Edited version of private advice

Authorisation Number: 5010073405319

Date of advice: 26 February 2021

Ruling

Subject: Refund of franking credits

Question

Does the entity qualify for a refund of franking credits as a tax exempt entity satisfying the requirements to be a prescribed income tax exempt entity under section 207-115 (6) of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The entity is a not-for-profit company limited by guarantee.

The entity has self-assessed as income tax exempt.

The entity has franking credits generated from investment income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 207-90(1)

Income Tax Assessment Act 1997 Section 207-115 (6)

Income Tax Assessment Act Regulations 1997 Division 50 - Exempt Entities

Reasons for decision

When an entity is a direct recipient of a franked distribution that is exempt income or non-assessable non-exempt income ("exempt" income) in its hands, the franking credit on the distribution is not included in the entity's assessable income and the entity is not entitled to a tax offset under section 207-90(1) of the Income Tax Assessment Income 1997 (ITAA 1997) which states:

If:

(a) a franked distribution is made to an entity; and

(b) the distribution does not flow indirectly through the entity to another entity; and

(c) the distribution is exempt income or non-assessable non-exempt income in the hands of the entity;

then, for the purposes of this Act:

(d) the amount of the franking credit on the distribution is not included in the assessable income

of the entity under section 207-20; and

(e) the entity is not entitled to a tax offset under this Division because of the distribution.

Certain categories of tax-exempt institutions that are listed as being "eligible for a refund" under section 207-115 of the ITAA 1997 have an entitlement under section 207-110 of the ITAA 1997 to a tax offset in relation to the franking credit on their franked distributions so they can claim are fund of excess franking credits.

When a franked distribution is made directly to a refund-eligible exempt institution, the

institution is entitled to a tax offset equal to the franking credit on the distribution. When a franked distribution flows indirectly to such an institution, it will be entitled to a tax offset provided it did not flow indirectly to the institution either as a partner or through another exempt institution with same refund status.

Under section 207-115 of the ITAA 1997, the exempt institutions that are "eligible for a refund" are:

a. registered charities that are endorsed as being exempt from income tax;

b. an entity endorsed as a deductible gift recipient under section 30-120(a) of the ITAA 1997;

c. an entity listed as a deductible gift recipient under Subdivision 30-B of the ITAA 1997 that has an Australian Business Number;

d. a public fund for which there is in force a declaration by the Treasurer that the fund is a relief fund for the people of a particular country under section 30-85(2) of the ITAA 1997; and

e. an entity that is prescribed in the regulations as being eligible for a refund.

The entity is an income tax exempt entity, but it is not an exempt institution that is eligible for a refund as it is not an entity prescribed as an exempt institution by the Regulations. Additionally, it does not come under any of the other categories listed in section 207-115 of the ITAA 1997 and therefore does not qualify for a refund of franking credits.