Edited version of private advice

Authorisation Number: 1052109151333

Date of advice: 20 April 2023

Ruling

Subject: Special dividend/excess franking tax offsets

Question 1

Are you entitled to the franking tax offset in relation to the franking credits on the in specie dividend received from XXX Group Ltd in the 20XX incomeyear?

Answer

Yes.

Question 2

Can you claim the accumulated franking credits in the past years in the XXXX taxreturn?

Answer

No.

This ruling applies for the following period:

Year ending DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

You are an Australian resident company for taxation purposes.

Your shares are held by XXX and XXX.

In the XXXX income year, you made a profit of $XXX.

Prior to the XXXX income year, you incurred losses.

You have excess franking tax offsets in the income years where you have incurred losses.

You did not convert your excess franking tax offsets during the XXXX to XXXX income years to carried forward losses.

You held shares in XXX Group Limited (XXX) as of 20 May 20XX, being the date XXX has resolved to pay a special dividend to facilitate the in specie distribution of the ABC Group Limited (ABC) shares.

You held the shares in XXX on capital account.

On 1 June 20XX, you received special dividend from XXX as follows:

Relevant legislative provisions

Income Tax Assessment Act 1997 section 207-20

Income Tax Assessment Act 1997 subsection 36-55(1)

Reasons for decision

Question 1

Are you entitled to the franking tax offset in relation to the franking credits on the in specie dividend received from XXX in the 20XX incomeyear?

Summary

In accordance with Class Ruling 2022/60, you will include in your assessable income the amount of franking credit on the distribution in addition to any inclusion of the distribution itself in assessable income under other provisions. You are also entitled to a tax offset equal to the franking credit amount.

Detailed reasoning

Division 207 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the consequences of an entity receiving directly or indirectly a franked distribution from a corporate tax entity. As a general rule, for the income year in which the distribution is made, the recipient of a franked distribution:

a)    includes in assessable income the amount of the franking credit on the distribution. This is in addition to any other amount included in the recipient's assessable income in relation to the distribution itself; and

b)    is entitled to a tax offset equal to the franking credit.

The general rule under section 207-20 (i.e., gross-up and tax offset) only applies to an individual or corporate tax entity that receives a franked distribution if it meets the residency requirement. The residency requirement will be met where:

•         the recipient is an individual, company or corporate limited partnership and is an Australian resident at the time the distribution is made, or

•         the recipient is a corporate unit trust or a public trading trust and is a resident unit trust for the income year in which the distribution is made.

In your case, you are an Australian company, you held shares in XXX on 22 May 20XX on capital account and received in specie distribution of ABC shares from XXX on 1 June 20XX.

The ATO has issued Class Ruling 2022/60 that sets out the income tax consequences for shareholders of the XXX who received a dividend by way of in specie distribution (special dividend) of shares in ABC. CR 2022/60 applies to those who held shares in XXX, who are residents of Australia, and who held their shares on capital account.

In accordance with Class Ruling 2022/60, you will include in your assessable income the amount of franking credit on the distribution in addition to any inclusion of the distribution itself in assessable income under other provisions. You are also entitled to a tax offset equal to the franking credit.

Question 2

Can you claim the accumulated franking credits in the past years in the XXXX taxreturn?

Summary

As you are a corporate entity, you cannot claim the accumulated excess franking tax offsets from the previous years in your tax return for the XXXX income year. However, the excess franking offsets can be converted to a deemed tax loss which can be carried forward for future years.

Detailed reasoning

Subdivision 36-C of the ITAA 1997 contains the rules that allow a corporate tax entity's excess franking offsets to be treated as a tax loss for the income year. As franking tax offsets are generally not refundable to corporate tax entities, these excess franking offsets could otherwise be lost.

Subsection 36-55(1) of the ITAA 1997 provides that an entity that is a corporate tax entity at any time during an income year has an amount of excess franking offsets for that year if the total non-refundable tax offsets to which it is entitled for the year under Division 207 and Subdivision 210-H of the ITAA 1997 exceeds the income tax that it would have to pay for that year if:

•         it did not have those tax offsets; and

•         it did not have any tax offsets that are subject to the tax offset carry forward rules or the refundable tax offset rules; and

•         it did not have any tax offset under section 205-70;

but it had all its other tax offsets.

As you are a corporate entity, you cannot claim the accumulated excess franking tax offsets from the previous years in your tax return for the XXX income year. However, the excess franking offsets can be converted to a deemed tax loss which can be carried forward for future years.

Where there is excess franking tax offset in the 20XX income year, you are also able to convert this into a deemed tax loss to be carried forward for the future years.

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).