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This edited version has been archived due to the length of time since original publication.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.

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Edited version of your private ruling

Authorisation Number: 1012410542440

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Ruling

Subject: Dividends and Frankable Distribution

Question 1

Is the distribution by A Ltd to B Ltd a 'dividend' under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is the distribution by A Ltd to B Ltd a frankable distribution for the purposes of Division 202 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

1 July 2012 - 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

B Ltd is a 100% owned subsidiary of A Ltd. A Ltd is an Australian tax resident company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 202 and

Income Tax Assessment Act 1936 Subsection 6(1).

Reasons for decision

Question 1:

The distribution is paid to a shareholder from current year profits. The amounts are not paid from A Ltd's share capital account. Accordingly, the distribution will be a 'dividend' under subsection 6(1) of the ITAA 1936.

Question 2:

Subsection 202-40(1) of the ITAA 1997 provides that a distribution is a frankable distribution, to the extent that it is not unfrankable under section 202-45 of the ITAA 1997. This means that, to determine the extent to which a distribution or non-share dividend is frankable, one must first determine the extent (if any) to which it is unfrankable.

The purpose of Subdivision 202-C of the ITAA 1997 is to ensure that only distributions (by a corporate tax entity) equivalent to realised taxed profits can be franked.

Section 202-45 of the ITAA 1997 lists the kinds of distributions which are unfrankable:

202-45 The following are unfrankable :

(a) (Repealed by No 101 of 2003)

    (b) a distribution to which paragraph 24J(2)(a) of the Income Tax Assessment Act 1936 applies that is taken under section 24J of the Income Tax Assessment Act 1936 to be *derived from sources in a prescribed Territory, as defined in subsection 24B(1) of the Income Tax Assessment Act 1936 (distributions by certain *corporate tax entities from sources in Norfolk Island);

    (c) where the purchase price on the buy-back of a *share by a *company from one of its *members is taken to be a dividend under section 159GZZZP of that Act - so much of that purchase price as exceeds what would be the market value (as normally understood) of the share at the time of the buy-back if the buy-back did not take place and were never proposed to take place;

(d) a distribution in respect of a *non-equity share;

    (e) a distribution that is sourced, directly or indirectly, from a company's *share capital account;

    (f) an amount that is taken to be an unfrankable distribution under section 215-10 or 215-15;

    (g) an amount that is taken to be a dividend for any purpose under any of the following provisions:

      (i) unless subsection 109RB(6) or 109RC(2) applies in relation to the amount - Division 7A of Part III of that Act (distributions to entities connected with a *private company);

      (ii) (Repealed by No 79 of 2007)

      (iii) section 109 of that Act (excessive payments to shareholders, directors and associates);

      (iv) section 47A of that Act (distribution benefits - CFCs);

(h) an amount that is taken to be an unfranked dividend for any purpose:

      (i) under section 45 of that Act (streaming bonus shares and unfranked dividends);

      (ii) because of a determination of the Commissioner under section 45C of that Act (streaming dividends and capital benefits);

    (i) a *demerger dividend;

    (j) a distribution that section 152-125 or 220-105 says is unfrankable.

None of the paragraphs contained in section 202-45 of the ITAA 1997 applies to make the distribution an unfrankable distribution.


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