Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 Refundable tax offsets
Outline of chapter
4.1 Part 1 of Schedule 4 to this bill amends the ITAA 1936 and the ITAA 1997 to remove scope for double refunds of excess imputation credits to both a trustee and a beneficiary.
4.2 Part 2 of Schedule 4 to this bill amends the ITAA 1997 to deny refunds of excess imputation credits to non-complying superannuation funds and non-complying ADFs.
Context of amendments
4.3 Resident individuals and certain entities, including superannuation funds, are eligible for refunds of excess imputation credits in respect of dividends paid on or after 1 July 2000. If these taxpayers receive a franked dividend from a company and they are taxed at a rate which is lower than the company tax rate, they will receive a refund of excess imputation credits reflecting the difference between the relevant tax rates.
Removal of scope for double refunds to trustees and beneficiaries
4.4 Due to a defect in the current law, both a trustee and a beneficiary may be entitled to a refund in respect of the same imputation credits. This may occur, for example, where a trustee is assessed in respect of dividend income under subsection 98(1) of the ITAA 1936 because a beneficiary is a minor, and therefore under a legal disability, and the beneficiary is a beneficiary in another trust estate or has income from other sources.
Denial of refunds to non-complying superannuation funds
4.5 All superannuation funds, including non-complying superannuation funds and non-complying ADFs, are currently eligible for refunds of excess imputation credits. Non-complying superannuation funds and non-complying ADFs are taxed at the top marginal tax rate rather than the concessional 15% rate generally applicable to complying superannuation entities. Therefore, they would rarely be in a position to claim a refund.
4.6 Since commencement of the refundable imputation credits measure from 1 July 2000, it has become apparent that non-complying superannuation entities may be used as a vehicle to access tax benefits inappropriately. It is possible for such funds to enter into artificial schemes so as to produce surplus imputation credits in respect of which they would be entitled to a refund.
Summary of new law
Removal of scope for double refunds to trustees and beneficiaries
4.7 These amendments will make a correction to the refundable tax offset rules in Division 67 of the ITAA 1997 so that double claiming of a refund of excess imputation credits by both a trustee and a beneficiary will not be possible. In addition, a consequential amendment will be made to Division 6 of the ITAA 1936.
Denial of refunds to non-complying superannuation funds
4.8 The income tax law will be amended to ensure that non-complying superannuation funds and non-complying ADFs are not eligible for refunds of excess imputation credits.
Detailed explanation of new law
Removal of scope for double refunds to trustees and beneficiaries
4.9 Refunds of excess imputation credits are provided for by Division 67 of the ITAA 1997. Subsection 67-25(1) sets out the tax offsets that arise from franked dividends that are refundable. The franking rebate allowed to trustees under section 160AQY of the ITAA 1936 is currently refundable where the trustee is assessed under section 98 of the ITAA 1936.
4.10 Item 3 will amend subsection 67-25(1) so that a franking rebate allowable to a trustee under section 160AQY will not be refundable where the trustee is assessed under section 98. Trustees assessed under section 99 will continue to be eligible for refunds of excess imputation credits.
4.11 The amendment to the refundable tax offset provisions will apply to refunds of tax offsets (i.e. franking rebates) that relate to dividends paid on or after 1 July 2000. This means that there will be no scope for double refunds of excess imputation credits. [Schedule 4, subitem 4(2)]
4.12 Beneficiaries will continue to be eligible for refunds of excess imputation credits. If a beneficiary is a beneficiary in another trust estate or has income from other sources, the income assessed to the trustee under subsections 98(1) or (2) is also included in the assessable income of the beneficiary under subsection 100(1) and the beneficiary is given a credit under subsection 100(2) for any tax paid by the trustee. A franking rebate is allowable under section 160AQX.
4.13 Consequential amendments will be made to Division 6 of the ITAA 1936 to overcome a complication that arises where a trustee is assessed under subsections 98(1) or (2) but the income is not also included in the assessable income of the beneficiary under subsection 100(1). This could arise where the beneficiary has no other income and is not a beneficiary in another trust estate. A beneficiary is entitled to a franking rebate in respect of a distribution attributable to a franked dividend, and therefore to a refund of excess imputation credits, only where the distribution is included in the assessable income of the beneficiary.
4.14 Item 1 inserts new subsection 100(1A) to include the distribution in the beneficiarys assessable income in this case. The amount will be included only where there is a potential refund of excess imputation credits. Item 2 amends subsection 100(2) so that the beneficiary will be given a tax credit for any tax paid by the trustee.
Denial of refunds to non-complying superannuation funds
4.15 The tax offsets relating to franked dividends that are subject to the refundable tax offset rules are listed in subsection 67-25(1) of the ITAA 1997. New subsections 67-25(1A) and (1C) will make franking rebates allowable to trustees of non-complying superannuation funds and non-complying ADFs no longer subject to the refundable tax offset rules. This means that trustees of non-complying superannuation funds and non-complying ADFs will no longer be eligible for refunds of excess imputation credits under section 67-30 of the ITAA 1997. [Schedule 4, item 6, subsections 67-25(1A) and (1B)]
4.16 The insertion of new subsections 67-25(1A) and (1C) necessitates a consequential amendment to subsection 67-25(1). New subsection 67-25(1B) will replicate the qualification relating to tax offsets described in paragraph (c) of subsection 67-25(1) as amended by item 3. The relevant offsets are franking rebates allowed to trustees under section 160AQY of the ITAA 1936. [Schedule 4, items 5 and 6, subsection 67-25(1B)]
4.17 Item 3 inserts a definition of non-complying ADF into subsection 995-1(1) of the ITAA 1997. This term will have the meaning given by Part IX of the ITAA 1936. [Schedule 4, item 7, subsection 995-1(1)]
Application and transitional provisions
Removal of scope for double refunds to trustees and beneficiaries
4.18 The amendments to Division 6 will apply to assessments for years of income starting on or after 1 July 2000. [Schedule 4, subitem 4(1)]
4.19 The amendments to the refundable tax offset rules will apply to tax offsets that relate to dividends paid on or after 1 July 2000. This means that the law will be corrected from the commencement of refunds of excess imputation credits. [Schedule 4, subitem 4(2)]
Denial of refunds to non-complying superannuation funds
4.20 The amendments to section 67-25 of the ITAA 1997 will apply to assessments for income years ending on or after 22 May 2001. [Schedule 4, item 8]