| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Authorisation Number: 1051187597334
Date of advice: 8 February 2017
Ruling
Subject: Departure from benchmark rule
Question
Will the Commissioner make a determination under section 203-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to permit the entity to frank a distribution at a franking percentage that differs from its benchmark franking percentage for the 20ZZ income year?
Answer:
Yes.
Relevant facts and circumstances
This determination is given based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these set of facts, this determination has no effect and you cannot rely on it.
The entity formed a consolidated group on 1 April 20YY. Its subsidiary suffered a substantial fraud during the year ended 30 June 20XX resulting in a net bad debt write off during the two years ended 30 June 20XX and 20YY.
Documents including invoices were forged by an ex-employee who then paid the funds to themselves. This affected cash flow of the subsidiary. The ex-employee also created fictitious loan agreements. Non-existent 'profits' had been included in the income of the subsidiary by the ex-employee. When the fraud was discovered, a thorough investigation was carried out to ascertain the fictitious transactions and write off the 'profit' which had been previously reported on those fictitious transactions.
The fraud performed against the company and the quantum involved was an extraordinary event for the company. It was also beyond the company's control and the control of the members.
Calculation of the revised franking credit rate:
The entity paid instalments of income tax as they fell due. Quarterly income tax instalments were based on the originally reported income. The dividends for the year ended 30 June 20ZZ were declared in August 20YY and paid in September 20YY. As a result of the fraud and lodgement of the income tax return for the year ended 30 June 20YY, there was a consequent refund of income tax.
The refund of income tax had a major impact on the franking account; the effect being that the franking credits available were suddenly dramatically reduced. It was on this basis that the company was only able to pay a dividend franked to the rate of 29.7%.
Had the fraud not taken place, there would have been no substantial refund of income tax paid and the dividends would have been franked at the full rate.
The company has paid fully franked dividends for many years.
There has been no change in the shareholding of the company.
No member of the company has been disadvantaged by the departure in the franking rate. All members of the company received a distribution with the same lower franking percentage.
No member of the company has received a franking (imputation) benefit in preference to other members of the company as a result of the departure.
The company has returned to paying fully franked dividends for the year ended 30 June 20AA.
Reasons for decision
Please note that all legislative references referred to below are in relation to the Income Tax Assessment Act 1997 unless otherwise specified.
Summary
The Commissioner will exercise his discretion under subsection 203-55(1) to permit the company to frank a distribution at a franking percentage that differs from its benchmark franking percentage for the 20ZZ income year.
Detailed reasoning
Section 203-25 provides that an entity must not make a frankable distribution whose franking percentage differs from the entity's benchmark franking percentage for the franking period in which the distribution is made. This is referred to as the benchmark rule.
The Commissioner has the power to permit a departure from the benchmark rule under section 203-55. Subsection 203-55(1) provides that the Commissioner may, on application by an entity, permit the entity to frank a distribution at a franking percentage that differs from the entity's benchmark franking percentage for the franking period in which the distribution is made.
Subsection 203-55(2) further provides that the Commissioner's powers under this section may only be exercised in extraordinary circumstances.
Subsection 203-55(3) requires the Commissioner to have regard to the following matters in determining if extraordinary circumstances exist:
(a) The entity's reasons for departing from the benchmark rule;
The entity's subsidiary suffered a substantial fraud by an ex-employee during the year ended 30 June 20XX resulting in a net bad debt write off during the two years ended 30 June 20XX and 20YY.
The company paid instalments of income tax as they fell due. Quarterly income tax instalments were based on the income originally reported. The dividends for the year ended 30 June 20ZZ were declared in August 20YY and paid in September 20YY. As a result of the fraud and lodgement of the income tax return for the year ended 30 June 20YY, there was a refund of income tax.
The refund of income tax had a major impact on the franking account; the effect being that the franking credits available were suddenly dramatically reduced. It was on this basis that the entity was only able to pay a dividend franked at the rate of 29.7%.
Had the fraud not taken place, there would have been no substantial refund of income tax paid and the dividends would have been franked at the full rate.
(b) The extent of the departure from the benchmark rule;
The entity has complied with the benchmark percentage for years ended 30 June 20YY and 30 June 20AA. The dividends for both these years were fully franked and have been for many years.
(c) If the circumstances that give rise to the entity's application are within the entity's control, the extent to which the entity has sought the exercise of the Commissioner's powers under this section in the past;
The circumstances that gave rise to the entity's application do not appear to be within its control and the entity has not sought the exercise of the Commissioner's powers under this section in the past.
(d) Whether a member of the entity has been disadvantaged as a result of the departure from the benchmark rule;
No member of the entity has been disadvantaged as a result of the departure from the benchmark rule. All members of the entity received a distribution with the same lower franking percentage.
(e) Whether a member of the entity will receive greater imputation benefits than another member of the entity because a distribution franked at a franking percentage that differs from the benchmark franking percentage for the franking period is made to one of them;
No member of the entity has received a greater imputation benefit in preference to other members of the entity as a result of the departure.
(f) Any other matters that the Commissioner considers relevant.
The Explanatory Memorandum to the New Business Tax System (Imputation) Act 2002 provides further guidance as to what constitutes extraordinary circumstances as follows:
2.69 The power to permit a departure from the benchmark rule will be exercised by the Commissioner only in extraordinary circumstances. Thus, the circumstances justifying a departure would generally need to be unforeseeable and beyond the control of the entity, its members and controllers. [Schedule 1, item 1, subsection 203-55(2)]
In this case it is considered that the circumstances of fraud would be unforeseeable and beyond the control of the company, its members and controllers.
Having regard to all the relevant matters it is considered that extraordinary circumstances existed so as to warrant a departure from the benchmark rule.
Therefore the Commissioner will make a determination under section 203-55 to permit the entity to depart from the benchmark rule for the dividend paid during the year ended 30 June 20ZZ and approve the allocation of a franking credit at a rate of 29.7% to that dividend.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
