New Business Tax System (Consolidation and Other Measures) Act 2003 (16 of 2003)

Schedule 27   Venture capital franking

Income Tax Assessment Act 1997

3   After Division 208

Insert:

Division 211 - Venture capital franking

Table of Subdivisions

Guide to Division 210

210-A Franking a distribution with a venture capital credit

210-B Participating PDFs

210-C Distributions that are frankable with a venture capital credit

210-D Amount of the venture capital credit on a distribution

210-E Distribution statements

210-F Rules affecting the allocation of venture capital credits

210-G Venture capital sub-account

210-H Effect of receiving a distribution franked with a venture capital credit

Guide to Division 210

Table of sections

210-1 Purpose of venture capital franking

210-5 How is this achieved?

210-10 What is a venture capital credit?

210-15 What does the PDF have to do to distribute the credits?

210-20 Limits on venture capital franking

210-1 Purpose of venture capital franking

The purpose of these rules is to encourage venture capital investment by superannuation funds and other entities that deal with superannuation.

210-5 How is this achieved?

This is done by giving tax benefits to those entities when they invest in PDFs, which are the vehicles for venture capital investment. If the PDF makes a distribution franked with a venture capital credit, the relevant venture capital investor receives a certain part of a distribution from the PDF as exempt income and, in addition, is entitled to a tax offset equal to the venture capital credit.

210-10 What is a venture capital credit?

(1) There is a venture capital franking sub-account in the franking account of each PDF.

(2) Venture capital credits arise in the sub-account if the PDF pays income tax that is reasonably attributable to capital gains from venture capital investments.

210-15 What does the PDF have to do to distribute the credits?

Only a participating PDF can distribute venture capital credits. A PDF elects to participate by keeping a record of its venture capital sub-account.

210-20 Limits on venture capital franking

(1) The venture capital credit on a distribution cannot exceed the franking credit on the distribution. It is, in this sense, a species of franking credit.

(2) A PDF can only distribute venture capital credits if it does it so that all members of the PDF receive venture capital credits in proportion to their holdings.

(3) If a PDF has a venture capital surplus when it makes a distribution, it must frank the distribution with venture capital credits.

(4) There are measures to ensure that a PDF does not maintain a venture capital deficit over a prolonged period.

Subdivision 210-A - Franking a distribution with a venture capital credit

Guide to Subdivision 210-A

210-25 What this Subdivision is about

A PDF can only frank a distribution with a venture capital credit if certain conditions are met. These conditions are set out in this Subdivision.

Table of sections

Operative provisions

210-30 Franking a distribution with a venture capital credit

[This is the end of the Guide.]

Operative provisions

210-30 Franking a distribution with a venture capital credit

An entity franks a *distribution with a venture capital credit if:

(a) the entity is a *participating PDF at the time the distribution is made; and

(b) the distribution is *frankable with a venture capital credit; and

(c) the entity allocates a *venture capital credit to the distribution.

Subdivision 210-B - Participating PDFs

Guide to Subdivision 210-B

210-35 What this Subdivision is about

A PDF may participate if it elects to keep a record of its venture capital sub-account.

Table of sections

Operative provisions

210-40 What is a participating PDF

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Operative provisions

210-40 What is a participating PDF

A *PDF is a participating PDF at a particular time if it keeps a record of its *venture capital sub-account at that time.

Subdivision 210-C - Distributions that are frankable with a venture capital credit

Guide to Subdivision 210-C

210-45 What this Subdivision is about

A distribution can only be franked with a venture capital credit if all members of the PDF receive distributions in proportion to their holdings.

Table of sections

Operative provisions

210-50 Which distributions can be franked with a venture capital credit?

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Operative provisions

210-50 Which distributions can be franked with a venture capital credit?

A *distribution by a *participating PDF is frankable with a venture capital credit if:

(a) the distribution is a *franked distribution; and

(b) the distribution is made under a resolution under which:

(i) distributions are made to all members of the PDF; and

(ii) the amount of the distribution per *membership interest is the same for each of those distributions.

Subdivision 210-D - Amount of the venture capital credit on a distribution

Guide to Subdivision 210-D

210-55 What this Subdivision is about

The amount of the venture capital credit on a distribution is that stated in the distribution statement, unless the amount exceeds the franking credit on the distribution.

In that case, the amount of the venture capital credit on the distribution is taken to be the same as the franking credit.

Table of sections

Operative provisions

210-60 Amount of the venture capital credit on a distribution

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Operative provisions

210-60 Amount of the venture capital credit on a distribution

(1) The amount of the *venture capital credit on a *distribution is that stated in the *distribution statement for the distribution, unless that amount exceeds the *franking credit on the distribution.

(2) If the amount of the *venture capital credit stated in the *distribution statement for a *distribution exceeds the *franking credit on the distribution, the amount of the venture capital credit is taken to be the same as the amount of the franking credit, and not the amount stated in the distribution statement.

Subdivision 210-E - Distribution statements

Guide to Subdivision 210-E

210-65 What this Subdivision is about

A participating PDF that makes a distribution franked with a venture capital credit must provide additional information in the distribution statement given to the recipient.

Table of sections

Operative provisions

210-70 Additional information to be included when a distribution is franked with a venture capital credit

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Operative provisions

210-70 Additional information to be included when a distribution is franked with a venture capital credit

(1) A *participating PDF that makes a *distribution *franked with a venture capital credit must include in the *distribution statement given to the recipient:

(a) a statement that there is a *venture capital credit of a specified amount on the distribution; and

(b) a statement to the effect that the venture capital credit is only relevant for a taxpayer who is:

(i) the trustee of a fund that is a *complying superannuation fund in relation to the income year in which the distribution is made and is not a self managed superannuation fund (within the meaning of the Superannuation Industry Supervision Act 1993); or

(ii) the trustee of a fund that is a *complying approved deposit fund in relation to the income year in which the distribution is made and is not a self managed superannuation fund (within the meaning of the Superannuation Industry Supervision Act 1993); or

(iii) the trustee of a unit trust that is a *pooled superannuation trust in relation to the income year in which the distribution is made; or

(iv) a *life insurance company.

(2) If, under subsection (1), a statement must be included in a *distribution statement, the distribution statement is taken not to have been given unless the statement is included.

Subdivision 210-F - Rules affecting the allocation of venture capital credits

Guide to Subdivision 210-F

210-75 What this Subdivision is about

If a PDF has a venture capital surplus when it makes a distribution frankable with venture capital credits, it must frank the distribution with venture capital credits.

Table of sections

Operative provisions

210-80 Draining the venture capital surplus when a distribution frankable with venture capital credits is made

210-81 Distributions to be franked with venture capital credits to the same extent

210-82 Consequences of breaching the rule in section 210-81

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Operative provisions

210-80 Draining the venture capital surplus when a distribution frankable with venture capital credits is made

(1) If a *participating PDF would otherwise have a *venture capital surplus at the time a *distribution that is *frankable with a venture capital credit is made, the PDF must either:

(a) allocate a *venture capital credit to the distribution that is equal to the *franking credit on the distribution; or

(b) allocate a venture capital credit to the distribution that either alone or when added to venture capital credits allocated to other distributions made under the resolution of the PDF under which the distribution in question is made, reduces the surplus to nil, or creates a *venture capital deficit.

(2) A *venture capital debit arises for a *participating PDF when a *distribution is made if the PDF does not allocate a *venture capital credit in accordance with subsection (1). The amount of the debit is:

where:

actual franked amount is the amount of the *venture capital credit that is allocated to the *distribution by the PDF (this may be nil).

subsection (1) franked amount is the amount of the *venture capital credit that would have been allocated to the *distribution if the PDF had made the smallest allocation needed to satisfy subsection (1).

210-81 Distributions to be franked with venture capital credits to the same extent

(1) If a *PDF *franks a *distribution with a venture capital credit, it must frank each other distribution made under the same resolution with a venture capital credit worked out using the same venture capital percentage.

(2) The venture capital percentage for a *distribution is worked out using the formula:

210-82 Consequences of breaching the rule in section 210-81

If a *PDF *franks a *distribution with a venture capital credit in breach of section 210-81:

(a) the distribution is taken not to have been franked with a venture capital credit; and

(b) each other distribution made under the same resolution is taken not to have been franked with a venture capital credit.

Subdivision 210-G - Venture capital sub-account

Guide to Subdivision 210-G

210-85 What this Subdivision is about

This Subdivision:

• creates a venture capital sub-account for each PDF; and

• identifies when venture capital credits and debits arise in the sub-account and the amount of those credits and debits; and

• identifies when there is a venture capital surplus or deficit in the sub-account; and

• creates a liability to pay venture capital deficit tax if the account is in deficit at certain times.

Table of sections

210-90 The venture capital sub-account

210-95 Venture capital deficit tax

Operative provisions

210-100 Venture capital sub-account

210-105 Venture capital credits

210-110 Determining the extent to which a franking credit is reasonably attributable to a particular payment of tax

210-115 Participating PDF may elect to have venture capital credits arise on its assessment day

210-120 Venture capital debits

210-125 Venture capital debit where CGT limit is exceeded

210-130 Venture capital surplus and deficit

210-135 Venture capital deficit tax

210-140 Effect of a liability to pay venture capital deficit tax on franking deficit tax

210-145 Effect of a liability to pay venture capital deficit tax on the franking account

210-150 Deferring venture capital deficit

210-90 The venture capital sub-account

(1) Each PDF has a venture capital sub-account in its franking account. The sub-account exists even if the PDF does not elect to become a participating PDF by keeping a record of it.

(2) To the extent that income tax is reasonably attributable to capital gains from venture capital investments, it generates a venture capital credit in the sub-account. There are other circumstances in which a venture capital credit arises.

(3) If a PDF receives a refund of that tax, a venture capital debit will arise for the PDF. There are other circumstances in which a venture capital debit will arise, such as on the payment of a distribution franked with a venture capital credit.

210-95 Venture capital deficit tax

(1) Venture capital deficit tax is payable if a PDF's venture capital sub-account is in deficit at the end of the PDF's income year, or immediately before it ceases to be a PDF.

(2) A PDF's venture capital sub-account may be in deficit, even if its franking account is not. This can happen because only income tax on income of a particular kind (capital gains on venture capital investments) gives rise to venture capital credits. This means that when a PDF anticipates a venture capital credit, it is not only anticipating that income tax will be paid, but that income tax on income of that kind will be paid. Although income tax may, in fact, later be paid, it will not necessarily be income of the kind that would give rise to a venture capital credit. This results in franking credits arising even while the venture capital sub-account remains in deficit.

(3) The discrepancy between the franking account balance and the venture capital sub-account balance can also arise because venture capital credits do not necessarily arise at the same time as the relevant franking credits and debits (see item 1 of the table in section 210-105 and item 2 of the table in section 210-120).

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Operative provisions

210-100 Venture capital sub-account

Each *PDF has a venture capital sub-account within its *franking account.

Note: The balance in the venture capital sub-account on 1 July 2002 will be either nil or, if the entity has a venture capital 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.

210-105 Venture capital credits

The table sets out when a credit arises in the *venture capital sub-account of a *PDF. A credit in a PDF's venture capital sub-account is called a venture capital credit .

210-110 Determining the extent to which a franking credit is reasonably attributable to a particular payment of tax

In determining the extent to which a *franking credit is reasonably attributable to a *CGT event in relation to a *qualifying SME investment of the *PDF, have regard to:

(a) the extent to which the credit can reasonably be attributed to the *payment of a PAYG instalment or the payment of income tax by the PDF in relation to its *section 124ZZB SME assessable income for an income year; and

(b) the extent to which the section 124ZZB SME assessable income can reasonably be attributed to the CGT event.

210-115 Participating PDF may elect to have venture capital credits arise on its assessment day

(1) Before a *PDF's assessment day for an income year, the PDF may elect to have the *venture capital credits that arise because of the *payment of PAYG instalments and income tax during that income year arise on the assessment day.

(2) The *PDF's assessment day for an income year is the earlier of:

(a) the day on which the PDF furnishes its return of income for the income year; or

(b) the day on which the Commissioner makes an assessment of the amount of the PDF's taxable income for that year under section 166 of the Income Tax Assessment Act 1936.

210-120 Venture capital debits

The table sets out when a debit arises in the *venture capital sub-account of a *PDF. A debit in a PDF's venture capital sub-account is called a venture capital debit .

210-125 Venture capital debit where CGT limit is exceeded

(1) A *venture capital debit arises for a *PDF where the PDF's net venture capital credits for the income year exceed whichever is the lesser of:

(a) the PDF's CGT limit for that income year; and

(b) the tax paid by the PDF on its *SME income component for that income year.

Net venture capital credits

(2) The *PDF's net venture capital credits for the income year is:

where:

venture capital credits is the total *venture capital credits of the *PDF that relate to tax in relation to taxable income of that income year.

venture capital debits is the total *venture capital debits of the *PDF that relate to tax in relation to taxable income of that income year.

CGT limit

(3) The *PDF's CGT limit for the income year is worked out using the formula:

where:

ordinary capital gains from all SME CGT events means the total of the *ordinary capital gains for the income year for *CGT events in relation to *SME investments of the *PDF.

ordinary capital gains from venture capital CGT events means the total of *ordinary capital gains for the income year for *CGT events in relation to shares in companies that are *qualifying SME investments.

SME tax rate is the tax rate applicable to the *SME income component of the *PDF for the income year.

Tax paid by the PDF on its SME income component

(4) The tax paid by the PDF on its SME income component for the income year is the tax paid by the *PDF on its *SME income component after allowing *tax offsets referred to in section 4-10.

210-130 Venture capital surplus and deficit

(1) A *PDF's *venture capital sub-account is in surplus at a particular time if, at that time, the sum of the *venture capital credits in the account exceeds the sum of the *venture capital debits in the account. The amount of the venture capital surplus is the amount of the excess.

(2) A *PDF's *venture capital sub-account is in deficit at a particular time if, at that time, the sum of the *venture capital debits in the account exceeds the sum of the *venture capital credits in the account. The amount of the venture capital deficit is the amount of the excess.

(3) A *PDF's *venture capital sub-account may be in *deficit even though its *franking account as a whole is in *surplus. Similarly, a PDF's venture capital sub-account may be in surplus even though its franking account as a whole is in deficit.

210-135 Venture capital deficit tax

(1) While recognising that an entity may anticipate *venture capital credits when *franking *distributions, the object of this section is to prevent those credits from being anticipated indefinitely by requiring the entity to reconcile its *venture capital sub-account at certain times and levying tax if the account is in *deficit.

(2) An entity is liable to pay *venture capital deficit tax imposed by the New Business Tax System (Venture Capital Deficit Tax) Act 2003 if its *venture capital sub-account is in *deficit at the end of an income year.

(3) An entity is liable to pay *venture capital deficit tax imposed by the New Business Tax System (Venture Capital Deficit Tax) Act 2003 if:

(a) it ceases to be a *PDF; and

(b) immediately before it ceases to be a PDF, its *venture capital sub-account is in *deficit.

210-140 Effect of a liability to pay venture capital deficit tax on franking deficit tax

(1) If an entity is liable to pay *venture capital deficit tax under subsection 210-135(2) because its *venture capital sub-account is in *deficit at the end of an income year, the amount (if any) of *franking deficit tax that the entity would otherwise be liable to pay under subsection 205-45(2) because its *franking account is in *deficit at that time is reduced by the amount of the liability for venture capital deficit tax.

(2) If an entity is liable to pay *venture capital deficit tax under subsection 210-135(3) because it ceases to be a *PDF during an income year, the amount (if any) of *franking deficit tax that the entity would otherwise be liable to pay under subsection 205-45(3) because it ceases to be a *franking entity at that time is reduced by the amount of the liability for *venture capital deficit tax.

210-145 Effect of a liability to pay venture capital deficit tax on the franking account

(1) If an entity incurs a liability to pay *venture capital deficit tax, a *franking credit arises for the entity immediately after the liability arises (the relevant day ).

(2) The amount of the *franking credit is equal to:

(a) if no liability to pay *franking deficit tax arises on the relevant day - the amount of the *venture capital deficit tax; or

(b) if a liability to pay franking deficit tax also arises on the relevant day - the amount of the venture capital deficit tax reduced by the amount of the franking deficit tax.

210-150 Deferring venture capital deficit

(1) The object of this section is to ensure that an entity does not avoid *venture capital deficit tax by deferring the time at which a *venture capital debit occurs.

(2) A *refund of income tax for an income year is taken to have been paid to an entity immediately before the end of that year for the purposes of subsection 210-135(2), if:

(a) the refund is paid within 3 months after the end of that year; and

(b) the entity's *venture capital sub-account would have been in *deficit, or in deficit to a greater extent, at the end of the previous income year if the refund had been received in the previous income year.

(3) If an entity ceases to be a *PDF during an income year, a *refund of income tax is taken to have been paid to it immediately before it ceased to be a PDF, for the purposes of subsection 210-135(3), if:

(a) the refund is attributable to a period in the year during which the entity was a PDF; and

(b) the refund is paid within 3 months after the entity ceases to be a PDF; and

(c) the *venture capital sub-account of the entity would have been in *deficit, or in deficit to a greater extent, immediately before it ceased to be a PDF if the refund had been received before it ceased to be a PDF.

Subdivision 210-H - Effect of receiving a distribution franked with a venture capital credit

Guide to Subdivision 210-H

210-155 What this Subdivision is about

A superannuation fund or other entity that deals with superannuation that receives a distribution franked with a venture capital credit is entitled to a tax offset equal to the credit.

Table of sections

210-160 The significance of a venture capital credit

210-165 Recipients for whom the venture capital credit is not significant

Operative provisions

210-170 Tax offset for certain recipients of distributions franked with venture capital credits

210-175 Amount of the tax offset

210-180 Application of Division 207 where the recipient is entitled to a tax offset under section 210-170

210-160 The significance of a venture capital credit

(1) The venture capital credit on a distribution is only significant in the hands of a relevant venture capital investor (basically a superannuation fund or other entity that deals with superannuation).

(2) That investor receives a tax offset. In most cases, this will be equal to the venture capital credit.

(3) Under section 124ZM of the Income Tax Assessment Act 1936, that part of the distribution that is franked with a venture capital credit is also treated as exempt income in the hands of the entity.

210-165 Recipients for whom the venture capital credit is not significant

(1) For other entities, the fact that all or part of the franking credit on a distribution is also a venture capital credit can be ignored.

(2) The franking credit will either generate a gross-up of the entity's assessable income and a corresponding tax offset under Division 207 or, if the right to make an election under section 124ZM of the Income Tax Assessment 1936 is exercised, the franked part of the distribution will be treated as exempt income.

(3) The unfranked part of the distribution is treated as exempt income under section 124ZM of the Income Tax Assessment Act 1936.

[This is the end of the Guide.]

Operative provisions

210-170 Tax offset for certain recipients of distributions franked with venture capital credits

(1) The recipient of a *distribution *franked with a venture capital credit is entitled to a *tax offset for the income year in which the distribution is made if:

(a) the recipient is a relevant venture capital investor; and

(b) the recipient is not:

(i) a *partnership; or

(ii) a trustee (other than the trustee of an eligible entity within the meaning of Part IX of the Income Tax Assessment Act 1936); and

(c) the recipient satisfies the *residency requirement for an entity receiving a distribution; and

(d) the distribution is not *exempt income of the recipient (ignoring section 124ZM of the Income Tax Assessment Act 1936); and

(e) the recipient is not a qualified person in relation to the distribution for the purposes of Division 1A of Part IIIAA of the Income Tax Assessment Act 1936; and

(f) the distribution is not part of a *dividend stripping operation; and

(g) the Commissioner has not made a determination under paragraph 204-30(3)(c) that no *imputation benefit is to arise for the receiving entity in respect of the distribution; and

(h) the Commissioner has not made a determination under paragraph 177EA(5)(b) that no imputation benefit is to arise in respect of the distribution to the recipient.

Relevant venture capital investors

(2) The following entities are relevant venture capital investors :

(a) the trustee of a fund that is a *complying superannuation fund in relation to the income year in which the *distribution is made and is not a self managed superannuation fund (within the meaning of the Superannuation Industry Supervision Act 1993);

(b) the trustee of a fund that is a *complying approved deposit fund in relation to the income year in which the distribution is made and is not a self managed superannuation fund (within the meaning of the Superannuation Industry Supervision Act 1993);

(c) the trustee of a unit trust that is a *pooled superannuation trust in relation to the income year in which the distribution is made;

(d) a *life insurance company.

210-175 Amount of the tax offset

Where the recipient is not a life insurance company

(1) If the entity receiving the *distribution is not a *life insurance company, the *tax offset is equal to the *venture capital credit on the distribution.

Where the recipient is a life insurance company

(2) If the entity receiving the *distribution is a *life insurance company, the *tax offset is worked out using the formula:

where:

complying superannuation class of taxable income means the *complying superannuation class of taxable income of the company for the income year in which the *distribution is made.

tax offset to which the entity would otherwise be entitled is the *tax offset that the company would be entitled to under subsection (1) if the entity were not a life insurance company.

total income is the company's assessable income for the income year.

210-180 Application of Division 207 where the recipient is entitled to a tax offset under section 210-170

If the recipient of a *distribution *franked with a venture capital credit is entitled to a *tax offset under section 210-170, Division 207 does not apply to that *part of the distribution that is venture capital franked.