Explanatory Memorandum
(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)Penalties for over-franking dividends
Overview
9.1 The provision imposing penalty for deliberate overfranking of dividends, franking additional tax (FAT), will be amended to ensure its proper application in cases where franking deficit tax is able to be offset by an initial payment of company tax. Consequently, the penalty will be applied consistently in all cases where a company deliberately overfranks a dividend and this gives rise to a franking deficit in a franking account at the end of a franking year.
9.2 The amendments and this explanation take into account changes to the imputation system proposed in Taxation Laws Amendment Bill (No. 3) 1993.
Summary of the amendments
9.3 To ensure that FAT is calculated by reference to the amount of franking deficit tax (FDT) that would be payable but for allowing an offset of the initial payment of tax.
9.4 The amendments apply to FAT payable as a result of the deliberate overfranking of a dividend that is paid after 14 December 1993, the date of introduction of this Bill.
Background to the legislation
9.5 Since the introduction of the imputation system FAT has applied where a company deliberately overfranks a dividend. Dividend overfranking occurs when the franked amount of a dividend paid during the franking year exceeds the required franking amount.
9.6 FAT applies where:
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- the overfranking gives rise to a franking deficit in the relevant franking account at the end of a franking year; and
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- the deficit is more than 10% of the total franking credits arising in that account during that year.
9.7 The penalty is 30% of the FDT which is payable in respect of the relevant franking deficit. FDT is not, of itself, a penalty. It is a payment to make up the amount of company tax that has been imputed by the payment of franked dividends. There is provision for the 30% penalty to be remitted in appropriate circumstances.
9.8 When the initial payment system for the collection of company tax was introduced, the imputation system was amended to allow an initial payment of company tax based on a company's own estimate to be offset against any FDT liability. The two payments are due around the same time. The effect of the offset is that a company is liable to pay FDT only to the extent the FDT liability exceeds the initial payment. Thus, where the initial payment exceeds the FDT liability, no FDT is payable.
9.9 At the time the offset arrangement was introduced there was no change in the policy in relation to deliberate overfranking of dividends. That is, subject to the 10% threshold, in all cases where the overfranking gives rise to a franking deficit at the end of the franking year a company should be liable to a penalty.
9.10 But the penalty is calculated as a percentage of the FDT liability. Where the initial payment is offset, the amount of actual FDT payable is reduced with the consequence that the FAT payable is also reduced.
9.11 In this regard the penalty provision is deficient.
Explanation of the amendments
9.12 Section 160ARX will be amended so that FAT is calculated as an amount equal to 30% of the FDT otherwise payable but for the operation of subsection 160AQJ(2).
9.13 Subsection 160AQJ(2) is the provision that allows for the offsetting of an initial payment of tax in specified circumstances. The ability to offset an initial payment against an FDT liability will not be affected by the amendments to section 160ARX. It is only for the purposes of calculating FAT that the unreduced amount of FDT is taken into account.
9.14 There are other proposed amendments to the imputation system contained in Taxation Laws Amendment Bill (No. 3) 1993. Broadly, a company will be required to maintain two franking accounts, a class A and class B franking account, from the begining of its 1994-95 franking year. FAT will be imposed in exactly the same circumstances where a dividend has been overfranked but using either the class A or class B franking account.
9.15 The amendments proposed by this Bill need to take into account the operation of the two franking accounts.
9.16 Therefore, FAT will be calculated as 30% of any class A or class B FDT, as the case may be, otherwise payable but for the offsetting of an initial payment of tax [Subclause 50(1), amended subsection 160ARX(1) and subclause 50(2), amended subsection 160ARX(2)] .
9.17 The changes to the application of FAT may apply in respect of a company's 1993-94 franking year, prior to the two franking accounts operating. Consequently, the amendments will ensure the changes to the FAT provisions will apply to the 1993-94 franking year when a single account will operate. That is, FAT will be calculated as 30% of the FDT otherwise payable with no reference to the class A or class B FDT otherwise payable [Subclause 50(3), amended section 160ARX] .
9.18 The changes to section 160ARX will apply to a FAT calculation for the franking year during which this Bill is introduced and for all later franking years [Subclause 51(3)] .
9.19 There will be a special application provision for the franking year during which the Bill is being introduced. For all companies this is the 1993-94 franking year.
9.20 The amendments will apply to the 1993-94 franking year only if the overfranked dividend was paid after 14 December 1993, the date of introduction of this Bill [Subparagraph 51(a)(ii)] .
9.21 This will ensure that the changes to the application of FAT will not apply to the 1993-94 franking year where the overfranking occurred before the introduction of the amending legislation.
9.22 On 1 March 1994 Company X, a 30 June balancing company, pays a fully franked dividend of $610. The franking account balance at the time the dividend was paid was nil, therefore, the required franking amount for the dividend was nil.
9.23 No other entries were posted to the franking account. The franking deficit at the end of the 1993-94 franking year was $610 with a consequent FDT liability of $390 (subsection 160AQJ(1)). However, on 28 July 1994 the company made an initial company tax payment of $500 based on its own estimate of tax. Under subsection 160AQJ(2) the amount of FDT payable by the company was therefore reduced to nil.
9.24 Under the proposed amendments, section 160ARX will operate so that the company will be liable to pay FAT of $117 (30% of $390) in respect of the 1993-94 franking year.
9.25 If the company had paid the same dividend on, say, 1 October 1993, before the introduction of the amendments, FAT could not be imposed.