distribution P made by Entity H to Entity K and Entity L?
Answer
No
Question 2
Will the Commissioner make a determination pursuant to subsection 204-30(3) of the ITAA 1997 in respect of Distribution Q made by Entity H to Entity K and Entity L?
Answer
No
Relevant facts and circumstances
Entity H will borrow funds from Entity J to fund its capital growth and expenditure requirements.
Entity H makes Distribution P and Distribution Q to Entity K and Entity L from time-to-time which enable Entity K and Entity L to provide funds to Entity J.
Entity J uses the funds received to provide Entity H with different types of loans from time-to-time under a facility agreement. Loan F and Loan G are loans made under an agreement that have different maturity dates of no longer than 10 years, and different terms.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 204-30(1)
Income Tax Assessment Act 1997 subsection 204-30(3)
Income Tax Assessment Act 1997 subsection 204-30(6)
Reasons for decision
Question 1
Summary
The Commissioner will not make a determination pursuant to subsection 204-30(3) in respect of a Distribution P made by Entity H to Entity K and Entity L.
Detailed reasoning
Subsection 204-30(3) sets out the Commissioner's power to make a determination when an entity streams imputation benefits to certain members.
Subsection 204-30(1) provides that:
This section empowers the Commissioner to make determinations if an entity streams one or more distributions (or one or more distributions and the giving of other benefits), whether in a single franking period or in a number of franking periods, in such a way that:
(a) an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions; and
(b) the member would derive a greater benefit from franking credits than another member of the entity; and
(c) the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.
The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member.
Where each of the paragraphs in subsection 204-30(1) are present, the Commissioner may make a determination pursuant to subsection 204-30(3) which will result in a specified franking debit in the entity's franking account, a specified exempting debit in the entity's exempting account, or denying imputation benefits to favoured members in respect of the distribution.
Imputation benefit
Subsection 204-30(6) sets out when a member of an entity receives an imputation benefit.
Pursuant to paragraph 204-30(6)(c), Entity K and Entity L will receive imputation benefits when Entity H makes a fully franked Distribution P as:
… a franking credit would arise in the franking account of [Entity K and Entity L] as a result of the distribution …
Subsection 204-30(1)
Entity H will continue to pay a fully franked Distribution P to Entity K and Entity L in proportion to their membership interests. Therefore, the profile of any distributions payable on the membership interests will not differ to that of other distributions made on the membership interests.
The Commissioner accepts that where Entity H maintains the same profile of fully franked distributions to Entity L and Entity K in proportion to their membership interests, that neither entity will be a 'disadvantaged member' which receives lesser or no imputation benefits than another member.
Therefore, as the requirement of paragraph 204-30(1)(c) will not be satisfied and in turn all the requirements of subsection 204-30(1) will not be present, the Commissioner will not make a determination pursuant to subsection 204-30(3) in respect of a Distribution P that Entity H will make to Entity K and Entity L.
Question 2
Summary
The Commissioner will not make a determination pursuant to subsection 204-30(3) in relation to the payment of a Distribution Q to Entity K and Entity L.
Detailed reasoning
In accordance with the terms for a Distribution Q, the Detailed reasoning set out above in Question 1 for a Distribution P applies in the same way for a fully franked Distribution Q that Entity H will pay to Entity K and Entity L.
Therefore, as the requirement of paragraph 204-30(1)(c) will not be satisfied and in turn all the requirements of subsection 204-30(1) will not be present, the Commissioner will not make a determination pursuant to subsection 204-30(3) in respect of a Distribution Q that Entity H will make to Entity K and Entity L.
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