Edited version of private advice

Authorisation Number: 1052233965552

Date of advice: 20 March 2024

Ruling

Subject: Franking deficit tax - Commissioner's discretion

Question

Will the Commissioner exercise discretion under subsection 205-70(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to not apply the 30% offset reduction in the 20XX financial year?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The company operated for the full year in the 20XX financial year.

The company's franking account balance at the end of the financial year was a deficit.

The company completed a large volume of work in the last quarter of the financial year as compared to the first three quarters.

A key reason for the franking account deficit at the end of the financial year because there were only two PAYG instalments in the financial year.

A secondary reason is that the company earnings grew in the second year of operation.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 205-70(6)

Reasons for decision

Subsection 205-70(6) of the ITAA 1997 provides that the 30% offset reduction does not apply if the Commissioner exercises his discretion in the relevant year. The Commissioner will determine this in writing, after receiving an application by the entity. The 30% reduction will not be applied if the franking deficit occurred as a result of events that were outside of the control of the entity.

The Commissioner will generally consider a franking deficit to have arisen due to events outside the taxpayer's control if the events that gave rise to the deficit were not readily foreseeable and could not be influenced or controlled by the company.

For a circumstance to be outside of the taxpayer's or their agent's control or unanticipated, there must have been an event or circumstance which:

•         was unforeseeable or unexpected

•         operated alone or together with other circumstances (unusual or not)

•         was beyond the control of the taxpayer or their agent, and

•         could not have been avoided by compliance with accepted standards of business organisation and professional conduct.

Examples of circumstances outside of the control or unanticipated are:

1. A downturn in business that is linked to the reduced offset. There must be evidence of behaviour on the part of the taxpayer that there was an attempt at mitigation, but that the result was unavoidable.

2. Unusual events which interrupt the ordinary course of business such as:

•       protracted audits undertaken by the Tax Office which may hinder the preparation, lodgement and payment of income tax

•       international reviews or objections in relation to specific taxation issues which cause unexpected or unavoidable refunds resulting in large franking debits to the franking account

•       situations resulting in unexpected or unavoidable refunds which trigger franking debits in the franking account

•       substituted accounting periods which have the effect of shortening the income year and hence shortening the period within which sufficient franking credits can be generated

•       liquidations, whether voluntary or not, which may shorten the income year and hence shorten the period within which sufficient franking credits can be generated, or

•       take-overs or consolidation of entities that trigger the consolidation rules obliging the joining entity to determine and pay any outstanding franking deficit tax at the joining time.

3. Circumstances which give rise to special consideration.

The following examples do not meet the legislative requirements of unanticipated circumstances or circumstances beyond the entities control:

•         improper tax planning

•         bad management

•         inadvertent errors, and

•         expansion of business.

Application to your circumstances

In this case, the franking deficit arose due to only two PAYG instalments in the financial year and unexpected growth in company. We consider that the company could have influenced and planned for the increased work. While we appreciate your circumstances, the Commissioner is unable to exercise the discretion in the circumstances. Improper tax planning and the expansion of business activities does not meet the legislative requirements of unanticipated circumstances or circumstances beyond your control.