senate

Explanatory Memorandum

(Circulated by the authority of the Treasurerthe Hon John Dawkins, M.P.)This Memorandum takes account of amendments made by the House of Representatives to the Bill as introduced.

Chapter 8 AMENDMENTS TO THE IMPUTATION SYSTEM

Overview

8.1 The imputation system of the income tax law is to be changed to allow a company, from the start of its 1994-95 franking year, to operate two franking accounts rather than the existing single account. The accounts will be known as class A and class B franking accounts. The change is a consequence of the reduction in the company tax rate from 39% to 33% [Clause 39] .

8.2 Franking debits and credits arising in relation to tax paid for 1992-93 and earlier years of income (including a credit that arises because of a franking surplus at the end of the 1993-94 franking year) will be posted to the class A franking account. The most relevant company tax rate for these years is 39%. Even though the tax rate for the 1986-87 and 1987-88 years of income is 49%, the relevant rate of tax for the class A franking account will be 39%.

8.3 Franking debits and credits arising in relation to tax paid for the 1993-94 and later years of income will be posted to the class B franking account. The company tax rate for these years is 33% and this will be the relevant rate for the class B franking account.

8.4 When a company pays a franked dividend the rate of tax used to calculate the imputation credit attached to the dividend will be the rate for the franking account that has been used to frank the dividend. Consequently, if a company has franking credits from tax paid at the 39% rate it will be able to frank a dividend which will then have a 39% imputation credit attached. Where the dividend is paid to an individual any franking rebate allowable will be calculated by reference to the 39% tax rate. Under these changes the rebate will no longer be calculated by reference to the tax rate for the financial year during which the dividend is paid.

8.5 A company will generally be required to make use of any available class A franking credits first to frank a dividend.

Summary of amendments

Purpose of amendments

8.6 As a result of these changes the imputation system will operate in the following way:

•

a company, for its 1994-95 and later franking years, will have two franking accounts. The class A franking account will be maintained for tax paid at the 39% rate and, if any, tax paid at the 49% rate. The class B account will be maintained for tax paid at the 33% rate;

•

the accounts will operate quite separately but in the same way as the current single account;

•

class A franking credits and debits will arise in respect of payments of tax and other related events for the 1992-93 and earlier years of income;

•

class B franking credits and debits will arise in respect of payments of tax and other related events for the 1993-94 and later years of income;

•

when a company pays a dividend a class A and a class B required franking amount will be calculated in respect of the dividend by reference to the surpluses, if any, of the respective accounts;

•

when a company pays a franked dividend it will make a declaration as to the extent the dividend is class A franked and class B franked (a particular dividend can be a class A franked dividend, a class B franked dividend or both);

•

the sum of the class A and class B franked amounts of a dividend cannot exceed the amount of the dividend;

•

class A and class B franking debits will arise to the extent a dividend has been, respectively, class A franked and class B franked;

•

where a class A or class B franked dividend is paid to a company then a class A or a class B franking credit, as the case may be, arises in the recipient company's appropriate account;

•

a class A franked dividend paid to an individual shareholder will carry an entitlement to a franking rebate calculated at the 39% rate while a class B franked dividend will carry an entitlement to a rebate calculated at the 33% rate; and

•

the special rules that apply to life companies will be modified to enable tax paid at the 39% rate for the 1993-94 and later years of income to give rise to a class A franking credit.

A transitional provision

8.7 Included in these amendments is a transitional provision that will apply to a company's 1993-94 franking year where a franked dividend is paid to them by an earlier balancing company. Broadly, where a franked dividend is paid by an early balancing company which is in its 1994-95 franking year to a company which is still in its 1993-94 franking year, the franking credit that arises to the recipient company is deferred until the first day of its 1994-95 franking year.

Franking deficit tax reimposed

8.8 Under the changes franking deficit tax (FDT) may be payable in respect of either the class A or class B franking account. This may be seen as the creation of a new tax liability - FDT payable in respect of a class A and class B franking deficit. Consequently, the Income Tax (Franking Deficit) Act 1987 will be amended to reimpose FDT.

Date of effect

8.9 The amendments will apply to a company's 1994-95 and later franking years.

Background to the legislation

How the imputation system works

8.10 This is a broad description of how the imputation system works. The system is contained in Part IIIAA of the Act.

8.11 The imputation system operates to impute tax paid at the company level as a credit (called an 'imputation credit') to resident shareholders who are assessed on the total amount of the dividend and the imputation credit, but are entitled to a rebate of tax equal to that credit. A dividend with an imputation credit attached to it is known as a franked dividend, and the extent to it is franked is known as the franked amount of the dividend.

8.12 When a franked dividend passes from one resident company to another, the attached franking credit is effectively transferred to the recipient company thus enabling that company to frank a similar amount of its dividends paid to its shareholders. The recipient company includes only the amount of the dividend in its assessable income and the intercorporate rebate applies.

8.13 The following example illustrates the operation of the basic system.

Franking Account

8.14 To enable a company to keep track of the amount of franking credits it has at any one point in time there is a requirement to keep a franking account. The account records the amount of franking debits and franking credits that arise to the company. This enables a company to ascertain the franking account balance at any time, in particular when paying dividends. Franking accounts are kept on an annual basis - a company's franking year.

8.15 Franking credits most commonly arise when a company makes a payment of tax or, as explained above, receives a franked dividend. A debit commonly arises when a company pays a franked dividend.

8.16 In broad terms, entries posted to a franking account reflect the amount of company profits able to be distributed as franked dividends not the tax paid. As such, a mechanism is required to convert an amount of tax paid into an amount of income corresponding to the tax concerned, referred to as the adjusted amount.

8.17 The adjusted amount is calculated by multiplying the amount of tax concerned by the factor -

(1-company tax rate)/company tax rate


where the company tax rate is the rate for the income year in relation to which the tax is paid.

Franking year

8.18 For companies other than early balancing companies the franking year is the financial year - the period from 1 July to 30 June. This includes late balancing companies. For early balancing companies the franking year is the substituted instalment period, broadly, the accounting period the company has adopted.

8.19 For all practical purposes a company's franking year will correspond with its year of tax which, in turn, is the year succeeding the related year of income. Thus for the 1993-94 income year, the related the year of tax is 1994-95 which corresponds with the 1994-95 franking year.

Franking a Dividend

8.20 Franking actually occurs where a dividend is paid by a resident company and the company declares that the dividend is franked to the extent specified in the declaration. Thus a fully franked dividend is a dividend that has a franking percentage of 100%.

Required Franking Amount

8.21 When it comes to franking a dividend the general rule is that a company is required to frank a dividend it pays to the extent allowed by the surplus balance in its franking account after taking account of any future dividends the company is committed to pay. A franking surplus exists on a particular day where the total of the franking credits arising during the franking year up to that day exceeds the total franking debits to that day.

8.22 Broadly, where the franking surplus is not less than the amount of a dividend, the dividend must be fully franked. Where the franking surplus is less than the dividend, the dividend must be partly franked to the extent of the surplus. These rules specify the minimum extent to which a dividend must be franked and is known as the required franking amount.

Overfranking and Underfranking

8.23 A company is permitted to frank a dividend in excess of the required franking amount in anticipation of further franking credits that will arise during a franking year. This is called overfranking. However, in no circumstances is a company able to frank a dividend in excess of the amount of the dividend itself.

8.24 Underfranking occurs when a company franks a dividend to an extent less than the required franking amount. When a dividend is underfranked the company is effectively treated as if it had franked the dividend to the required extent using the relevant franking credits by the posting of a franking debit equal to the amount of underfranking.

Franking Deficit Tax

8.25 A company is liable to pay franking deficit tax (FDT) on the amount of any franking deficit which exists at the end of a franking year. FDT is not a penalty. It is a payment that makes up for the amount of company tax that has been imputed by the payment of franked dividends. Where a company has become liable to FDT it is entitled to have that liability reduced by an initial payment of tax that has been based on the company's own estimation of notional tax. FDT can also be offset against any company tax assessed after the end of the franking year concerned.

Franking Additional Tax

8.26 FDT is not intended to be a facility that allows a company to deliberately overfrank dividends to an extent obviously greater than a reasonable estimate of anticipated franking credits and debits in a franking year. Broadly, a company is liable to a penalty of up to 30% of FDT payable where the FDT liability arose because the company deliberately overfranked a dividend. The penalty is known as franking additional tax.

Effects for Shareholders

8.27 Fully franked or partly franked dividends paid by a resident company carry a rebate entitlement for resident individual shareholders. Shareholders know they have received a franked dividend because a company is required to provide a dividend statement to the shareholder setting out the franked amount of the dividend.

8.28 The amount of the imputation credit attached to the franked dividend is calculated by converting the franked amount of the dividend to the underlying amount of tax paid and is included in the assessable income of the shareholder. A rebate equal to the amount of the imputation credit is allowed to the shareholder.

8.29 Where a franked dividend is paid to a trustee of a trust estate or to a partnership, the attached imputation credit is included in the assessable income of the trust or partnership. An appropriate proportion of the imputation credit then flows through to the beneficiaries/partners depending on their share of the net income of the trust or partnership. In cases where the trustee of the trust is liable to pay tax on trust income, or on behalf of beneficiaries, the trustee is entitled to a rebate equal to the imputation credit or the tax assessed, whichever is the lesser.

8.30 Where a shareholder is a resident company the imputation credit attached to a franked dividend is not included in the assessable income of the company (nor is a rebate allowed to the company for that credit), but is available to the company to frank dividends it pays to its shareholders.

8.31 Imputation credits are not allowed to non-resident shareholders. However, where a franked dividend is paid to a non-resident the franked amount of the dividend is exempt from withholding tax.

Imputation and changes in the company tax rate

8.32 Under the existing law, imputation credits attached to franked dividends are determined by reference to the company tax rate for the financial year in which the dividends are paid. For all practical purposes in this regard, the year of tax corresponds to the franking year of a company and, in turn, to the year of income of the individual shareholders.

8.33 Thus, franked dividends paid by a company in the 1993-94 year of tax when the company tax rate is 39% will be franked by reference to that rate, that is, according to the formula 39/61. In this way, a $61 fully franked dividend will have a $39 imputation credit attached. When received by a resident individual shareholder the dividend will entitle the shareholder to an franking rebate of $39, and when received by another company will entitle the company to a franking credit of $61.

8.34 As part of this basic structure of the law, the situation is that a change in the company tax rate for a particular year of tax automatically adjusts the imputation credit attached to franked dividends in that year.

8.35 This means that when the company tax rate is reduced to 33% for the 1994-95 year of tax ( payable on income of the 1993-94 income year), the imputation credit would be calculated according to the formula 33/67. This gives a resident individual shareholder an imputation credit of $30.04 on a the $61 fully franked dividend, and a company shareholder a franking credit of $61.

8.36 Conversely, franking credits arising on payment of tax are determined by reference to the company tax rate for the year of income for which the payment is being made. For example, the franking credit arising on the payment of tax for the 1987-88 year of income would be calculated using the formula 51/49 regardless of when the payment is made. Thus, if paid during the 1989-90 franking year (when the company tax rate for the related financial year was 39%) the franking credit arising in that franking year is still calculated using the 51/49 factor.

8.37 Consequently, under this basic structure it is possible for a franking credit calculated by reference to one rate to give rise to an imputation credit calculated by reference to another rate.

Explanation of the amendments

Outline

8.38 The amendments will:

•

set up a dual franking system;

•

adjust the required franking account provisions to take account of the two franking accounts and to ensure available class A franking credits are used to frank dividends first;

•

adjust the franking process and the franking rebate calculation to take account of the two franking accounts;

•

ensure FDT can be properly calculated for the two franking accounts and the initial payment of tax can be offset against any aggregate FDT liability;

•

adjust the machinery provisions of the imputation system, including self assessment, to take account of the two franking accounts;

•

install a transitional provision to apply to dividends paid by early balancing companies.

Dual franking accounts

8.39 The amendments will enable a company to keep two franking accounts. The dual franking account system will operate from the beginning of a company's 1994-95 franking year. The two franking accounts will operate separately but on the same basis as the current single franking account. What primarily distinguishes the two accounts is that they will account for tax paid for different years of income.

8.40 The class A franking account will operate in respect of tax paid for 1992-93 and earlier years of income. This account can be distinguished in that the company tax rate for most of these years (so far as is relevant for the imputation system) has been 39%. It is worthwhile thinking of the class A account as the 39% account.

8.41 However, the rate of tax for 1986-87 and 1987-88 years of income is 49%. Even though the class A franking account is the '39% account' it will still be the relevant account for the franking debits and credits that arise in relation to the few tax payments that will occur in respect of the 1986-87 and 1987-88 and earlier years of income.

8.42 The rate of tax for the statutory fund component of a life assurance company's taxable income has remained unchanged. Therefore, being the 39% account, the class A franking account will also be the relevant account for debits and credits arising in respect of tax paid on the statutory fund component of a life assurance company's taxable income for the 1993-94 and later years of income.

8.43 The class B franking account will operate in respect of tax paid for 1993-94 and later years of income. The relevant rate of tax for these years of income is 33%.

8.44 Many companies will not have an active class A franking account. Broadly, unless a company:

•

carries forward a franking surplus from its 1993-94 franking account;

•

receives a franked dividend that has been franked by the paying company using its class A account; or

•

pays tax or another relevant event occurs in respect of the 1992-93 and earlier years of income;

there will be no entries to the class A franking account.

8.45 As mentioned above, the dual franking account system will operate in respect of a company's 1994-95 and later franking years [Subclause 109(1)] .

Surplus or deficit of the two franking accounts

8.46 The ability of a company to frank the dividends it pays is determined in the first instance by reference to the franking surplus of the company's franking account at the time of payment of dividends. The liability for FDT is based on the franking deficit of an account at the end of a franking year.

8.47 So it will be that a company will need to determine the class A franking surplus or class A franking deficit of its class A franking account and the class B franking surplus or class B franking deficit of its class B franking account [Clause 40 , inserting new definitions 'class A franking deficit', 'class A franking surplus', 'class B franking deficit' and 'class B franking surplus in section 160APA , Clause 41 , amended subsections 160APJ(1) and (2), new subsections 160APJ(1A) and(3) '] .

8.48 The surplus or deficit is calculated in the same manner as for the single account. Thus a class A franking surplus exists on a particular day where the total of the class A franking credits arising during the franking year up to that day exceeds the total class A franking debits. A class A franking deficit exists in the reverse situation. The class B franking surplus or deficit is calculated by reference to class B franking debits and credits.

Entries to the two franking accounts

8.49 The following tables set out the entries that will be posted to the two accounts. Class A franking credits and debits will be posted to the class A franking account. Class B franking credits and debits will be posted to the class B franking account.

Non-mutual life assurance companies

8.50 Under the imputation system non-mutual life assurance companies receive franking credits and use franking debits on the same basis as other companies with shareholders. (Mutual life companies are not permitted to maintain franking accounts.) However, these franking credits and franking debits are reduced to take into account the tax liability on income that cannot be distributed to shareholders because of various prudential rules.

8.51 Reducing franking debits and credits are determined by a formula that calculates the reduction on the basis that 80% of the company tax liability is attributable to statutory fund income and cannot be distributed to shareholders. The tax on the statutory fund income is the difference between tax on taxable income and tax on the non-fund component of taxable income. The non-fund component covers income relating to assets which are not included in an insurance fund maintained by the company. Essentially, this is income derived from business other than life assurance, superannuation and accident and disability business.

8.52 Until an assessment of tax payable for a year of income is made (when the final payment is made) a company will not know the actual tax payable on the statutory fund component and the non-fund component. For those franking debits that reduce credits for the initial payment of tax and subsequent payment before final payment and the credit that reduces a refund of tax before final payment there is a temporary reduction based on the previous year's tax assessed. When the tax payable for the year of income becomes known - an assessment is served or deemed to be served - the temporary reduction is reversed and the permanent reduction is calculated.

8.53 This treatment of life assurance companies will be incorporated into the dual franking account system.

8.54 However, for life assurance companies the general company tax rate of 33% for the 1993-94 and later years of income will only apply to the non-fund component of their taxable income. The rates of tax for the statutory fund component will remain unchanged.

8.55 To reflect the different tax rates applying to life assurance companies and based on the existing reducing debits and credits approach the following will apply:

•

as is the case for all companies, a class B franking credit or debit will arise in relation to payments of tax (and other related events) for the 1993-94 and later years of income;

•

the particular class B franking credit or debit is reduced by a class B franking debit or credit, as the case may be, equal to the adjusted amount of the total tax paid on the statutory fund component.

8.56 The net effect of these first two steps is there will remain a class B credit or debit based on tax paid on the non-fund component of the life assurance company's income, that is, tax paid at the 33% rate. The next step is:

•

a class A franking credit or debit arises based on 20% of the tax paid on the statutory fund component of the income.

The 20% class A franking credits or debits that arise will be adjusted amounts of the tax paid and this will be calculated by reference to the 39% tax rate [Clause 40, new definition of 'special life company tax rate' in section 160APA] .

8.57 The 20% class A franking credit or debit represents the tax paid on the statutory fund component of taxable income that can be distributed to shareholders.

8.58 The amendments provide for, where relevant, the sequence of a temporary class A franking credit or debit based on previous year's tax assessed, a reversing entry and a permanent class A franking credit or debit.

8.59 These 20% class A franking credits and debits are in addition to franking credits and debits of a life assurance company that will arise on tax paid in respect of 1992-93 and earlier years of income. Consistent with current treatment, these latter credits and debits will be reduced by 80%.

8.60 The tables below set out the class A and class B franking credits and debits that are peculiar to a life assurance company.

Dividend streaming provisions

8.61 Broadly, the dividend streaming provisions treat a company as having franked to the same extent all dividends paid on a single class of shares under a dividend streaming arrangement. The provisions operate so that franking debits arise to the company in respect of dividends substituted for, or by, franked dividends under the arrangement.

8.62 The debits are calculated by reference, where appropriate, to:

•

the rate at which the substituted dividends were franked (this is expressed in terms of a percentage, the franking percentage, with a fully franked dividend being a dividend franked to 100%);

•

the franked amount of the substituted dividends; or

•

where the franked dividend is the substitute for an unfranked dividend (subsection 160AQCB(4)), the amount of the substituted dividends.

8.63 Under the dual franking account system a substituted dividend may have a class A or a class B franking percentage or a class A or a class B franked amount depending on how the substituted dividend has been franked. In these circumstances class A or class B franking debits will arise under the dividends streaming provisions by reference to relevant percentages or franked amounts.

8.64 The dividend streaming provisions deal with four different types of dividend streaming provisions.

8.65 Under the first type a company pays an unfranked or partly franked dividend in substitution for the payment (or proposed payment) of a franked dividend. The franking percentage of the franked dividend has to be greater than that of the unfranked or partly franked dividend. With a dividend being capable of being simultaneously class A and class B franked it will be the aggregate of the class A and class B franking percentages that is taken into account [Clause40, new definition 'franking percentage' in section 160APA] .

8.66 The amendments will provide for a class A franking debit to arise equal to the amount of the class A franking debit that would have arisen had the unfranked or partly franked dividends been class A franked at the same rate (the substituted class A franking percentage) as the substituted dividends. The class B franking debit arises in the same manner by reference to the rate at which the substituted dividend has been class B franked [Clause 70, new paragraphs 160AQCB(1)(c) and (d)] .

8.67 The second type of arrangement is where a company issues tax-exempt bonus shares to a shareholder in substitution for the payment (or proposed payment) of franked dividends. The amount of the class A or class B franking debit that will arise will be the amount that would have arisen if the company had paid the substituted franked dividends to the shareholder instead of issuing the tax exempt bonus shares [Clause 70, new paragraphs 160AQCB(2)(c) and(d)] .

8.68 The third type of arrangement is where a company's franked dividend is substituted by the payment of an unfranked or partly franked dividend by another company (described in the provisions as a linked company). Under the amendments the amount of the class A franking debit that will arise to the company, that would have otherwise paid the franked dividend, is calculated by multiplying the amount of the unfranked or partly franked dividend by the substituted class A franking percentage. The class B franking debit is calculated by reference to any substituted class B franking percentage [Clause 70, new paragraphs 160AQCB(3)(c) and (d)] .

8.69 The fourth type of arrangement is where the company pays a franked dividend and this is in substitution for the payment of an unfranked dividend by another company.

8.70 Under this type of arrangement there is no substituted franking percentage or franked amount that can be referred to in order to calculate the franking debit. The franking debit that arises to the company is equal to the total amount of unfranked dividends paid by the other company that relates to the franked dividend.

8.71 The amendments will provide that a class B franking debit now arises equal to this amount [Clause70, amended subsection 160AQCB(4)] .

Estimated debit determinations

8.72 Under the imputation system a company is able to apply to the Commissioner to make an estimated debit determination. The company can do this when action has been taken to reduce a tax liability or when a refund of the initial payment of tax is expected. Action to reduce a tax liability - called liability reduction action - includes a request for a credit amendment and the lodgment of an objection. The Commissioner makes a determination by serving notice of the determination on the company or is deemed to have made a determination if 21 days have passed since the lodgment of the application.

8.73 The estimated debit is the franking debit that would arise if the action is successful or the refund is received. By this mechanism, a company is able to anticipate a future franking debit that is expected to arise in the circumstance specified and will result in a reduction of its franking account balance. This avoids the inappropriate application of the required franking rules.

8.74 When the Commissioner makes an estimated debit determination a franking debit equal to the amount specified in the determination arises at that time. When the liability reduction action terminates (called the 'termination time'), eg., the objection is finalised, or the initial payment is refunded, a franking credit arises equal to the estimated debit and this credit offsets the entry created by the debit determination. Any subsequent debit which results from a successful liability reduction action or refund adjusts the franking account balance to reflect the true position.

8.75 Under these amendments a company will be able to apply to the Commissioner to make both estimated class A and class B debit determinations.

8.76 Where a company has taken liability reduction action or is expecting a refund of an initial payment of tax in respect of the 1992-93 and earlier years of income any debit that arises will be a class A franking debit. In these situations application for, and a determination by the Commissioner of, an estimated class A debit is appropriate [Clause 40, new definitions 'estimated class A debit' and 'estimated class A debit determination' in section 160APA, Clause 79, amended section 160AQD] .

8.77 An estimated class B debit determination is appropriate where the action or refund is in respect of the 1993-94 and later years of income [Clause 40, new definitions 'estimated class B debit' and 'estimated class B debit determination' in section 160APA, Clause 80, new section 160AQDA] .

8.78 Companies will be able to make applications for estimated class A and class B determinations after the commencement of their 1994-95 franking year [Subclause 109(2)] .

8.79 A transitional provision covers those estimated debit determinations made in respect of the 1993-94 franking year which remain 'live' at the end of that franking year. The table below sets out the live determinations and the transitional arrangements that will apply to these determinations.

The required franking amount

8.80 Statutory rules apply to determine the required franking amount (RFA) in relation to a dividend that is to be paid by a company. These rules will be modified so now there will be determined both a class A RFA and a class B RFA.

8.81 The modified rules will apply to dividends paid after the start of a company's 1994-95 franking year [Subclause 109(4)] .

8.82 Currently, the first and basic rule for calculating the RFA is a dividend must be franked to the extent permitted by the company's franking surplus at the date of payment of the dividend. Under the dual franking account system the rule will be modified so that a dividend will have to be franked first to the extent permitted by the class A franking surplus of the company and then to the extent permitted by the class B franking surplus.

8.83 Thus, if the class A franking surplus is greater than the amount of the dividend, the dividend must be fully franked using the class A franking surplus even if the company has a class B franking surplus. If the dividend exceeds the sum of the class A and class B franking surplus the dividend must be franked to the extent permitted by the two accounts. If the dividend exceeds the class A franking surplus but not the sum of the class A and class B surpluses the dividend is required to be franked to the extent of the class A franking surplus and so much of the class B franking surplus such that the dividend is fully franked.

8.84 The existing rule that the franked amount of a dividend cannot exceed the amount of the dividend will continue to apply. This means the sum of the class A and class B RFAs cannot exceed the amount of the dividend.

8.85 Under the current provisions the basic rule is subject to further rules which apply where a company, at the date of payment of a dividend, is to pay a further dividend on that day or has an obligation to pay a frankable dividend at a later time during the franking year - a committed future dividend - or will pay dividends as part of certain dividend streaming arrangements. In these situations, unless the company's franking surplus is sufficient to fully frank all of the relevant dividends, the company is required to pro-rate the franking surplus over all the dividends being paid.

8.86 Under the dual franking account system companies will still be required to pro-rate the class A and class B franking surpluses but subject to the requirement that the class A franking credits are required to be used first.

8.87 A further rule applies where a company overfranks a dividend when it has a committed future dividend. The company is required to frank the committed future dividend to the same extent as the earlier overfranked dividend. Also, if more than one dividend is paid on the same day and one of the dividends is overfranked, the other dividend or dividends are required to be franked to the same extent.

8.88 Under the modified required franking rules, being 'franked to the same extent' will mean that the relevant dividends are franked by the same percentage and that the class A and class B franked amount of the relevant dividends are in the same proportion.

Class A and class B RFAs

8.89 The class A RFA will be the amount worked out under the existing formulas in section 160AQE but using the class A franking surplus as the basis for the calculation [Clause 81, new subsection 160AQDB] .

8.90 More specifically the following references in section 160AQE will be changed:

•

franking surplus of a company becomes the class A franking surplus;

•

franked amount becomes class A franked amount;

•

RFA becomes class A RFA; and

•

franking debit becomes class A franking debit.

8.91 The formulas otherwise operate as they do currently.

8.92 The first step in calculating the class B RFA is to calculate the gross RFA. The gross RFA will be the amount worked out under existing section 160AQE but using the sum of the class A and class B franking surpluses as the basis for the calculation [Clause 81, definition of 'gross required franking amount' in new subsection 160AQDB and Clause 82, new subsection 160AQE(6)] .

8.93 The class B RFA is the gross RFA less the class A RFA [Clause 81, new subsection 160AQDB(2)] .

8.94

Example

A company has on a particular day the following franking surpluses:

class A franking account: $5 000

class B franking account: $8 000

On that day it proposes to pay a dividend (the 'current dividend') of $10 000 and has a committed future dividend of $10 000.

Step 1: Calculate class A RFA (subsections 160AQDB(1) and 160AQE(2)).

class A RFA = 10 000 * (5 000/(10 000+10 000) = $2 500


Step 2: Calculate gross RFA (subsections 160AQDB(2) and 160AQE(2)) .

gross RFA = 10 000* (5 000 + 8 000)/(10 000 + 10 000)


= $6500

Step 3: Calculate class B RFA (subsection 160AQDB(2)).

class B RFA = gross RFA - class A RFA = 6500 - 2500 = $4000


Overfranking and underfranking

8.95 Consistent with the current rules, the amended required franking rules specify only the minimum extent to which a dividend must be class A or class B franked. A company will be able to frank a dividend in excess of the class A or class B RFA. Where a company does so and there is a franking deficit in relation to a particular account at the end of the franking year, the company will be liable to pay class A or class B FDT, as the case may be.

8.96 The underfranking rules will also apply under the dual franking account system. Thus, for example, where the class A RFA is more than 10% of the dividend and the dividend is not franked to the class A RFA, a class A franking debit arises equal to the amount by which the class A RFA exceeds the franked amount of the dividend.

Franking a dividend

8.97 The existing law sets out the actual franking event. A dividend is franked when a resident company is paying a frankable dividend and makes a declaration that the dividend is franked to the percentage specified in the declaration. When this happens the dividend is franked to the extent calculated by applying the percentage specified in the declaration to the dividend in order to determine the franked amount of a dividend.

8.98 Under the dual franking account system a frankable dividend that is paid can be either class A franked or class B franked or both. Thus a company would make a declaration that a dividend is class A franked to the percentage (the class A franking percentage) specified in the declaration and this determines the class A franked amount of the dividend [Clause 40, new definitions of 'class A franked amount', 'class A franked dividend', 'class A franking percentage' in section 160APA, Clause 83 amended subsection 160AQF(1)] .

8.99 A separate declaration is made in relation to a dividend that is to be class B franked giving rise to the class B franked amount of the dividend [Clause 40, new definitions of 'class B franked amount', 'class B franked dividend', 'class B franking percentage' in section 160APA, Clause 83 new subsection 160AQF(1AA)] .

8.100 A franked dividend will now be a dividend that has been class A or class B franked or both. The franked amount of a dividend will be the sum of the class A and class B franked amounts. When a dividend has been both class A and class B franked it will be simultaneously a class A franked dividend and a class B franked dividend.

8.101 The franked amount of the dividend - the sum of the class A and class B franked amounts - cannot exceed the amount of the dividend. Declarations that result in the franked amount exceeding the amount of the dividend are invalid [Clause 83, new subsection 160AQF(1AB)] .

8.102 Where a company pays a class A franked dividend, a class A franking debit arises in the class A franking account equal to the class A franked amount of the dividend. A class B franked dividend gives rise to a class B franking debit in similar fashion.

8.103 Companies will be able to class A frank and/or class B frank a dividend after they commence to operate dual franking accounts.

Dividend statement to shareholders

8.104 The dividend statement that must be provided when a company pays a frankable dividend to shareholders will be revised to take account of the dividend being capable of being class A or class B franked or both.

8.105 The information that will be provided on the dividend is:

•

the class A or class B franked amount or both;

•

the unfranked amount of the dividend;

•

the extra amount that is to be included in the shareholder's assessable income under subsection 160AQT(1) (even if that subsection does not apply to the particular dividend) - this is the class A imputation credit;

•

the class B imputation credit;

•

the sum of the class A and class B imputation credits; and

•

any amount of dividend withholding tax deducted from the dividend [Clause 84, new paragraph 160AQH(b)] .

Franking deficit tax

8.106 Under the dual franking account system franking deficit tax (FDT) will be payable in respect of any franking deficit of a class A or a class B franking account that exists at the end of any franking year. Class A FDT is payable in respect of a class A franking deficit [Clause 40, new definition of 'class A franking deficit tax' in section 160APA, Clause 85, amended subsection 160AQJ(1)] . Class B FDT is payable in respect of a class B franking deficit [Clause 40, new definition of 'class B franking deficit tax' in section 160APA, Clause 85, new subsection 160AQJ(1A)] .

8.107 Class A and class B FDT liabilities will be calculated in relation to a company's 1994-95 and later franking years [Subclause 109(3)] .

8.108 FDT is not a penalty. It is regarded as a payment required to make up the amount of company tax that has been imputed by the payment of frank dividends (whether class A or class B franked) in a franking year that has not actually become available by the end of that year. This is reflected by the fact that the amount of FDT payable is the class A or class B franking deficit, as the case may be, converted back to an equivalent amount of company tax that effectively has been prematurely imputed to shareholders. ; The rate for class A FDT is 39%, while the rate for class B FDT is 33% [Clause 40, new paragraphs (b) and (ba) of definition of 'applicable general company tax rate' in section 160APA]

8.109 Where a company has become liable to pay class A and/or class B FDT it is entitled to offset the sum of these amounts (if any) against any future company tax assessed (including where an amended assessment increases tax assessed). The effect of this is to decrease the actual payment of tax made in relation to the assessment which reduces the franking credit that would otherwise have arisen in the absence of the offset [Clause 86, amended section 160AQK] .

8.110 Where a company is liable for class A or class B FDT but makes an initial payment of tax based on actual (rather than notional tax) liability it is relieved from the payment of the sum of the class A and class B FDT to the extent of the initial payment. Thus, where this aggregate FDT (referred to in subsection 160AQJ(2) as the 'relevant franking deficit tax') is less than the initial payment no FDT is payable.

8.111 Where the aggregate FDT exceeds the initial payment the company is liable to pay only the excess. This excess aggregate FDT is broken up into class A and Class B FDT in the same proportion that the original class A or class B FDT liability was to the aggregate FDT [Clause 85, amended subsection 160AQJ(2)] .

8.112 For a life company calculating the reduced FDT liability the initial payment amount is reduced. This is because the franking credits that arise to a life company when an initial payment is made are reduced. The formula used to calculate the reduced initial payment amount will be adjusted as a result of the changed arrangements for dealing with franking credits and debits that arise for tax paid by a life company [Clause 65, amended paragraph 160APYC(c), Clause 85, amended paragraphs 160AQJ(2)(e) and (f)] .

8.113 Under the current law a franking debit arises under section 160APYC where a company is not liable to pay an amount of FDT because an initial payment of tax has reduced that liability under subsection 160AQJ(2). When the initial payment is made a franking credit arises in respect of the whole of the amount of the initial payment. The franking debit effectively reverses the franking credit to reflect the reduction of the FDT liability by the initial payment.

8.114 For subsection 160AQJ(2) to operate the FDT liability must be in respect of the franking year in which the last day of the company's year of income, for which the initial payment is made, occurs. For example, where a company has the financial year as its income year an FDT liability for the 1993-94 franking year (due on 31 July 1994) could be reduced by the initial payment for the 1993-94 year of income. This would be due on 28 July 1994.

8.115 The dual franking account system will apply from a company's 1994-95 franking year. From that time only initial payments in respect of the 1993-94 and later years of income (giving rise to class B franking credits) can reduce an FDT liability.

8.116 Consequently, section 160APYC will be amended only to provide for a class B franking debit to arise. There is no need to provide for a class A franking to arise.

Effects for shareholders

8.117 Under the imputation system, where a franked dividend is paid to a shareholder who is a resident individual, or a partnership or trustee of a trust estate, the shareholder is required to include the imputation credit attached to the dividend as assessable income. The shareholder is then entitled to a rebate, or to pass on a rebate in the case of a partnership or trust, of the amount so included.

8.118 Under the dual franking account system a franked dividend may be class A or class B franked or both. This will give rise to class A or class B imputation credits, as the case may be, and the imputation credits will be included in the assessable income of the shareholder. If the franked dividend is both class A and class B franked the sum of the imputation credits is included in assessable income.

8.119 This will be done in the same way as under the current provisions but modified to take account of the two classes [Clause 87, amended subsections 160AQT(1) and (1A) and new subsections 160AQT(1AA) and (1B)] .

8.120 The amount to be included in a shareholder's assessable income is calculated by multiplying the class A or class B franked amount of the relevant dividend by the factor -

company tax rate/(1 - company tax rate)</ EQN>


8.121 If it is a class A franked amount the company tax rate is 39% and the factor is 39/61. If it is a class B franked amount the rate is 33% and the factor is 33/67 [Clause 40, new paragraphs (c) and (ca) of definition of 'applicable general company tax rate' in section 160APA] .

8.122 Existing section 160AQT provides for a franking rebate to be allowed to an individual shareholder equal to the amount included in assessable income under section 160AQT. This will be the amount of the class A or class B imputation credit, or the sum of both, attached to the franked dividend.

Dividends paid to trusts and partnerships

8.123 The imputation system places beneficiaries of a trust estate and partners in a partnership in the same position, in relation to the imputation credit, as they would have been if they had received the franked dividend directly as a shareholder. In this way a resident beneficiary or partner is entitled to a franking rebate if he or she is an individual or, in the case of a company, to a franking credit.

8.124 Broadly, where a franked dividend is paid to a partnership or trustee the attached imputation credit is included in the assessable income of the partnership or trust estate. The amount that is included in the assessable income is apportioned between the persons who are assessed in relation to the net income of the partnership or trust estate (including the trustee under sections 98, 99 and 99A). The apportionment is made on the basis of the proportion of the income attributable to the franked dividend that is included in the net income of the trust or partnership that is assessed to the beneficiary, trustee or partner. The amount is known as the 'flow-on franking amount'.

8.125 A resident individual who is entitled to a share of the franked dividends paid to the trust or partnership is entitled to a rebate of an amount equal to the share of the imputation credits in relation to the franked dividends. The amount of rebate calculated in this way is called the 'potential rebate amount'. For a partner or beneficiary that is a resident company the potential rebate amount gives rise to a franking credit that is not included in assessable income. Where a trustee is assessed on the trust income the potential rebate amount is allowed to the trustee.

8.126 Under the dual franking account system there will be both a class A and class B flow-on franking amount and a class A and class B potential rebate amount [Clause 40, new definitions 'class A flow-on franking amount', 'class A potential rebate amount', 'class B flow-on franking amount' and 'class B potential rebate amount' in section 160APA] .

8.127 Taking a class A franked dividend as an example the class A flow-on franking amount will be the share of a class A franked dividend that flows to the partner or trustee as a part of the share of the net income of the trust or partnership. The class A potential rebate amount is the rebate calculated by reference to the share of the imputation credit attached to the share of the class A franked dividend.

8.128 Class B franked dividends will be treated in a similar way.

8.129 The operative provisions ensuring franked dividends received indirectly through partnerships and trusts are treated in the same way as if they had been received directly will be amended to take account of the treatment of class A and class B franked dividends.

8.130 In all cases the amendments ensure that the reference to a flow-on franking amount becomes a reference to a class A and/or class B flow-on franking amount and the rebate allowed is based on the class A or class B potential rebate amount or the sum of both.

8.131 The following provisions are amended:

Adjustment of imputation credits for companies and non-residents

8.132 A company shareholder that is paid a franked dividend is not required under section 160AQT to include the extra amount in relation to that dividend - the imputation credit - as assessable income. Similarly, a non resident is not required to include the imputation credit as assessable income.

8.133 The imputation system ensures this rule is applied even when a company or non-resident shareholder receives a franked dividend through a trust as a beneficiary, through a partnership, or where a trust is assessed in respect of a company or non-resident beneficiary.

8.134 Specific provisions are required in these circumstances because the imputation credit is initially included in the trust or partnership income and then in the share of that income notwithstanding the partner or beneficiary is a company or non resident.

8.135 Broadly, the specific provisions (contained in Subdivision 7C) allow a deduction to the company or non-resident of an amount equal to the imputation credit - the potential rebate amount - that is included in their share of the trust or partnership income. In the case of a potential rebate amount arising on receipt of a trust amount the allowable deduction cannot exceed the trust amount.

8.136 Because there may be both a class A and class B potential rebate amount that will give rise to an allowable deduction the specific provisions need to be modification to take this into account. The provisions otherwise operate in exactly the same way.

8.137 The following provisions will be are amended:

Machinery provisions

8.138 A number of the machinery provisions will be amended to take account of the change from a single franking account to dual franking accounts. The amended provisions will operate in exactly the same way as they did under the single account system. The amendments will simply ensure that the provisions apply equally to both the class A and class B franking account.

8.139 These amendments will apply from a company's 1994-95 franking year - when dual franking accounts operate.

Assessments

8.140 A company is required to self assess its franking account balance and any FDT payable in respect of a franking year. This occurs at the time a company lodges a franking account return if it is required to do so by the Commissioner. (Currently, the requirement to lodge generally applies to companies that have a franking deficit at the end of the franking year.)

8.141 As a result of the dual franking account system a company will be required to self assess the class A or class B franking account balance and any class A or class B FDT payable, as the case may be [Clause 40, new definitions of 'franking account account assessment, 'class A franking account assessment', 'class A franking account balance', 'class B franking account assessment' and 'class B franking account balance' in section 160APA, Clause 98, amended subsection 160ARH(1) and new subsection 160ARH(2)] .

8.142 In addition the Commissioner will be able to make -

•

part year assessments [Clause 99, amended subsections 160ARJ(1) and (2) and new subsection 160ARJ(1A)] ;

•

default assessments where a company does not lodge a franking account return [Clause 100, amended subsection 160ARK(1) and new subsection 160ARK(2)] ; and

•

amended assessments [Clause 101, amended subsection 160ARN(10)]in respect of a company's -

•

class A franking account balance any class A FDT that may be payable; and

•

class B franking account balance and any class B FDT that may be payable.

Penalties

8.143 Franking additional tax (FAT) is a penalty tax that applies where a company deliberately overfranks a dividend. The imposition of FAT will be changed to take into account the dual franking account system.

8.144 A FAT liability will arise when:

•

a company has paid a class A franked dividend during the franking year to an extent greater than the class A RFA; and

•

a class A franking deficit exists at the end of the franking year that is more than 10% of the total of the class A franking credits that arose during that year.

8.145 In this situation a company will be liable to FAT equal to 30% of the class A FDT payable [Clause 103, amended subsection 160ARX(1)] .

8.146 FAT will be imposed in the same way where a company has class B overfranked a dividend [Clause 103, new subsection 160ARX(2)] .

8.147 The amendments will provide for the penalty for failing to lodge a franking account return or any other information to be double the amount of the sum of any class A and class B FDT payable rather than double the FDT payable [clause 104, amended subsection 160ARZ] .

Self assessment penalties

8.148 Substantial changes were made to the penalty provisions in the income tax law recently. The new penalty provisions set out the standards that taxpayers should meet in fulfilling their tax obligations in a self assessment environment. The changes generally apply to the 1992-93 and later years of income.

8.149 Because a company is required to self assess its liability, if any, to FDT the new penalty provisions apply to the FDT obligations.

8.150 Broadly, penalties are imposed in relation to any 'franking tax shortfall'. The franking tax shortfall is the difference between the FDT properly payable by a company for a franking year (the 'proper franking tax') and the FDT that would have been payable by the company for that year if it were assessed on the basis of statements made by the company (the 'statement franking tax').

8.151 These penalty provisions will be changed to reflect the dual franking account system. Penalties will be imposed in respect of a franking tax shortfall of a class A or class B franking account, as the case may be.

8.152 Subject to one exception the operative provisions that impose penalty tax will not be amended. Rather the relevant definitions will be amended so that current definitions of franking tax shortfall, proper franking tax and statement franking tax apply equally to the class A or class B franking account and any FDT liability of the two accounts [Clause 102, amended definitions of 'franking tax shortfall', 'proper franking tax', 'statement franking tax' and new definitions 'class A franking tax shortfall', 'class A proper franking tax', 'class A statement franking tax', 'class B franking tax shortfall', 'class B proper franking tax', 'class B statement franking tax' in section 160ARXA] .

8.153 The operative provisions will then operate normally.

8.154 The one change to the operative provisions relates to the penalty of 25% of a franking tax shortfall that is caused by a company taking a position on a question of interpretation that is not reasonably arguable at the time the position is taken. The application of this penalty is subject to a threshold test. A company is only liable for a penalty for not having a reasonably arguable position where the franking tax shortfall caused by the position is greater than the higher of $10 000 or 1% of the FDT that would have been payable on the basis of the taxpayer's return.

8.155 The amendments will ensure that, where appropriate, this is a reference to 1% of the class A or class B FDT that would have been payable [Clause 105, new subparagraph 160ARZD(1)(c)(ii]) .

Other machinery provisions

8.156 Companies will be required to keep records of matters relevant to ascertaining the class A and class B franking account balance and to retain these records for a period of at least five years [Clause 106, amended section 160ASC] .

Tax file number withholding tax provisions

8.157 Under the tax file number withholding tax provisions, where a taxpayer does not quote a tax file number in relation to the payment of dividends then withholding tax applies to the unfranked amount of a dividend.

8.158 The amendments will ensure that the withholding tax provisions continue to apply in this way. If a dividend is fully franked - the sum of the class A and class B franking percentages equals 100% - withholding tax will not apply. If the sum of the franking percentages is less than 100% withholding tax will apply to the unfranked portion of the dividend [Clause 107, amended subsections 221YHZC(1B) and (1D)] .

Transitional arrangement for 1993-94 franking year

8.159 A transitional provision will be implemented to prevent certain dividends which will carry imputation credits calculated by reference to the 33% tax rate, from being able to generate imputation credits calculated by reference to the 39% rate. The provision will apply to dividends paid by early balancing companies during their 1994-95 franking year to a later balancing company that is still in its 1993-94 franking year.

8.160 There will also be a mechanism to ensure no disadvantage arises for companies receiving dividends from early balancing companies that are relying on these dividends to frank their own dividends and, because of the transitional provision, would otherwise have a franking deficit or an increased franking deficit at the end of the franking year.

8.161 For an early balancing company - a company that with the leave of the Commissioner, has adopted in lieu of the financial year an accounting period that ends one month or more before the end of the financial year - its franking year also commences earlier. Thus for a company that balances on 31 December 1993 in lieu of 30 June 1994, its 1994-95 franking year commences on 1 January 1994.

8.162 The dual franking account system is to apply from a company's 1994-95 franking year. An early balancing company could pay either a class A or class B franked dividend in the period 1 January 1994 to 30 June 1994 to a company that is not an early balancing company and is therefore still in its 1993-94 franking year. At that time the dual franking account system has not started to operate for the recipient company.

8.163 Because a class A or class B franked dividend is still a franked dividend then a franking credit would arise in the recipient company's single franking account. While this does not pose a problem if the dividend is class A franked, if the dividend is a class B franked dividend the value of the imputation credit increases as a result of the disparity in the tax rates.

8.164 If, for example, the early balancing company paid a dividend of $67 that had been 100% class B franked then a franking credit of $67 would arise in the recipient company's franking account. When that dividend is effectively passed on by the recipient company to its shareholders it will have attached to it an imputation credit of $42.84 (67 x 39/61), instead of $33 (67 x 33/67).

8.165 To overcome this problem a transitional provision will ensure that:

•

where a company receives a class A franked dividend during its 1993-94 franking year, a franking credit arises in its single franking account for that year;

•

where a company receives a class B franked dividend during its 1993-94 franking year, the class B franking credit is deferred and will not arise until the beginning of the company's 1994-95 franking year; and

•

if a franking deficit arises, or is increased, as a result of the abovementioned arrangement, the deferred class B franking credits will be deemed to have arisen on the last day of the 1993-94 franking year to the extent necessary to eliminate the deficit. In such cases the amount of the class B franking credits will be reduced by 23% to reflect the fact that the origin of the dividends was a company paying tax at 33%.

8.166 Details of these provisions are set out below.

Receipt of class A franked dividend

8.167 If:

•

a company is paid a class A franked dividend between 1 January 1994 and 30 June 1994;

•

the company is in its 1993-94 franking year; and

•

a class A franking credit would have arisen to the company when the dividend was paid if the dual franking account system had been operated by that company;

then a franking credit arises on the day the dividend is paid on the assumption the class A franked dividend is a franked dividend [Paragraph 111(1)(d)] .

8.168 If the class A franked dividend was received indirectly through a trust or partnership, and a class A franking credit would have arisen in respect of the trust or partnership amount, a franking credit arises on the assumption the class A franked amount of the dividend was a franked amount of the dividend [Paragraph 111(2)(c)] .

Receipt of class B franked dividend

8.169 If:

•

a company is paid a class B franked dividend between 1 January 1994 and 30 June 1994;

•

the company is in its 1993-94 franking year; and

•

a class B franking credit would have arisen to the company when the dividend was paid if the dual franking account system had been operated by that company;

then the class B franking credit is taken to arise on the first day of the company's 1994-95 franking year instead of the day the dividend is paid [Paragraph 111(1)(e)] .

8.170 If the class B franked dividend was received indirectly through a trust or partnership, and a class B franking credit would have arisen in respect of the trust or partnership amount, the class B franking credit arises on the first day of the company's 1994-95 franking year [Paragraph 111(2)(d)] .

Restoration of class B franking credits in 1993-94 franking year

8.171 This transitional provision applies where class B franking credits are deemed to arise at the beginning of the 1994-95 franking year instead of the 1993-94 franking year and a company has a franking deficit at the end of the latter franking year.

8.172 Where these conditions are met, and subject to a limit on the amount, the deferred class B franking credits will be restored to the 1993-94 franking year by deeming them to arise on the last day of that year. The restored franking credits are to be reduced by 23% to reflect the fact that they arose from the payment of a dividend franked at 33%. When restored they become franking credits as opposed to class B franking credits to reflect the fact they are being restored to a single franking account.

8.173 The limit on the amount works like this:

•

if the relevant franking credits are less than 130% of the franking deficit, all the deferred class B franking credits will be reduced by 23% and restored to the 1993-94 franking year [Paragraph 111(3)(c)] ;

•

if the relevant franking credits are greater than 130% of the franking deficit only so much of these deferred class B franking credits as is necessary to eliminate the franking deficit will be restored [Paragraph 111(3)(d)] .

8.174 Where the franking credits do exceed 130% of the deficit the amount of restored franking credits is calculated using the formula:

Franking credit * 130% franking deficit/Total franking credits


where -

franking credit is the amount of each deferred franking credit; 130% franking deficit is the amount of the 1993-94 franking deficit; and total franking credits is the total amount of deferred franking credits.

8.175 The amount of any class B franking credits in excess of 130% of the franking deficit will be credited to the class B franking account at the beginning of the company's 1994-95 franking year [Subparagraph 111(3)(d)(ii)] .

8.176

Example

On 31 May 1994 Company X, an early balancing company, pays Company Y a $10 000 franked dividend that is fully class B franked. The 1994-95 franking year of Company Y commences on 1 July 1994. At the end of its 1993-94 franking year Company Y has a franking deficit of $6 000.

Under subclause 111(1) the $10 000 class B franking credit is normally deferred and arises on 1 July 1994 in the class B franking account of Company Y.

Because Company Y has a franking deficit for its 1993-94 franking year part of the deferred class B franking credit is deemed to be a franking credit that arises on the last day of the 1993-94 franking year. The amount is calculated as follows:

Step 1: Calculate 'proportional franking credit'.

10 000 * (130% * 6 000)/10 000 = $7 800


Step 2: Calculate franking credit.

7 800 - (23% * 7 800) = $6 006


In the 1993-94 franking account a franking credit of $6006 on 30 June 1994.

In the 1994-95 class B franking account a class B franking credit of $2200 (10000 - 7800) arises on 1 July 1994.

8.177 Section 160AR of the Principal Act ensures that, where a company receives a franked dividend indirectly through a trust or partnership, the company is not assessed on the imputation credit that has been included in the trust amount because of section 160AQT. Section 160AR will not be affected by the transitional provision. Even though the franking credit is deferred the deduction under section 160AR will be allowed when the franked dividend received indirectly through a trust or partnership is actually brought to account by the company [Subclause 111(4)] .

Reimposition of FDT

8.180 Section 160AQJ is to be amended so that FDT can be imposed in respect of either a class A or class B franking deficit. This may be seen as the creation of a new tax liability.

8.181 Consequently, the Income Tax (Franking Deficit) Act 1987 which formally imposes FDT will be amended to reimpose FDT as calculated under section 160AQJ of the Principal Act.

8.182 The amendments are contained in the Income Tax (Franking Deficit) Amendment Bill 1993 (the IT(FD)A). The provision imposing FDT is repealed and then reinserted [Clause 3 of the IT(FD)A] .

8.183 This amendment applies at the same time as the amendments to the FDT provisions of the Act [Clause 2 of the IT(FD)A] .