Taxation Laws Amendment Act (No. 8) 2003 (107 of 2003)
Schedule 7 Tax offset arising from franking deficit tax liability
Part 1 Amendment of the Income Tax Assessment Act 1997
8 At the end of Division 219
Add:
219-70 Tax offset under section 205-70
(1) In applying section 205-70 to a *life insurance company, that section has effect as if:
(a) the reference in paragraph 205-70(1)(c) to the amount that would have been an entity's income tax liability for a previous income year were a reference to the part of such an amount in respect of the company that is attributable to its shareholders; and
(b) the reference in subsection 205-70(3) to the amount that would have been an entity's income tax liability for the relevant year were a reference to the part of such an amount in respect of the company that is attributable to its shareholders.
(2) In working out the part of an amount that is attributable to the company's shareholders for the purposes of this section, regard is to be had to the accounting records of the company.
Example: The following apply to a life insurance company that satisfies the residency requirement for an income year:
· the company has a tax offset of $60,000 under section 205-70 (the franking deficit offset ) for that year;
· the company's income tax liability for that year would be $100,000 if the franking deficit offset were disregarded;
· 20% of the $100,000 is attributable to the company's shareholders (the shareholders' part ).
As a result of applying $20,000 of the franking deficit offset to reduce the shareholders' part to nil, the company's income tax liability becomes $80,000. The remaining $40,000 of the offset will be included in a franking deficit tax offset for the next income year for which the company satisfies the residency requirement.
219-75 Working out franking credits and franking debits where a tax offset under section 205-70 is applied
Revised shareholders' ratio - modification of section 219-50
(1) Subsection (2) applies to a *life insurance company if a *tax offset under section 205-70 is applied to work out the company's income tax liability for an income year.
Note: This means subsection (2) applies if the tax offset is applied to reduce the part of the amount mentioned in paragraph 219-70(1)(b) in relation to the income year.
(2) For the purposes of working out the amount of a *franking credit or *franking debit for the company in relation to the income year (other than a franking credit covered by item 1 of the table in section 219-15), section 219-50 has effect as if:
(a) steps 1 and 2 of the method statement in section 219-50 were omitted; and
(b) the reference in step 3 of that method statement to the *shareholders' ratio were a reference to the revised shareholders' ratio worked out as follows:
Method statement
Step 1. Work out the remainder (if any) of the part of the amount mentioned in paragraph 219-70(1)(b) after the *tax offset is applied to reduce that part.
Note: The part mentioned in paragraph 219-70(1)(b) is the part of an amount of the company's income tax liability for the income year that is attributable to its shareholders.
Step 2. Divide the step 1 result by the company's total income tax liability for the income year (after applying the *tax offset).
The result (which can be nil) is the company's revised shareholders' ratio for the income year.
Example: For the 2002-2003 income year X Co (which is a life insurance company) has a tax offset of $68,000 under section 205-70. Its income tax liability for that year would have been $400,000 on the assessment day (1 February 2004) if the tax offset were disregarded. Of that liability, $80,000 is attributable to the shareholders. The step 1 result is therefore $12,000 ($80,000 minus $68,000).
X Co's income tax liability after applying the tax offset is $332,000 ($400,000 minus $68,000). The revised shareholders' ratio is therefore 3/83 ($12,000 divided by $332,000).
For that income year, the company paid $249,000 of PAYG instalments before the assessment day and $83,000 of income tax one month after that day.
On the assessment day, a franking credit of $9,000 arises under item 2 of the table in section 219-15 ($249,000 multiplied by 3/83). On the day the additional amount of tax is paid, another franking credit of $3,000 arises under item 4 of that table ($83,000 multiplied by 3/83).
Adjustment resulting from amended assessment - modification of section 219-55
(3) Subsection (4) applies to a *life insurance company if:
(a) the assessment of the company's income tax liability for an income year (the previous assessment ) is amended; and
(b) at least one of the following applies:
(i) a *tax offset under section 205-70 is applied in making that amended assessment;
(ii) a tax offset under section 205-70 was applied in making the previous assessment.
(4) Section 219-55 has effect in relation to the company as if:
(a) if subparagraph (3)(b)(i) of this section applies - a reference in that section to the new ratio were a reference to the revised shareholders' ratio that is based on the amended assessment; and
(b) if subparagraph (3)(b)(ii) of this section applies - the reference in paragraph (1)(b) of that section to the *shareholders' ratio used previously were a reference to the revised shareholders' ratio that is based on the previous assessment.
Example: Continuing the example in subsection (2), the assessment of X Co for the 2002-2003 income year is amended on 31 March 2004. Under the amended assessment, X Co's income tax liability would be $300,000 if the tax offset were disregarded.
Of that liability, $60,000 is attributable to the shareholders. That amount is reduced by the tax offset of $68,000 to nil.
X Co's liability to pay income tax is therefore reduced to $240,000 ($300,000 minus $60,000) and it will receive a refund of $92,000 ($332,000 minus $240,000). As the revised shareholders' ratio has become nil, no franking debit arises from the refund.
The franking credits that previously arose from the payments of PAYG instalments and income tax would not have arisen if the new revised shareholders' ratio had been used. Section 219-55 (as applied by subsection (4) of this section) therefore operates to create an adjustment to cancel those franking credits. The adjustment is a franking debit of $12,000 that arises on the day of the amendment of the assessment.