Edited version of private advice

Authorisation Number: 1012671557394

Ruling

Subject: Imputation System

Question 1

Will XYZ Limited's income year for the purpose of working out its franking periods under section 203-40 of the Income Tax Assessment Act 1997 (ITAA 1997) be its transitional period of greater than 12 months?

Answer

Yes.

Question 2

Will XYZ Limited's next income year for the purpose of working out its franking periods under Division 203 of the ITAA 1997 be the 12 months immediately following the end of its transitional period?

Answer

Yes.

Question 3

Will a new franking period for the purposes of Division 203 of the ITAA 1997 begin for XYZ Limited immediately following the end of its transitional period?

Answer

Yes.

Question 4

Will the frankable distribution made by XYZ Limited during its transitional period be in respect of a different franking period to any frankable distribution made by XYZ Limited after the end of its transitional period?

Answer

Yes.

Question 5

Will the frankable distribution made by XYZ Limited during its transitional period set the benchmark franking percentage (within the meaning given by section 203-30 of the ITAA 1997) for any frankable distribution made by XYZ Limited after the end of its transitional period?

Answer

No.

Relevant facts and circumstances:

• XYZ Limited is an Australian resident public company.

• XYZ Limited has been given a transitional period of greater than 12 months.

• XYZ Limited made a frankable distribution during this transitional period.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 18

Income Tax Assessment Act 1997 subsection 2-15(3)

Income Tax Assessment Act 1997 subsection 4-10(2)

Income Tax Assessment Act 1997 subsection 9-5(2)

Income Tax Assessment Act 1997 Division 203

Income Tax Assessment Act 1997 section 203-15

Income Tax Assessment Act 1997 section 203-30

Income Tax Assessment Act 1997 section 203-40

Income Tax Assessment Act 1997 subsection 203-40(1)

Income Tax Assessment Act 1997 subsection 203-40(2)

Income Tax Assessment Act 1997 subsection 203-40(3)

Income Tax Assessment Act 1997 subsection 203-40(4)

Income Tax Assessment Act 1997 subsection 203-40(5)

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Summary

XYZ Limited's income year for the purpose of working out its franking periods under section 203-40 of the ITAA 1997 will be its transitional period of greater than 12 months.

Detailed reasoning

The term 'income year' is a basic term used throughout the ITAA 1997. It is a core concept (subsection 2-15(3) of the ITAA 1997).

'Income year' is defined in subsection 995-1(1) of the ITAA 1997. The basic meaning is given by subsections 4-10(2) and 9-5(2) of the ITAA 1997.

Under subsection 4-10(2) of the ITAA 1997, an income year corresponds with either a 'financial year' or an accounting period. A financial year and an accounting period are both periods of 12 months (see subsection 995-1(1) of the ITAA 1997 for the definition of 'financial year', and section 18 of the Income Tax Assessment Act 1936 (ITAA 1936) for the description of an accounting period). An 'income year' is defined under subsection 9-5(2) of the ITAA 1997 in essentially the same way as under subsection 4-10(2) of the ITAA 1997.

However, the definition of 'income year' in subsection 995-1(1) of the ITAA 1997 (and consequently the definition in subsections 4-10(2) and 9-5(2) of the ITAA 1997) applies 'except so far as the contrary intention appears' (the opening words of subsection 995-1(1) of the ITAA 1997).

The context in which the term income year is used in section 203-40 of the ITAA 1997 supports a contrary intention. That is, an income year, in the context of section 203-40, is not restricted to a period of 12 months pursuant to the basic meaning given by subsections 4-10(2) and 9-5(2) of the ITAA 1997.

Section 203-40 of the ITAA 1997 is used to work out the franking periods for an entity in an income year where the entity is not a 'private company' for the income year (subsection 203-40(1)). Subsections 203-40(2), (3), (4) and (5) prescribe the franking periods for the entity in its income year by reference to the length of the entity's income year. Subsections 203-40(2), (3), (4) and (5) use the following words:

• If the entity's income year is a period of 12 months…(subsection 203-40(2));

• If the entity's income year is a period of 6 months or less…(subsection 203-40(3));

• If the entity's income year is a period of more than 6 months and less than 12 months…(subsection 203-40(4)); and

• If the entity's income year is a period of more than 12 months…(subsection 203-40(5)).

Moreover, the purpose of Division 203 of the ITAA 1997 is to ensure that one member of a corporate tax entity is not preferred over another when the entity franks distributions (section 203-15 of the ITAA 1997). That is, Division 203 is directed at franking credit streaming. Accordingly, an entity must not make a frankable distribution in breach of the 'benchmark rule' in section 203-25 of the ITAA 1997.

XYZ Limited has a 'transitional period' of greater than 12 months. If XYZ Limited's income year, for the purpose of working out its franking periods under section 203-40 of the ITAA 1997, was not its transitional period of greater than 12 months, there would be a period within XYZ Limited's transitional period that would not be covered by a franking period. As a result, frankable distributions within the non-covered period could escape the benchmark rule. We consider that this was not Parliament's intention.

Accordingly, XYZ Limited's income year for the purpose of working out its franking periods under section 203-40 of the ITAA 1997 will be its transitional period of greater than 12 months. This is based on the clear words of section 203-40 and the purpose of Division 203 of the ITAA 1997.

This conclusion is also supported by the decision of the Administrative Appeals Tribunal in Norwich Superannuation Services Pty Ltd v FCT 99 ATC 2015. In that case, Norwich Superannuation Services Pty Ltd (NSS) was acquired by Norwich Union Financial Services Ltd (NUFS). NSS successfully applied for a 31 December substituted accounting period in order to align itself with NUFS. As a result, NSS had a six month transitional period of 1 July 1994 to 31 December 1994. NSS lodged an income tax return for this period and disclosed a tax loss of $532,063. NSS sought to transfer the $532,063 loss to NUFS under former section 80G of the ITAA 1936. In affirming the Commissioner's decision that the loss could not be transferred to NUFS, Senior Member Pascoe held that, in the context of former section 80G of the ITAA 1936, NSS's transitional period of 1 July 1994 to 31 December 1994 was not a 'year of income', but also said (at 2018):

For section 80G to apply a company must have incurred a loss in a year of income (``the loss year'') and in that year the company must have been a ``group company''. To be a group company NSS was required to have been a subsidiary of NUFS during the whole of that year of income. I am satisfied that the reference in section 80G(2) to a part of a year of income applies only to those companies referred to in subsection (1) as not having been in existence during part of a year. I am further satisfied that the reference to a ``year of income'' or part of a year of income must mean a period of a year as is generally understood as a period of 12 months. There appears to be no warrant for interpreting a word as meaning anything other than its normal accepted meaning unless the particular provision or some other provision of the Act clearly allows a different interpretation or a deemed meaning.

The clear words of section 203-40 of the ITAA 1997 allows for a different interpretation of the term 'income year' than the basic meaning given by subsections 4-10(2) and 9-5(2) of the ITAA 1997.

Question 2

Summary

XYZ Limited's next income year for the purpose of working out its franking periods under Division 203 of the ITAA 1997 will be the 12 months immediately following the end of its transitional period.

Detailed reasoning

XYZ Limited's next income year, within the basic meaning given by subsections 4-10(2) and 9-5(2) of the ITAA 1997, corresponds with the 12 months immediately following the end of its transitional period.

Provided that XYZ Limited does not have another transitional period within this 12 month period, and no other circumstances arise during this 12 month period that cause XYZ Limited's income year, for the purposes of Division 203 of the ITAA 1997, to be a period other than a period of 12 months, XYZ Limited's next income year, for the purpose of working out its franking periods under Division 203 will be the 12 months immediately following the end of its transitional period.

Question 3

Summary

A new franking period for the purposes of Division 203 of the ITAA 1997 will begin for XYZ Limited immediately following the end of its transitional period.

Detailed reasoning

As concluded above, XYZ Limited's 'transitional period' of greater than 12 months represented its income year for the purpose of working out its franking periods under section 203-40 of the ITAA 1997. Under section 203-40, XYZ Limited's last franking period within its transitional period ended on the last day of its transitional period.

Accordingly, a new franking period for the purposes of Division 203 of the ITAA 1997 will begin for XYZ Limited immediately following the end of its transitional period.

Question 4

Summary

The frankable distribution made by XYZ Limited during its transitional period will be in respect of a different franking period to any frankable distribution made by XYZ Limited after the end of its transitional period.

Detailed reasoning

XYZ Limited made a frankable distribution in the last franking period within its transitional period. As this franking period ended on the last day of XYZ Limited's transitional period, the frankable distribution will be in respect of a different franking period to any frankable distribution made by XYZ Limited after the end of its transitional period.

Question 5

Summary

The frankable distribution made by XYZ Limited during its transitional period will not set the benchmark franking percentage for any frankable distribution made by XYZ Limited after the end of its transitional period.

Detailed reasoning

The benchmark franking percentage for an entity for a franking period is equal to the franking percentage for the first frankable distribution made by the entity within the franking period (section 203-30 of the ITAA 1997).

As discussed above, the frankable distribution made by XYZ Limited during its transitional period was made in XYZ Limited's last franking period within its transitional period. This was XYZ Limited's first frankable distribution for this franking period. As a result, it set XYZ Limited's benchmark franking percentage for that franking period.

As discussed above, a new franking period will begin for XYZ Limited immediately following the end of its transitional period. The benchmark franking percentage for XYZ Limited for this new franking period will be set by the first frankable distribution that XYZ Limited makes in this new franking period. Accordingly, the frankable distribution made by XYZ Limited during its transitional period will not set the benchmark franking percentage for any frankable distribution made by XYZ Limited after the end of its transitional period.