Edited version of your written advice

Authorisation Number: 1013087909147

Date of advice: 19 September 2016

Ruling

Subject: Income Tax ~ Capital Management ~ Dividend Streaming

Question 1

For the purposes of the benchmark rule contained within section 203-25 of the Income Tax Assessment Act 1997 (ITAA 1997), is your relevant franking period a 6-month period pursuant to section 203-40 of the ITAA 1997 on the basis that you are not a private company?

Answer

Yes.

Question 2

If there has been a breach of the benchmark rule contained within section 203-25 of the ITAA 1997', will the Commissioner exercise his power to permit departure from the benchmark rule in respect of an unfranked dividend paid in the second half of 20YY by virtue of section 203-55 of ITAA 1997?

Answer

Not applicable, as the answer to Question 1 is 'Yes'.

This ruling applies for the following periods:

1 July 20XX to 30 June 20YY.

The scheme commences on:

31 July 20YY

Relevant facts and circumstances

You are a Public Trading Trust as defined by section 102R of the Income Assessment Act 1936 (ITAA 1936).

You have an income tax period of 12 months ending on 30 June.

In the year ended 30 June 20YY the commercial project for which you were established was close to being finalised and products of the project sold. The intention was to appoint liquidators in the second half of the year ended 30 June 20YY to liquidate all remaining assets and wind you up.

In the first half of the year ended 30 June 20YY you paid a partially franked distribution to your members. At this stage it was not expected another distribution would be made in the year ended 30 June 20YY. Rather, it was the intention at that time that a liquidator would soon be appointed.

Due to unexpected delays the liquidation process could not be commenced in the 20YY year as expected.

In the second half of the year ended 30 June 20YY, excess cash became available to you.

In the second half of the year ended 30 June 20YY, with a desire to facilitate wind-up through disposing of excess cash, you paid an unanticipated further distribution your members.

Due to having insufficient franking credits, this second distribution was unfranked.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 102R

Income Tax Assessment Act 1936 section 102T

Income Tax Assessment Act 1997 Part 3-6

Income Tax Assessment Act 1997 section 203-15

Income Tax Assessment Act 1997 section 203-20

Income Tax Assessment Act 1997 section 203-25

Income Tax Assessment Act 1997 section 203-30

Income Tax Assessment Act 1997 section 203-40

Income Tax Assessment Act 1997 section 203-45

Income Tax Assessment Act 1997 paragraph 203-50(1)(b)

Income Tax Assessment Act 1997 section 203-55

Income Tax Assessment Act 1997 paragraph 960-100(1)(b)

Income Tax Assessment Act 1997 paragraph 960-100(1)(f)

Income Tax Assessment Act 1997 section 960-115

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

For the purposes of the benchmark rule contained within section 203-25 of the Income Tax Assessment Act 1997 (ITAA 1997), is your relevant franking period a 6-month period pursuant to section 203-40 of the ITAA 1997 on the basis that you are not a private company?

Summary

You are not a private company. Franking periods are therefore worked out under section 203-40 of the ITAA 1997. Distributions made by you fall within separate 6 month franking periods.

The benchmark rule in section 203-25 of the ITAA 1997 requires that distributions by an entity that are made in a franking period are not franked at a rate different to the entity's benchmark franking percentage for that franking period.

As there was only one distribution by you in each of the franking periods ended 31 December 20XX and 30 June 20YY, and the franking percentage attaching to that one distribution set the benchmark franking percentage for the relevant franking period, there has been no breach of the benchmark rule under section 203-25 of the ITAA 1997 in either franking period.

Detailed reasoning

The benchmark rule set out in section 203-25 of the ITAA 1997 is designed to ensure than one member of a corporate tax entity (subject to certain exclusions in section 203-20) is not preferred over another by the manner in which distributions are franked (section 203-15 ITAA 1997).

Subsection 203-25 requires that distributions by an entity that are made in a franking period are not franked at a rate different to the entity's benchmark franking percentage for that franking period.

Section 960-115 of the ITAA 1997 defines corporate tax entity to include both a company and a public trading trust.

You are a public trading trust under section 102R of the ITAA 1936. It follows that you are a corporate tax entity under section 960-115 of the ITAA 1997.

Section 203-30 of the ITAA 1997 specifies that the benchmark franking percentage for an entity is set by reference to the franking percentage for the first frankable distribution made by the entity during the relevant period.

Franking Period

You have an income year of 12 months ending 30 June.

On the basis of this 12 month income year ending 30 June 20YY, subsection 203-40(2) of the ITAA 1997 specifies that if you are an entity that is not a private company, each of the following is a franking period in that year:

(a) The period of 6 months beginning at the start of the entity's income year on 1 July 20XX and ending 31 December 20XX.

(b) The remainder of the year from 1 January 20YY to 30 June 20YY.

If, however, you are considered to be a private company, section 203-45 specifies that the franking period is the same as the income year ending 30 June 20YY.

Are you a private company?

A 'private company' is defined in section 995-1 of the ITAA 1997 as a company that is not a public company for the income year.

The term company is a defined in section 995-1 of the ITAA 1997 as a body corporate or any other unincorporated association or body of persons (excluding a partnership or a non-entity joint venture).

Principles of the Law of Trusts, 1996, 3rd Edition, LBC Information Services at paragraph 1000 provides:

A trust may be defined as an obligation enforceable in equity which rests on a period (the trustee) as owner of some specific property (the trust property) to deal with the property for the benefit of another period (the beneficiary) or for the advancement of certain purposes.

A trust (public trading or otherwise) thus does not satisfy the definition of a company under section 995-1 of the ITAA 1997. This view is supported by a company being listed separately from a trust under the definition of entity in subsection 960-100 of the ITAA 1997 (see paragraphs 960-100(1)(b) and (f)) and the definition of a corporate tax entity in section 960-115 of the ITAA 1997 (see subsections 960-115(a) and (d)).

However, section 102T of the ITAA 1936 prescribes that public trading trusts are to be treated as companies for specified purposes of the income tax law. In relation to the introduction of section 102T, page 87 of the explanatory memorandum to the Taxation Laws Amendment Bill (No.4) 1985 provides the following:

The purpose of this section, in broad terms, is to equate public trading trusts….with companies in the application of certain specified provisions of the Principal Act.

Section 102T of the ITAA 1936 does not refer, in whole or in part, to Part 3-6 of the ITAA 1997 (being the Imputation System provisions). Thus, a public trading trust is not treated as a company for the purposes of section 203-45 of the ITAA 1997.

As you are trust, and are not to be equated to a company for the purposes of Part 3-6 of the ITAA 1997, thus you are not a private company for the purpose of section 203-45 of the ITAA1997. The exclusions to the benchmark rule for companies in certain circumstances, as set out in section 203-20 of the ITAA 1997, will also not apply you.

As you are an entity that is not a private company, franking periods for you are therefore worked out under section 203-40 of the ITAA 1997: A corporate tax entity that is not a private company has franking periods of 6 months (or less in certain circumstances not applicable here) in accordance with section 203-40 of the ITAA 1997

It follows from the application of section 203-40 of the ITAA 1997 that payment by you of:

• the partially franked distribution falls within the 6-month franking period ending 31 December 20XX; and

• the unfranked dividend falls within the subsequent 6-month franking period ending 30 June 20YY.

There was only one distribution in each of these franking periods, and the franking percentage attaching to that single distribution became the benchmark franking percentage for the relevant franking period. As no other distributions were made in the relevant franking period, you have not breached the benchmark rule in section 203-25 of the ITAA 1997 in either franking period.

Question 2

If there has been a breach of the benchmark rule contained within section 203-25 of the ITAA 1997', will the Commissioner exercise his power to permit departure from the benchmark rule in respect of an unfranked dividend paid in the second half of the year ended 30 June 20YY by virtue of section 203-55 of ITAA 1997?

Detailed reasoning

Not applicable as there has been no breach of the benchmark rule (refer Answer 1 above).