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Edited version of your written advice
Authorisation Number: 1013058068102
Date of advice: 22 July 2016
Ruling
Subject: Franked dividends and attached credits
Question 1
Is the Club able to claim franking credits on share market investments?
Answer
No
This ruling applies for the following periods:
1 July 2010 to 30 June 2011
1 July 2011 to 30 June 2012
1 July 2012 to 30 June 2013
1 July 2013 to 30 June 2014
1 July 2014 to 30 June 2015
1 July 2015 to 30 June 2016
1 July 2016 to 30 June 2017
1 July 2017 to 30 June 2018
1 July 2018 to 30 June 2019
1 July 2019 to 30 June 2020
1 July 2020 to 30 June 2021
The scheme commences on: 1 July 2010
Relevant facts and circumstances
• The Club self-assesses as a not-for-profit income tax exempt entity
• The Club is registered as a not-for-profit organisation
• The Club's constituent documents prevent them from distributing profits or assets among members while the organisation is functional and on winding up
• The Club sold assets in the 20XX financial year
• The Club invested some of the proceeds received from the sale in the share market
• The Club is expecting to receive franked dividends from their share market investments
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 50-1
Income Tax Assessment Act 1997 Section 50-45
Income Tax Assessment Act 1997 Section 207-20
Income Tax Assessment Act 1997 Subsection 207-90(1)
Reasons for decision
Issue 1
Receipt of franked dividends and attached credits by a not-for-profit entity
Question 1
Is the Club able to claim franking credits on share market investments?
Summary
The Club is an income tax exempt so franking credit attached to a distribution is not included in the Club's assessable income. Therefore, the Club is not entitled to a tax offset.
Detailed reasoning
Sporting organisation
Sporting organisations are not-for-profit societies, associations or clubs established for the encouragement of a game, sport or animal racing. A Club can self-assess their income tax exempt status, if it meets all of the following requirements:
• it is a not-for-profit society, association or club
• it is established for the purpose of encouragement of either of the following
• a game or sport
• animal racing
• it is not a charity
• it meets one of the three following tests
• physical presence in Australia test
• Deductible Gift Recipient (DGR) test
• prescribed by law test
• it complies with all the substantive requirements in its governing rules
• it applies its income and assets solely for the purpose for which it is established.
The main purpose of the society, association or club must be the encouragement of a game, sport or animal racing. To determine your organisation's main purpose, consideration is given to its constituent documents, activities, use of funds and history. Any other purpose of the organisation must be incidental, ancillary or secondary to encouragement of the game, sport or animal racing.
The Club self-assesses as an income tax exempt entity.
Franking Credits
Franking credits arise for shareholders when certain Australian-resident companies pay income tax on their taxable income and distribute their after-tax profits by way of franked dividends. These franked dividends have franking credits attached. Franked dividends are received either directly as a shareholder or indirectly as a beneficiary of a trust.
To be eligible for a refund of franking credits, a not-for-profit organisation must have an ABN, be a resident and be at least one of the following:
• a registered charity endorsed by the Tax Office to access income tax exemption
• endorsed by the Tax Office as a DGR in its own right
• specifically named as a DGR in the Income Tax Assessment Act1997 (ITAA 1997)
The Club is not a registered charity nor is it a DGR. The Club self-assesses as income tax exempt and therefore distributions made to it are not assessable.
Distribution made to an income tax exempt entity
Section 207-90(1) of the ITAA 1997 relates to distributions that are not assessable.
If:
(a) a franked distribution is made to an entity; and
(b) the distribution does not flow indirectly through the entity to another entity; and
(c) the distribution is exempt income or non-assessable non-exempt income in the hands of the entity;
then for the purposes of this Act:
(d) the amount of the franking credit on the distribution is not included in the assessable income of the entity under section 207-20; and
(e) the entity is not entitled to a tax offset under this Division because of the distribution.
A franked distribution received by the Club does not flow to any other entity - a not-for-profit organisation applies its income and assets solely for the purpose for which it was established and does not distribute to its members.
Conclusion
The Club has self-assessed as an income tax exempt entity and therefore does not have assessable income. As a result, if the Club receives franked distributions from investments, it cannot claim the franking credit on distributions and is not entitled to a tax offset on distributions received.
In addition, the Club is not an endorsed charity, nor is it a DGR, so is not eligible to claim a refund of franking credits.
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