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Ruling
Subject: Franking of dividend
Question 1
Will the dividend constitute a frankable distribution under section 202-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
Question 2
Will the share capital account be tainted under Division 197 of the ITAA 1997 because of the share capital reduction undertaken by the company?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
During the year ended 30 June 2012
Relevant facts and circumstances
The company is an Australian tax resident whose shares are listed on the Australian Securities Exchange (ASX).
The company and its wholly owned subsidiaries have formed a tax consolidated group for income tax purposes. It is the head company of the tax consolidated group.
The dividend was paid to the company's shareholders in the 2012 income year.
The dividend is sourced from the company's current year profit.
The company has sufficient franking credit to frank the dividend.
The company reduced its share capital account prior to the dividend being paid.
The company's net assets exceed its share capital by at least the amount of the dividend.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 197
Income Tax Assessment Act 1997 section 197-5
Income Tax Assessment Act 1997 section 202-40
Income Tax Assessment Act 1997 section 202-45
Income Tax Assessment Act 1936 subsection 6(1)
Income Tax Assessment Act 1936 subsection 44(1)
Income Tax Assessment Act 1936 subsection 44(1A)
Reasons for decision
Question 1
Under section 202-40 of the ITAA 1997, a distribution is a frankable distribution to the extent that it is not unfrankable under section 202-45 of the ITAA 1997.
Section 202-45 of the ITAA 1997 lists the distributions that are unfrankable. Paragraph 202-45(e) of the ITAA 1997 lists one of those distributions as:
a distribution that is sourced, directly or indirectly, from a company's share capital account.
A dividend paid under section 254T of the Corporations Act 2001 will be subject to taxation as an assessable franked dividend if it is paid out of profits or out of an amount other than profits where the company's net assets exceed its share capital before and after the dividend payment, and it is not otherwise sourced, directly or indirectly, from a company's share capital account.
Based on the facts provided, the dividend will constitute a frankable distribution under section 202-40 of the ITAA 1997.
Question 2
Division 197 of the ITAA 1997 operates to ensure that a company's share capital account becomes tainted if it transfers certain amounts to that account.
The share capital tainting provisions are integrity rules designed to prevent a company from disguising a distribution of profits as a tax-preferred capital distribution by transferring profits into its share capital account and subsequently making distributions from that account.
Subsection 197-5(1) of the ITAA 1997 provides:
Subject to subsection (2), this Division applies to an amount (the transferred amount) that is transferred to a company's share capital account from another of the company's accounts, if the company was an Australian resident immediately before the time of the transfer.
Note: If a company has 2 or more share capital accounts, those accounts are taken to be a single account (see subsection 975-300(2)).
Paragraphs 4.12 and 4.13 of the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No.3) Bill 2006; New Business Tax System (Untainting Tax) Bill 2006 provide guidance on when an amount is transferred from one account to another.
Based on the facts, Division 197 of the ITAA 1997 does not apply to taint the company's share capital account.