Commonwealth: New Business Tax System (Imputation) Act 2002 (Cth)

New Business Tax System (Imputation) Act 2002 No. 48, 2002 An Act to amend the taxation law to implement a simplified imputation system, and for related purposes Contents 1 Short title................................... 2 Commencement............................... 3 Schedule(s).................................. Schedule 1—The simplified imputation system Income Tax Assessment Act 1997 Schedule 2—Consequential amendments of Chapter 6 (the Dictionary) of the Income Tax Assessment Act 1997 Schedule 3—Transitional provisions dealing with the application of Part IIIAA of the Income Tax Assessment Act 1936 Income Tax Assessment Act 1936 Income Tax (Transitional Provisions) Act 1997 Schedule 4—Transitional provisions dealing with the conversion of the franking account Income Tax Assessment Act 1936 Income Tax (Transitional Provisions) Act 1997 New Business Tax System (Imputation) Act 2002 No. 48, 2002 An Act to amend the taxation law to implement a simplified imputation system, and for related purposes [Assented to 29 June 2002] The Parliament of Australia enacts: 1 Short title This Act may be cited as the New Business Tax System (Imputation) Act 2002. 2 Commencement This Act commences on the day on which it receives the Royal Assent. 3 Schedule(s) Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1—The simplified imputation system Income Tax Assessment Act 1997 1 After Part 3‑5 Insert: Part 3‑6—The imputation system Division 200—Guide to Part 3‑6 Guide to Division 200 200‑1 What this Division is about This Division provides an overview of the imputation system. Table of sections 200‑5 The imputation system 200‑10 Franking a distribution 200‑15 The franking account 200‑20 How a distribution is franked 200‑25 A corporate tax entity must not give its members credit for more tax than the entity has paid 200‑30 Benchmark rule 200‑35 Effect of receiving a franked distribution 200‑40 An Australian corporate tax entity can pass the benefit of having received a franked distribution on to its members 200‑45 Special rules for franking by some entities 200‑5 The imputation system The *imputation system partially integrates the income tax liabilities of an Australian corporate tax entity and its members by: (a) allowing the entity, when distributing profits to its members, to pass to those members credit for income tax paid by the entity on those profits; and (b) allowing the entity's Australian members to claim a tax offset for that credit; and (c) allowing the entity's Australian members to claim a refund if they are unable to fully utilise the tax offset in reducing their income tax. 200‑10 Franking a distribution When an Australian corporate tax entity distributes profits to its members, the entity has the option of passing to those members credit for income tax paid by the entity on the profits. This is done by franking the distribution. 200‑15 The franking account (1) A franking account is used to keep track of income tax paid by the entity, so that the entity can pass to its members the benefit of having paid that tax when a distribution is made. (2) Each corporate tax entity has a franking account. (3) Typically, a corporate tax entity receives a credit in the account if the entity pays income tax or receives a franked distribution. A credit in the franking account is called a franking credit. (4) Typically, a corporate tax entity receives a debit in the account if the entity receives a refund of tax or franks a distribution to its members. A debit in the franking account is called a franking debit. 200‑20 How a distribution is franked (1) A corporate tax entity franks a distribution by allocating a franking credit to it. (2) The amount of the franking credit on the distribution is the amount specified in a statement that accompanies the distribution. (3) Only some kinds of distribution can be franked. These are called frankable distributions. 200‑25 A corporate tax entity must not give its members credit for more tax than the entity has paid (1) A corporate tax entity must not frank a distribution from profits with a franking credit that exceeds the maximum amount of income tax that could have been paid by the entity on the profits distributed. (2) If a distribution is franked in excess of this limit, the entity will be taken to have franked the distribution with the maximum franking credit for the distribution. 200‑30 Benchmark rule (1) All frankable distributions made within a particular period must be franked to the same extent. This is the benchmark rule. (2) It is designed to ensure that one member of a corporate tax entity is not preferred over another by the manner in which distributions are franked. 200‑35 Effect of receiving a franked distribution (1) Under Division 207, if an Australian member of a corporate tax entity receives a franked distribution, the member can usually offset, against the member's own income tax liability, income tax paid by the entity on the profits underlying the distribution. (2) The tax offset to which the member is entitled is equal to the franking credit on the distribution. Note 1: A member may be entitled to a refund under Division 67 if the sum of the tax offset and certain other tax offsets exceeds the amount of income tax that the member would have to pay if the member had not got those tax offsets. Note 2: If the member is not a resident, the tax effects of receiving a distribution will be dealt with under Division 11A of Part III of the Income Tax Assessment Act 1936, and Subdivision 207‑D of this Part. 200‑40 An Australian corporate tax entity can pass the benefit of having received a franked distribution on to its members If an Australian corporate tax entity receives a franked distribution, it can pass the benefit of having received a franking credit on the distribution to its own members by franking distributions to those members. 200‑45 Special rules for franking by some entities There are special rules to deal with: (a) venture capital franking by a pooled development fund; and (b) franking by life insurance companies; and (c) franking by exempting companies and former exempting companies. Division 201—Objects and application of Part 3‑6 Table of sections 201‑1 Objects 201‑5 Application of this Part 201‑1 Objects (1) The main object of this Part is to allow certain *corporate tax entities to pass to their *members the benefit of having paid income tax on the profits underlying certain *distributions. (2) The other objects of this Part are to ensure that: (a) the imputation system is not used to give the benefit of income tax paid by a *corporate tax entity to *members who do not have a sufficient economic interest in the entity; and (b) the imputation system is not used to prefer some members over others when passing on the benefits of having paid income tax; and (c) the *membership of a corporate tax entity is not manipulated to create either of the outcomes mentioned in paragraphs (a) and (b). 201‑5 Application of this Part Subject to the rules on the application of this Part set out in the Income Tax (Transitional Provisions) Act 1997, this Part applies to events that occur on or after 1 July 2002. Division 202—Franking a distribution Table of Subdivisions 202‑A Franking a distribution 202‑B Who can frank a distribution? 202‑C Which distributions can be franked? 202‑D Amount of the franking credit on a distribution 202‑E Distribution statements Subdivision 202‑A—Franking a distribution Guide to Subdivision 202‑A 202‑1 What this Subdivision is about An entity can only frank a distribution if certain conditions are met. These conditions are set out in this Subdivision. Table of sections Operative provisions 202‑5 Franking a distribution [This is the end of the Guide.] Operative provisions 202‑5 Franking a distribution An entity franks a *distribution if: (a) the entity is a *franking entity that satisfies the *residency requirement when the distribution is made; and (b) the distribution is a *frankable distribution; and (c) the entity allocates a *franking credit to the distribution. Note 1: Division 205 deals with a corporate tax entity's franking account and sets out when credits, known as franking credits, and debits, known as franking debits, arise in that account. Note 2: The mechanism by which an entity allocates a franking credit to a distribution (for example, whether it is done by resolution or some other means) is determined by the entity. Subdivision 202‑B—Who can frank a distribution? Guide to Subdivision 202‑B 202‑10 What this Subdivision is about Generally, a corporate tax entity that is resident at the time a distribution is made, can frank the distribution. There are some exceptions. Table of sections Operative provisions 202‑15 Franking entities 202‑20 Residency requirement when making a distribution [This is the end of the Guide.] Operative provisions 202‑15 Franking entities An entity is a franking entity at a particular time if: (a) it is a *corporate tax entity at that time; and (b) it is not a *life insurance company that is a *mutual insurance company at that time; and (c) in a case where the entity is a *company that is a trustee of a trust—it is not acting in its capacity as trustee of the trust at that time. 202‑20 Residency requirement when making a distribution An entity satisfies the residency requirement when making a *distribution if: (a) in the case of a *company—the company is an *Australian resident at that time; and (b) in the case of a *corporate limited partnership—the corporate limited partnership is an Australian resident at that time; and (c) in the case of a *corporate unit trust—the corporate unit trust is a *resident unit trust for the income year in which that time occurs; and (d) in the case of a *public trading trust—the public trading trust is a resident unit trust for the income year in which that time occurs. Subdivision 202‑C—Which distributions can be franked? Guide to Subdivision 202‑C 202‑25 What this Subdivision is about Generally, distributions that are made out of realised profits can be franked. Those distributions that are not frankable are identified. Table of sections 202‑30 Frankable distributions Operative provisions 202‑35 Object 202‑40 Frankable distributions 202‑45 Unfrankable distributions 202‑30 Frankable distributions Distributions and non‑share dividends are frankable unless it is specified that they are unfrankable. [This is the end of the Guide.] Operative provisions 202‑35 Object The object of this Subdivision is to ensure that only distributions equivalent to realised taxed profits can be franked. 202‑40 Frankable distributions (1) A *distribution is a frankable distribution, to the extent that it is not unfrankable under section 202‑45. (2) A *non‑share dividend is a frankable distribution, to the extent that it is not unfrankable under section 202‑45. 202‑45 Unfrankable distributions The following are unfrankable: (a) a distribution by a co‑operative company as defined in section 117 of the Income Tax Assessment Act 1936 for which a deduction is allowable under section 120 of that Act; (b) a distribution to which paragraph 24J(2)(a) of that Act applies that is taken under section 24J of that Act to be derived from sources in a prescribed Territory, as defined in paragraph 24BB(a) of that Act (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 taken under subsection 46M(3) or paragraph 46M(4)(a) of that Act not to be a *frankable dividend (dividends paid from certain accounts such as *share capital accounts); (f) an amount that is taken to be an unfrankable distribution under section 160APAAAA or 160APAAAB of that Act; (g) an amount that is taken to be a dividend for any purpose under any of the following provisions: (i) Division 7A of Part III of that Act (distributions to entities connected with a *private company); (ii) section 108 of that Act (loans to shareholders and associates); (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). Subdivision 202‑D—Amount of the franking credit on a distribution Guide to Subdivision 202‑D 202‑50 What this Subdivision is about The amount of the franking credit on a distribution is that stated in the distribution statement, unless the amount stated exceeds the maximum franking credit for the distribution. In that case, the amount of the franking credit on the distribution is taken to be the maximum franking credit for the distribution, worked out under this Subdivision. Table of sections 202‑55 What is the maximum franking credit for a frankable distribution? Operative provisions 202‑60 Amount of the franking credit on a distribution 202‑65 Where the franking credit stated in the distribution statement exceeds the maximum franking credit for the distribution 202‑55 What is the maximum franking credit for a frankable distribution? The maximum franking credit for a distribution is equivalent to the maximum amount of income tax that the entity making the distribution could have paid, at the current corporate tax rate, on the profits underlying the distribution. [This is the end of the Guide.] Operative provisions 202‑60 Amount of the franking credit on a distribution (1) The amount of the *franking credit on a *distribution is that stated in the *distribution statement for the distribution, unless that amount exceeds the *maximum franking credit for the distribution. (2) The maximum franking credit for a *distribution is worked out using the formula: 202‑65 Where the franking credit stated in the distribution statement exceeds the maximum franking credit for the distribution If the amount of a *franking credit stated in a *distribution statement for a *distribution exceeds the *maximum franking credit for the distribution, the amount of the franking credit on the distribution is taken to be the amount of the maximum franking credit for the distribution, and not the amount stated in the distribution statement. Subdivision 202‑E—Distribution statements Guide to Subdivision 202‑E 202‑70 What this Subdivision is about An entity that makes a frankable distribution must give the recipient a statement setting out details of the distribution. Table of sections Operative provisions 202‑75 Obligation to give a distribution statement 202‑80 Distribution statement 202‑85 Changing the franking credit on a distribution by amending the distribution statement [This is the end of the Guide.] Operative provisions 202‑75 Obligation to give a distribution statement (1) An entity that makes a *frankable distribution must give the recipient a *distribution statement. (2) The statement must be given: (a) if the entity is not a *private company for the income year in which the *distribution is made—on or before the day on which the distribution is made; or (b) if the entity is a private company for the income year in which the distribution is made: (i) where the Commissioner has not made a determination under subsection (3)—before the end of 4 months after the end of the income year in which the distribution is made; or (ii) where the Commissioner makes a determination under subsection (3) that the statement may be given before a later time—before that time. Note: A consequence of the rule in paragraph (2)(b) is that private companies can, in effect, frank retrospectively. (3) The Commissioner may determine in writing that a *private company may give the statement before a time that is later than 4 months after the end of the income year in which the distribution is made. 202‑80 Distribution statement (1) A distribution statement is a statement made in accordance with this section. (2) The statement must be in the *approved form. (3) The statement must: (a) identify the entity making the distribution; and (b) state the date on which the distribution is made; and (c) state the amount of the distribution; and (d) state that there is a *franking credit of an amount specified on the distribution; and (e) state the *franking percentage for the distribution; and (f) state the amount of any *withholding tax that has been deducted from the distribution by the entity; and (g) include any other information required by the *approved form that is relevant to imputation generally or the distribution. Note: Under the Taxation Administration Act 1953 it is an offence to fail to give a statement required under this Subdivision, or make a misleading statement in connection with a distribution (whether franked or not). 202‑85 Changing the franking credit on a distribution by amending the distribution statement Changing the franking credit on a specified distribution (1) The Commissioner may, on application by an entity, determine in writing that the entity may change the *franking credit on a specified *distribution by amending the *distribution statement for the distribution. (2) In deciding whether to make a determination under subsection (1), the Commissioner must have regard to: (a) whether the date for lodgment of an *income tax return by the recipient of the specified *distribution for the income year in which the distribution was made has passed; and (b) whether, if the *franking credit on the specified distribution were changed in accordance with the entity's application, there would be any difference in the *withholding tax liability of the recipient; and (c) whether amending the distribution statement as requested by the entity would lead to a breach of the *benchmark rule, or any of the rules in Division 204 (the anti‑streaming rules); and (d) whether amending the distribution statement as requested by the entity would lead to a new *benchmark franking percentage being set for the entity for the *franking period in which the distribution was made; and (e) any other matters that the Commissioner considers relevant. Changing the franking credits on a specified class of distributions (3) The Commissioner may, on application by an entity, determine in writing that the entity may change the *franking credits on *distributions of a specified class by amending the *distribution statements for the distributions. (4) In deciding whether to make a determination under subsection (3), the Commissioner must have regard to: (a) the number of recipients to whom an amended *distribution statement would be made; and (b) whether the date for lodgment of *income tax returns by recipients of *distributions of the specified class for the income year in which the distributions were made has passed; and (c) whether, if the *franking credit on the specified distributions were changed in accordance with the entity's application, there would be any difference in the *withholding tax liability of the recipients; and (d) whether amending the distribution statements as requested by the entity would lead to a breach of the *benchmark rule, or any of the rules in Division 204 (the anti‑streaming rules); and (e) whether amending the distribution statements as requested by the entity would lead to a new *benchmark franking percentage being set for the entity for the *franking period in which the distributions were made; and (f) any other matters that the Commissioner considers relevant. Applying to the Commissioner (5) The entity must: (a) make its application under this section in writing; and (b) include in the application all information relevant to the matters to which the Commissioner must have regard under: (i) subsection (2), if the application relates to a *distribution; or (ii) subsection (4), if the application relates to a class of distributions. Review (6) If the entity or a *member of the entity is dissatisfied with a determination under subsection (3), the entity or member may object to it in the manner set out in Part IVC of the Taxation Administration Act 1953. Division 203—Benchmark rule Guide to Division 203 203‑1 What this Division is about Distributions within a particular period must all be franked to the same extent. Table of sections 203‑5 Benchmark rule 203‑10 Benchmark franking percentage Operative provisions 203‑15 Object 203‑20 Application of the benchmark rule 203‑25 Benchmark rule 203‑30 Setting a benchmark franking percentage 203‑35 Franking percentage 203‑40 Franking periods—where the entity is not a private company 203‑45 Franking period—private companies 203‑50 Consequences of breaching the benchmark rule 203‑55 Commissioner's powers to permit a departure from the benchmark rule 203‑5 Benchmark rule (1) A corporate tax entity must frank all frankable distributions made within a particular period at a franking percentage set as the benchmark for that period. This is the benchmark rule. (2) The benchmark rule does not apply to some corporate tax entities. Those entities are identified in section 203‑20. 203‑10 Benchmark franking percentage (1) 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. (2) An entity has a benchmark franking percentage, even if it is not subject to the benchmark rule. [This is the end of the Guide.] Operative provisions 203‑15 Object The object of this Subdivision is to ensure that one *member of a *corporate tax entity is not preferred over another when the entity *franks *distributions. 203‑20 Application of the benchmark rule (1) The *benchmark rule does not apply to a company in a *franking period if: (a) at all times during the franking period, the company is a *listed public company that, under its constituent documents, must *frank all *distributions made to its *members under a single resolution at the same *franking percentage; and (b) any distributions made by the company during the period are made to all members of the company. (2) The *benchmark rule does not apply to a company in a *franking period if, at all times during the franking period, the company is a *listed public company with a single *class of *membership interest. 203‑25 Benchmark rule An entity must not make a *frankable distribution whose *franking percentage differs from the entity's *benchmark franking percentage for the *franking period in which the distribution is made. This is the benchmark rule. Note: If a corporate tax entity franks a distribution in breach of this rule, the distribution will still be a franked distribution, although consequences will flow under section 203‑50. 203‑30 Setting a benchmark franking percentage The benchmark franking percentage for an entity for a *franking period is the same as the *franking percentage for the first *frankable distribution made by the entity within the period. Note: If no frankable distribution is made during the period, there is no benchmark franking percentage for the period. 203‑35 Franking percentage (1) Subject to subsection (2), the franking percentage for a *frankable distribution is worked out using the formula: (2) If the *franking percentage for a *frankable distribution would exceed 100% if it were worked out under subsection (1), it is taken to be 100%. 203‑40 Franking periods—where the entity is not a private company (1) Use this section 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. (2) If the entity's income year is a period of 12 months, each of the following is a franking period for the entity in that year: (a) the period of 6 months beginning at the start of the entity's income year; (b) the remainder of the income year. (3) If the entity's income year is a period of 6 months or less, the franking period for the entity in that year is the same as the income year. (4) If the entity's income year is a period of more than 6 months and less than 12 months, each of the following is a franking period for the entity in that year: (a) the period of 6 months beginning at the start of the entity's income year; (b) the remainder of the income year. (5) If the entity's income year is a period of more than 12 months, each of the following is a franking period for the entity in that year: (a) the period of 6 months beginning at the start of the entity's income year (the first franking period); (b) the period of 6 months beginning immediately after the end of the first franking period; (c) the remainder of the income year. 203‑45 Franking period—private companies The franking period for an entity that is a *private company for an income year is the same as the income year. 203‑50 Consequences of breaching the benchmark rule (1) If an entity makes a *frankable distribution in breach of the *benchmark rule: (a) the entity is liable to pay over‑franking tax imposed by the New Business Tax System (Over‑franking Tax) Act 2002 if the *franking percentage for the *distribution exceeds the entity's *benchmark franking percentage for the *franking period in which the distribution is made; and (b) a *franking debit arises in the entity's *franking account if the franking percentage for the distribution is less than the entity's benchmark franking percentage for the franking period in which the distribution is made. (2) Use the following formula to work out: (a) in a case dealt with under paragraph (1)(a)—the amount of the *over‑franking tax; and (b) in a case dealt with under paragraph (1)(b)—the amount of the *franking debit: where: franking % differential is the difference between: (a) the *franking percentage for the *frankable distribution; and (b) either: (i) if subparagraph (ii) does not apply—the entity's *benchmark franking percentage for the *franking period in which the *distribution is made; or (ii) if the Commissioner in the exercise of the Commissioner's powers under subsection 203‑55(1), permits the entity to frank the distribution at a different franking percentage—that percentage. Example: An entity makes 3 successive frankable distributions in a franking period. Each of those distributions is represented in the following diagram. The franking percentage for the first distribution is 40%, and so the entity's benchmark franking percentage for the period is 40%. Note: Distribution 2 is under‑franked to the extent of the franking % differential. This is used to work out the amount of the under‑franking debit under subsection (2). Distribution 3 is over‑franked to the extent of the franking % differential. This is used to work out the amount of over‑franking tax on the distribution under the New Business Tax System (Over‑franking Tax) Act 2002. The amount of the tax is calculated using the same formula as that set out in subsection (2). (3) A *franking debit arising under paragraph (1)(b) is in addition to any franking debit that would otherwise arise for the entity because of the *distribution. (4) The *franking debit arises on the day on which the *frankable distribution is made. 203‑55 Commissioner's powers to permit a departure from the benchmark rule Powers of the Commissioner (1) The Commissioner may, on application by an entity, make a determination in writing permitting the entity to *frank a *distribution at a *franking percentage that differs from the entity's *benchmark franking percentage for the *franking period in which the distribution is made. (2) Because the *benchmark rule is an integral part of the imputation system, the Commissioner's powers under this section may only be exercised in extraordinary circumstances. Matters to which the Commissioner must have regard in exercising the power (3) In deciding whether there are extraordinary circumstances justifying the exercise of the Commissioner's power to make a determination under subsection (1), the Commissioner must have regard to: (a) the entity's reasons for departing, or proposing to depart, from the *benchmark rule; and (b) the extent of the departure, or proposed departure, from the benchmark rule; and (c) if the circumstances that give rise to the entity's application are within the entity's control, the extent to which the entity has sought the exercise of the Commissioner's powers under this section in the past; and (d) whether a *member of the entity has been or will be disadvantaged as a result of the departure, or proposed departure, from the benchmark rule; and (e) whether a *member of the entity will receive greater *imputation benefits than another member of the entity because a distribution *franked at a *franking percentage that differs from the *benchmark franking percentage for the *franking period is made to one of them; and (f) any other matters that the Commissioner considers relevant. When may the powers be exercised? (4) The Commissioner may make a determination under subsection (1) either before or after the *frankable distribution is made. Consequence of the Commissioner exercising the power under this section (5) An allocation of a *franking credit at a percentage specified by the Commissioner in a determination under subsection (1) is taken to comply with the *benchmark rule. Applying to the Commissioner (6) The entity must: (a) make its application under this section in writing; and (b) include in the application all information relevant to the matters to which the Commissioner must have regard under subsection (3). Review (7) If the entity or a *member of the entity is dissatisfied with the determination under subsection (1), the entity or member may object to it in the manner set out in Part IVC of the Taxation Administration Act 1953. Division 204—Anti‑streaming rules Table of Subdivisions 204‑A Objects and application 204‑B Linked distributions 204‑C Substituting tax‑exempt bonus share for franked distributions 204‑D Streaming distributions 204‑E Disclosure requirements Subdivision 204‑A—Objects and application Table of sections 204‑1 Objects 204‑5 Application to non‑share dividends 204‑1 Objects The objects of this Division are to ensure that: (a) an entity and its *members cannot avoid the effect of the *benchmark rule by exploiting the *benchmark franking percentage of another entity; and (b) an entity does not stream *franked distributions and *tax‑exempt bonus shares; and (c) an entity does not stream *distributions to members of the entity who derive a *greater benefit from franking credits than other members. 204‑5 Application (1) The rules in this Division will apply to an entity even if it is not subject to the benchmark rule. (2) This Division applies to non‑share dividends in the same way as it applies to distributions. Subdivision 204‑B—Linked distributions Guide to Subdivision 204‑B 204‑10 What this Subdivision is about This Subdivision prevents the exploitation of a corporate tax entity's benchmark franking percentage by another corporate tax entity, or that other entity's members, by imposing a franking debit where there is exploitation. Table of sections Operative provisions 204‑15 Linked distributions [This is the end of the Guide.] Operative provisions 204‑15 Linked distributions Franking debit arises where a distribution by one entity is substituted for a distribution by another (1) This section gives rise to a *franking debit if: (a) the exercise of a choice or selection by a *member of an entity (the first entity); or (b) the member's failure to exercise a choice or selection; has the effect of determining (to any extent) that another entity makes to one of its members a *distribution (the linked distribution) that is: (c) in substitution (in whole or in part) for a distribution by the first entity to that member or any other member of the first entity; and (d) unfranked, or *franked at a *franking percentage that differs from the first entity's *benchmark franking percentage for the *franking period in which the linked distribution is made. Note: Division 205 deals with a corporate tax entity's franking account and sets out when a debit, known as a franking debit, arises in that account. Franking account in which the debit arises (2) The debit arises in the *franking account of the entity with the higher *benchmark franking percentage for the *franking period in which the linked distribution is made. Amount of the debit (3) The debit is equal to the one that would arise in that *franking account if the entity had made a *franked distribution, equal to the linked distribution, with a *franking percentage equal to the *benchmark franking percentage for that entity. When does the debit arise (4) The debit arises on the day on which the linked distribution is made. Debit is in addition to any other franking debit arising because of the linked distribution (5) The debit is in addition to any other debit that arises in an entity's *franking account because of the linked distribution. Where an entity has no benchmark franking percentage (6) If an entity has no *benchmark franking percentage for the *franking period in which the linked distribution is made, this section applies as if: (a) in a case where the linked distribution has a *franking percentage of less than 50%—the entity had a benchmark franking percentage of 100% for that period; and (b) in a case where the linked distribution has a franking percentage equal to or greater than 50%—the entity had a benchmark franking percentage of 0% for that period. Subdivision 204‑C—Substituting tax‑exempt bonus share for franked distributions Guide to Subdivision 204‑C 204‑20 What this Subdivision is about This Subdivision prevents the substitution of a tax‑exempt bonus share for a franked distribution by imposing a franking debit on the issue of the share as if it were a franked distribution. Table of sections Operative provisions 204‑25 Substituting tax‑exempt bonus shares for franked distributions [This is the end of the Guide.] Operative provisions 204‑25 Substituting tax‑exempt bonus shares for franked distributions Franking debit arises if tax‑exempt bonus shares are issued in substitution for a franked distribution (1) This section gives rise to a *franking debit in an entity's *franking account if: (a) the exercise of a choice or selection by a *member of the entity; or (b) the member's failure to exercise a choice or selection; has the effect of determining (to any extent) that the entity issues one or more *tax‑exempt bonus shares, to that member or another member of the entity, in substitution (in whole or in part) for one or more *franked distributions by the entity to that member or another member. Amount of the debit (2) The debit is equal to the one that would arise in the entity's *franking account if the entity made a *distribution, equal to the *franked distributions referred to in subsection (1), franked at the entity's *benchmark franking percentage for the *franking period in which the shares are issued. When does the debit arise (3) The debit arises on the day when the shares are issued. Meaning of tax‑exempt bonus share (4) For a *company whose *shares have no par value, tax‑exempt bonus share means a share issued by the company in the circumstances mentioned in subsection 6BA(6) of the Income Tax Assessment Act 1936. (5) For any other *company, tax‑exempt bonus share means a *share issued by the company to a *shareholder in the company where: (a) the amount or value of the share is debited against an amount standing to the credit of a share premium account of the company; and (b) no part of the paid‑up value of the share is a dividend; and (c) the share is issued: (i) as a bonus share; or (ii) in the circumstances mentioned in subsection 6BA(1) of the Income Tax Assessment Act 1936, as in force immediately before 1 July 1998. Where a company has no benchmark franking percentage for the franking period (6) If a *company has no *benchmark franking percentage for the *franking period in which the *tax‑exempt bonus share is issued, this section applies as if the entity had a benchmark franking percentage of 100% for that period. Subdivision 204‑D—Streaming distributions Guide to Subdivision 204‑D 204‑26 What this Subdivision is about This Subdivision prevents the streaming of imputation benefits to one member of a corporate tax entity in preference to another by either imposing a franking debit or denying an imputation benefit where there is streaming. Table of sections Operative provisions 204‑30 Streaming distributions 204‑35 When does a franking debit arise if the Commissioner makes a determination under paragraph 204‑30(3)(a) 204‑40 Amount of the franking debit 204‑45 Effect of a determination under paragraph 204‑30(3)(b) 204‑50 Assessment and notice of determination 204‑55 Right to review where a determination made [This is the end of the Guide.] Operative provisions 204‑30 Streaming distributions Commissioner's power to make a determination when distributions or distributions and other benefits are streamed (1) This section empowers the Commissioner to make determinations if an entity streams one or more *distributions (or one or more distributions and the giving of other benefits), whether in a single *franking period or in a number of franking periods, in such a way that: (a) an *imputation benefit is, or apart from this section would be, received by a *member of the entity as a result of the distribution or distributions; and (b) the member would derive a *greater benefit from franking credits than another member of the entity; and (c) the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits. The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member. Examples of other benefits (2) These are examples of the giving of other benefits: (a) issuing bonus *shares; (b) returning paid‑up share capital; (c) forgiving a debt; (d) the entity or another entity making a payment of any kind, or giving any property, to a *member or to another person on a member's behalf. Nature of the determination that the Commissioner may make (3) The Commissioner may make one or more of these determinations: (a) that a specified *franking debit arises in the *franking account of the entity, for a specified *distribution or other benefit to a disadvantaged member; (b) that no *imputation benefit is to arise in respect of a distribution that is made to a favoured member and specified in the determination. A determination must be in writing. (4) The Commissioner may specify the *franking debit under paragraph (3)(a) by specifying the *franking percentage to be used in working out the amount of the debit. (5) The Commissioner may specify the *distribution under paragraph (3)(a) or (b) by specifying: (a) the date on which the distribution was made, or the period during which the distribution was made; and (b) the member, or class of members, to whom the distribution was made. What is an imputation benefit? (6) A *member of an entity receives an imputation benefit as a result of a distribution if: (a) the member is entitled to a *tax offset under Division 207 as a result of the distribution; or (b) an amount would be included in the member's assessable income as a result of the distribution because of the operation of section 207‑40; or (c) a *franking credit would arise in the *franking account of the member as a result of the distribution; or (d) the member would not be liable to pay *withholding tax on the distribution, because of the operation of paragraph 128B(3)(ga) of the Income Tax Assessment Act 1936. When does a favoured member derive greater benefit from franking credits? (7) The following subsection lists some of the cases in which a *member of an entity derives a greater benefit from franking credits than another member of the entity. It is not an exhaustive list. (8) A *member of an entity derives a greater benefit from franking credits than another member of the entity if any of the following circumstances exist in relation to the other member in the income year in which the distribution giving rise to the benefit is made, and not in relation to the first member: (a) the other member is not an Australian resident; (b) the other member would not be entitled to any *tax offset under Division 207 because of the distribution; (c) the amount of income tax that, apart from this Division, would be payable by the other member because of the distribution is less than the tax offset to which the other member would be entitled; (d) the other member is a *corporate tax entity at the time the distribution is made, but no *franking credit arises for the entity as a result of the distribution; (e) the other member is a *corporate tax entity at the time the distribution is made, but cannot use *franking credits received on the distribution to *frank distributions to its own members because: (i) it is not a *franking entity; or (ii) it is unable to make *frankable distributions. 204‑35 When does a franking debit arise if the Commissioner makes a determination under paragraph 204‑30(3)(a) If the Commissioner makes a determination giving rise to a *franking debit in the *franking account of an entity under paragraph 204‑30(3)(a), the debit arises in the franking account of the entity on the day on which the notice of determination is given to the entity in accordance with section 204‑50. 204‑40 Amount of the franking debit (1) The amount of the *franking debit arising because of a determination by the Commissioner under paragraph 204‑30(3)(a) must not exceed: (a) if the specified *distribution has been *franked—the difference between the amount of the *franking credit on the distribution and an amount worked out by multiplying the amount of the distribution by the highest *franking percentage at which a distribution to a favoured member is franked; or (b) if the specified distribution, although *frankable, has not been franked—an amount worked out by multiplying the amount of the distribution by the highest franking percentage at which a distribution to a favoured member is franked; or (c) if the specified distribution is *unfrankable—an amount worked out by multiplying the amount of the distribution by the highest franking percentage at which a distribution to a favoured member is franked; or (d) if the specified benefit is the issue of bonus shares from a share premium account—an amount worked out by multiplying the amount debited to the share premium account in respect of the bonus shares by the highest franking percentage at which a distribution to a favoured member is franked; or (e) if some other benefit is specified—an amount worked out by multiplying the value of the benefit by the highest franking percentage at which a distribution to a favoured member is franked. (2) In specifying the *franking debit, the Commissioner must have regard to: (a) any *franking debit already arising in the *franking account of the entity under paragraph 203‑50(1)(b) because the entity franked the specified *distribution in breach of the *benchmark rule; and (b) any franking debit already arising in the franking account of the entity, because of the specified distribution or benefit, under section 204‑15 (about linked distributions) or section 204‑25 (about substituting *tax‑exempt bonus shares for *franked distributions). 204‑45 Effect of a determination under paragraph 204‑30(3)(b) If the Commissioner makes a determination denying an *imputation benefit under paragraph 204‑30(3)(b), the determination has effect according to its terms. 204‑50 Assessment and notice of determination (1) A determination under subsection 204‑30(3) does not form part of an assessment. (2) The Commissioner must give notice in writing of the determination: (a) in a case where the Commissioner determines that a *franking debit is to arise in the *franking account of an entity under paragraph 204‑30(3)(a)—to the entity; and (b) in a case where a favoured member is denied an *imputation benefit under paragraph 204‑30(3)(b)—to the favoured member. (3) If the Commissioner makes a determination denying an *imputation benefit under paragraph 204‑30(3)(b) on a *distribution made by a *listed public company, the Commissioner is taken to have served notice in writing of the determination on the favoured member if the Commissioner causes a notice to be published in a daily newspaper that circulates generally in each State, the Australian Capital Territory and the Northern Territory. The notice is taken to have been served on the day on which the publication takes place. (4) A notice under this section may be included in a notice of assessment. 204‑55 Right to review where a determination made If a taxpayer to whom a determination relates is dissatisfied with the determination, the taxpayer may object to it in the manner set out in Part IVC of the Taxation Administration Act 1953. Subdivision 204‑E—Disclosure requirements Guide to Subdivision 204‑E 204‑65 What this Subdivision is about This Subdivision requires an entity to notify the Commissioner where there is a significant difference in its benchmark franking percentage over time, so that the Commissioner can assess whether there is streaming. Table of sections Operative provisions 204‑70 Application of this Subdivision 204‑75 Notice to the Commissioner 204‑80 Commissioner may require information where the Commissioner suspects streaming Operative provisions 204‑70 Application of this Subdivision This Subdivision does not apply to an entity to whom the benchmark rule does not apply. Note: Section 203‑20 identifies the entities to whom the benchmark rule does not apply. 204‑75 Notice to the Commissioner (1) An entity must notify the Commissioner in writing if the *benchmark franking percentage for the entity for a *franking period (the current franking period) differs significantly from the benchmark franking percentage for the entity for the last franking period in which a *frankable distribution was made (the last relevant franking period). (2) An entity's *benchmark franking percentage for the current franking period differs significantly from its benchmark franking percentage for the last relevant franking period if it has increased or decreased by an amount that is greater than the amount worked out using the following formula: (3) The notice must also state: (a) the *benchmark franking percentage for the current franking period; and (b) the benchmark franking percentage for the last relevant franking period. (4) The notice must be in the *approved form. 204‑80 Commissioner may require information where the Commissioner suspects streaming (1) If the *benchmark franking percentage for an entity for a *franking period (the current franking period) *differs significantly from the benchmark franking percentage for the entity for the last franking period in which a *frankable distribution was made (the last relevant franking period), the Commissioner may request the entity to give the Commissioner the following information: (a) the entity's reasons for setting a benchmark franking percentage for the current franking period that differs significantly from the benchmark franking percentage for the last relevant franking period; and (b) the *franking percentages for all *frankable distributions made in the current franking period and the last relevant franking period; and (c) details of any other benefits given to the entity's *members, either by the entity or an *associate of the entity, during the period beginning at the beginning of the last relevant franking period and ending at the end of the current franking period; and (d) whether any member of the entity has derived, or will derive, a *greater benefit from franking credits than another member of the entity as a result of the variation in the benchmark franking percentage between the current franking period and the last relevant franking period; and (e) any other information required by the *approved form that is relevant in determining whether the entity is streaming *distributions. (2) The entity must comply with the Commissioner's request. Division 205—Franking accounts Guide to Division 205 205‑1 What this Division is about This Division: • creates a franking account for each entity that is, or has been, a corporate tax entity; and • identifies when franking credits and debits arise in those accounts and the amount of those credits and debits; and • identifies when there is a franking surplus or deficit in the account; and • creates a liability to pay franking deficit tax if the account is in deficit at certain times. Table of sections 205‑5 The franking account Operative provisions 205‑10 Each entity that is or has been a corporate tax entity has a franking account 205‑15 Franking credits 205‑20 Paying a PAYG instalment or income tax 205‑25 Residency requirement for an event giving rise to a franking credit or franking debit 205‑30 Franking debits 205‑35 Refund of income tax 205‑40 Franking surplus and deficit 205‑45 Franking deficit tax 205‑50 Deferring franking deficit 205‑5 The franking account (1) Each entity that is, or has ever been, a corporate tax entity has a franking account. (2) The payment of a PAYG instalment or income tax will generate a franking credit in that account. The amount of the credit is equal to the amount of tax paid. The receipt of a franked distribution by an entity from another corporate tax entity will also generate a franking credit. There are other circumstances in which a franking credit arises. (3) The receipt of a refund of income tax or the payment of a franked distribution by a corporate tax entity will generate a franking debit. There are, however, other cases where a franking debit arises. For example, a franking debit might arise under a determination by the Commissioner because distributions have been streamed. (4) An entity must be a franking entity at certain times and satisfy certain residency requirements before a franking credit or debit arises in its account. (5) Franking deficit tax is payable if the franking account of an entity is in deficit at the end of the entity's income year, or when the entity ceases to be a franking entity. [This is the end of the Guide.] Operative provisions 205‑10 Each entity that is or has been a corporate tax entity has a franking account There is a franking account for each entity that is, or has at any time been, a *corporate tax entity. Note: The balance in the franking account on 1 July 2002 will either be nil or, if the entity had a franking surplus or deficit immediately before 1 July 2002 under the imputation scheme existing at that time, an amount calculated under the Income Tax (Transitional Provisions) Act 1997. 205‑15 Franking credits The following table sets out when a credit arises in the *franking account of an entity and the amount of the credit. The credit is called a franking credit. Credits in the franking account Item If: A credit of: Arises: 1 the entity *pays a PAYG instalment; and that part of the payment that is attributable to the period during which the entity was a franking entity on the day on which the payment is made the entity satisfies the *residency requirement for the income year in relation to which the PAYG instalment is paid; and the entity is a *franking entity for the whole or part of the relevant *PAYG instalment period 2 the entity *pays income tax; and that part of the payment that is attributable to the period during which the entity was a franking entity on the day on which the payment is made the entity satisfies the *residency requirement for the income year for which the tax is paid; and the entity is a *franking entity for the whole or part of that income year 3 a *franked distribution is made to the entity; and the *franking credit on the distribution on the day on which the distribution is made the entity satisfies the *residency requirement for the income year in which the distribution is made; and the entity is a *franking entity when it receives the distribution; and the entity is entitled to a *tax offset because of the distribution under Division 207 4 a *franked distribution *flows indirectly to the entity through a *partnership or trust; and the entity's share of the *franking credit on the distribution at the end of the income year of the last partnership or trust interposed between the entity and the corporate tax entity that made the distribution the entity is a *franking entity when the franked distribution is made; and the entity is entitled to a *tax offset because of the distribution under Division 207 5 the entity incurs a liability to pay *franking deficit tax under section 205‑45 or 205‑50 the amount of the liability immediately after the liability is incurred 205‑20 Paying a PAYG instalment or income tax (1) An entity pays a PAYG instalment if and only if: (a) the entity has a liability to pay the instalment; and (b) either: (i) the entity makes a payment to satisfy the liability (in whole or in part); or (ii) a credit, or an *RBA surplus, is applied to discharge or reduce the liability. Note: The requirement in paragraph (a) means that the entity cannot generate franking credits by making a "voluntary" payment of income tax (that is, paying an amount on account of income tax for which the entity is not liable at the time when the payment is made). (2) If an entity: (a) is liable to pay a *PAYG instalment; and (b) has a *PAYG instalment variation credit; the PAYG instalment variation credit must be fully applied to reduce the liability for the PAYG instalment before any other credit or payment can be applied to reduce that liability. (3) An entity pays income tax if and only if: (a) the entity has a liability to pay the income tax; and (b) either: (i) the entity makes a payment to satisfy the liability (in whole or in part); or (ii) a credit, or an *RBA surplus, is applied to discharge or reduce the liability. Note: The requirement in paragraph (a) means that the entity cannot generate franking credits by making a "voluntary" payment of income tax (that is, paying an amount on account of income tax for which the entity is not liable at the time when the payment is made). (4) Subparagraphs (1)(b)(ii) and (3)(b)(ii) do not apply to the application of a credit allowable under or by virtue of: (a) Division 18, 18A or 18B of Part III of the Income Tax Assessment Act 1936 (these Divisions deal with credits in respect of foreign tax, credits in respect of overseas tax paid on certain film income and credits in respect of overseas tax paid on certain shipping income); or (b) the International Tax Agreements Act 1953 (credit to relieve double taxation); or (c) section 45‑30 or 45‑215 in Schedule 1 to the Taxation Administration Act 1953 (these sections deal with credits for *PAYG instalments payable and credit on using a varied rate in certain cases). (5) The amount of the *PAYG instalment or income tax paid is equal to: (a) the amount of the liability, if it is satisfied in full; or (b) the amount by which the liability is reduced, if it is not satisfied in full. (6) If: (a) a surplus in an *RBA of an entity is applied to satisfy a liability of the entity to *pay a PAYG instalment in respect of an income year; and (b) a credit allowable under section 45‑30 in Schedule 1 to the Taxation Administration Act 1953 in respect of that income year is included in the RBA; and (c) the RBA does not include the liability to pay the *PAYG instalment; and (d) the amount of the credit exceeds the income tax assessed to the entity in respect of that income year; the amount of the PAYG instalment paid by virtue of the application of the surplus is reduced by the amount of the excess mentioned in paragraph (d). 205‑25 Residency requirement for an event giving rise to a franking credit or franking debit An entity satisfies the residency requirement for an income year in which, or in relation to which, an event specified in the table in section 205‑15 or 205‑30 occurs if: (a) where the entity is a *company: (i) the company is an *Australian resident for more than one half of the year; or (ii) the company is an Australian resident at all times during the year when the company exists; or (b) where the entity is a *corporate limited partnership: (i) the corporate limited partnership is an Australian resident for more than one half of the year; or (ii) the corporate limited partnership is an Australian resident at all times during the year when the corporate limited partnership exists; or (c) the entity is a *corporate unit trust for the income year; or (d) the entity is a *public trading trust for the income year. 205‑30 Franking debits The following table sets out when a debit arises in the *franking account of an entity and the amount of the debit. The debit is called a franking debit. Debits in the franking account Item If: A debit of: Arises: 1 the entity *franks a *distribution the amount of the *franking credit on the distribution on the day on which the distribution is made 2 the entity *receives a refund of income tax; and that part of the refund that is attributable to the period during which the entity was a franking entity on the day on which the refund is received the entity satisfies the *residency requirement for the income year to which the refund relates; and the entity was a *franking entity during the whole or part of the income year to which the refund relates 3 a *franking debit arises for the entity under paragraph 203‑50(1)(b) (the entity *franks a *distribution in contravention of the *benchmark rule) the franking debit worked out under paragraph 203‑50(2)(b) on the day specified in subsection 203‑50(4) 4 the entity ceases to be a *franking entity; and the amount of the *franking surplus on the day on which the entity ceases to be a franking entity the entity's *franking account is in *surplus immediately before ceasing to be a franking entity 5 a *franking debit arises for the entity under section 204‑15 (linked distributions) the franking debit specified in subsection 204‑15(3) on the day specified in subsection 204‑15(4) 6 a *franking debit arises under section 204‑25 (debit for substituting *tax‑exempt bonus shares for *franked distributions) the amount of the debit specified in subsection 204‑25(2) on the day specified in subsection 204‑25(3) 7 the Commissioner makes a determination under paragraph 204‑30(3)(a) giving rise to a *franking debit for the entity (streaming distributions) the amount of the debit specified in the determination on the day specified in section 204‑35 8 the entity is taken to have paid a dividend for the purposes of the Income Tax Assessment Act 1936 in an income year under Division 7A of Part III of that Act an amount equal to the debit that would have arisen if: on the last day of the income year