Taxation Ruling

IT 2560

Income tax: dividend imputation system: guidelines for remission of additional tax imposed for overfranking of dividends

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FOI status:

May be releasedFOI number: I 1011578

PREAMBLE

The imputation system of company taxation came into effect on 1 July 1987. Under this system, dividends paid on or after that date by Australian resident companies to Australian resident shareholders may carry imputation credits to the extent of the tax paid or payable at the company level. Corporate unit trusts and public trading trusts, defined in section 160APA of the Income Tax Assessment Act 1936 as current corporate trusts, are affected by the imputation system in the same way as companies. Therefore, in this ruling "company" includes a current corporate trust.

2. If, during a franking year, a company pays franked dividends to its shareholders in excess of its franking surplus for the year, the company will be liable to pay franking deficit tax under section 160AQJ. Franking deficit tax is designed to ensure that where a company franks dividends in excess of the level permitted by its tax liability, the deficiency is made good shortly after the end of the franking year.

3. Franking deficit tax is not intended to be a facility by which a company can deliberately overfrank its dividends. Section 160ARX provides, therefore, for the imposition of additional tax equal to 30% of the franking deficit tax, by way of penalty, where:

a)

the franking deficit of a company at the end of a franking year is more than 10% of the total of the franking credits arising during the franking year; and

b)

the franked amount of a dividend paid during the franking year to a shareholder in the company exceeded the required franking amount for that dividend.

4. Section 160ASB, however, allows the Commissioner to remit the whole or any part of the additional tax imposed under section 160ARX.

5. This ruling provides guidelines for the exercise of the Commissioner's discretion under section 160ASB to remit the statutory penalty imposed under section 160ARX. In providing these guidelines, there is no intention of laying down any conditions which may restrict a Deputy Commissioner or other authorised officer in exercising his or her discretion. It is essential that Deputy Commissioners and other authorised officers retain the flexibility necessary to deal with each particular case on its merits as required by the legislation.

RULING

Basic Component

6. The discretion to remit the statutory penalty imposed by section 160ARX will generally be exercised to impose a basic penalty equal to 10% of the franking deficit tax. This is the level of penalty that will apply to cases where the franking deficit tax liability arose as a result of the company making an unreasonable estimate of franking credits likely to arise during the year and there are no aggravating or extenuating circumstances. An unreasonable estimate of the franking credits likely to arise will be one that cannot be justified on the basis of the conditions existing at the time the estimate was made.

Further remission

7. Dividends paid by a company must be franked to the extent permitted by the surplus balance in its franking account at the date of payment of the dividends. In calculating the required franking amount, any other dividends to be paid on the same day and future dividends that the company has an obligation to pay later in the year must be taken into account. A company may, however, overfrank the dividends in anticipation of the franking credits reasonably expected to be available before the end of the franking year.

8. When considering requests for further remission of overfranking penalty the following factors should therefore be taken into consideration:

(a)

the extent to which the decision to frank a dividend in excess of the required franking amount was based on a reasonable expectation about events that would affect the franking account later in the year; and

(b)

the ability of the company or its associates to control the receipt of imputation credits and the payment of franked dividends. In this regard, the payment of franked dividends to associates and the receipt of imputation credits from associated companies will not usually be considered to be beyond a company's control.

9. Companies would normally be expected to be aware of related companies' franking policies in making decisions to frank dividends. Where the overfranking arose because dividends from a related company were franked to a lesser extent than expected, the company will need to show that the related company's decision to frank any dividend to a lesser extent than expected was based on factors that could not reasonably be foreseen.

10. Whether a further remission is to be granted in a particular case will therefore depend on the extent to which the company's estimate was reasonable and the circumstances resulting in the overfranking were unforeseen. A full remission would generally be made where the company can show that a reasonable estimate of franking credits and debits was made, and that the franking deficit arose because of unforeseen circumstances that were beyond the company's control.

11. Where the company had overfranked a dividend in the reasonable belief that an assessment of company tax would be served before the end of the franking year and the anticipated date of service of the assessment was a reasonable expectation, the additional tax imposed for overfranking will be remitted to the extent that overfranking occurred because the assessment was not served prior to the end of the franking year.

12. Where a liquidator has made a final distribution to shareholders and has franked the dividends in anticipation of the franking credits expected to arise from the company's final tax assessment, the penalty would be remitted in full to the extent that the overfranking arose because the assessment was not served during the franking year in which the final distribution was made.

13. Where dividends are overfranked as a result of the operation of section 160AQG treating the dividends as a combined class of dividends, further remission of the overfranking penalty would not usually be appropriate.

Increase of basic component

14. The basic penalty of 10% that would apply generally to companies that have overfranked would be increased if aggravating factors are present. Thus an increase of the penalty to 20% would be justified where it is clear that a company overfranked dividends in the certain knowledge that the necessary franking credits would not be available. Thus, if a company pays a franked dividend in its first year of operation when it has no franking credits and knows that franking credits cannot arise, no remission of the statutory penalty would generally be made.

15. No remission of the statutory penalty would be made in those cases where it is apparent that the directors of a company have exploited the imputation system to achieve a financial advantage for shareholders and others associated with the company.

COMMISSIONER OF TAXATION
21 September 1989

References

ATO references:
NO 88/1610-7

Date of effect:
Immediate

Subject References:
FRANKING ADDITIONAL TAX PENALTY FOR OVERFRANKING AUTHORITY TO REMIT

Legislative References:
160ARX
160ASB