Taxation Ruling

IT 2571

Income tax : application of sections 160AQT and 160AQY to continuously complying fixed interest approved deposit funds to which section 290A also applies.

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FOI status:

PREAMBLE

Section 290A of the Income Tax Assessment Act 1936 (the Act) was inserted by the Taxation Laws Amendment (Superannuation) Act 1989. The section exempts from tax a proportion of the income (other than taxable contributions and certain non-arm's length income) of a continuously complying fixed interest approved deposit fund (called a qualifying ADF in this Ruling).

2. Although qualifying ADFs would receive most of their income as interest, they may derive income from franked dividends. In that case, this office has been asked how section 290A interacts with sections 160AQT and 160AQU. Sections 160AQT and 160AQU deal with the gross-up amount to be included in assessable income where a franked dividend is received and the corresponding amount of allowable franking rebate.

RULING

3. The franking rebate that would have been available to a qualifying ADF under section 160AQU if section 290A had not applied, is reduced in the same proportion as the proportion of the ADF's income made exempt by section 290A.

4. Subsection 290A(1) of the Act exempts from tax a proportion of each amount that, apart from section 290A, would be normal assessable income of a qualifying ADF (normal assessable income is defined in subsection 267(1)). The relevant proportion is determined under subsection 290A(2).

5. Before applying subsection 290A(1), it is necessary to identify each amount that would ordinarily be normal assessable income of the qualifying ADF. If the ADF received a franked dividend, an amount calculated under the formula in subsection 160AQT(1) would ordinarily be included in the ADF's normal assessable income. (Even though section 290A might operate instantaneously to exempt part of the dividend, for the purpose of paragraph 160AQT(1)(c) the dividend, taken as a whole, is "not exempt" where the proportion exempt is less than 100%).

6. Subsection 290A(1) would then operate to make exempt a proportion of each otherwise assessable amount, including the amount otherwise assessable under section 160AQT. The result is that the amount actually included in assessable income under section 160AQT would be something less than the amount calculated under the formula in subsection 160AQT(1).

7. The franking rebate available under section 160AQU is equal to the amount included in assessable income under section 160AQT. For a qualifying ADF the amount included in assessable income under section 160AQT would be the amount actually included in assessable income after the operation of section 290A. This is consistent with the ordinary interpretation of the law that provisions purporting to include amounts in assessable income are subject to any overriding exempting provisions, e.g., where section 44 of the Act purported to include dividends in the assessable income of a formerly exempt statutory superannuation fund, paragraph 23(jaa) overruled section 44 so that no part of the fund's dividends were assessable.

EXAMPLE

8. The following example illustrates how the law would operate:

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Assume a qualifying ADF receives a franked dividend of $122, the company tax rate is 39% and the proportion calculated under subsection 290A(2) is 1/2;

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The amount that would be included in assessable income under section 160AQT, apart from section 290A, is $78, i.e., the amount calculated under the formula in subsection 160AQT(1);

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Section 290A would operate to exempt $39 of the $78. The result is that only $39 is actually included in assessable income under section 160AQT;

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The amount of franking rebate available under section 160AQU is equal to the amount included in assessable income under section 160AQT, i.e., $39.

COMMISSIONER OF TAXATION
7 December 1989

References

ATO references:
NO 89/7980-4

Date of effect:
Immediate

Subject References:
APPROVED DEPOSIT FUNDS
FRANKED DIVIDENDS
FRANKING REBATES

Legislative References:
160AQT
160AQU
290A