Edited version of your written advice

Authorisation Number: 1051451781180

Date of advice: 8 November 2018

Ruling

Subject: Refund of franking credits tax offset

Question

Is the Entity entitled to a refund of the franking credits attached to franked distributions received during the relevant period on the basis that the requirements in section 207-115(2) of the Income Tax Assessment Act 1997 (ITAA 1997) are satisfied for the purposes of section 67-25(1C)(a) of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

1. The Entity is an Australian resident for income tax purposes and is not a resident of any other jurisdiction.

2. The entity has a 30 June tax year end.

3. The Entity was previously registered with the Australian Charities and Not-for-profit Commission (ACNC) as an entity with ‘purposes to the general public and analogous to the other charitable purposes’.

4. The Entity was endorsed by the ATO to for the following tax concessions:

a. Income tax exemption,

b. GST concession, and

c. FBT rebate.

5. The ACNC revoked the ACNC registration of the Entity.

6. The Entity received an ATO Tax Concession Charity endorsement revocation notification referring to the ACNC’s revocation notice.

7. During the 2018 financial year the Entity received franked distributions prior to revocation.

8. The Entity considers itself to be a ‘State or Territory Body’ (‘STB’) as defined by section 24AQ of the ITAA 1936. The Entity considers as an STB (and not an excluded STB) it is eligible to self-assess as exempt from income tax under Division 1AB of ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936, Schedule 2D

Income Tax Assessment Act 1997, Section 50-5

Income Tax Assessment Act 1997 Section 4-10

Income Tax Assessment Act 1997 Subdivision 50-B

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 63-10

Income Tax Assessment Act 1997 Division 67

Income Tax Assessment Act 1997 Section 67-25

Income Tax Assessment Act 1997 Section 207-90

Income Tax Assessment Act 1997 Section 207-95

Income Tax Assessment Act 1997 Section 207-115

Income Tax Assessment Act 1997 Subsection 207-115(2)

Income Tax Assessment Act 1997 Subdivision 207-F

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary

The Entity is not entitled to a refund of franking credits.

Detailed reasoning

The general rule in relation to the receipt of franked dividends, as set out in section 207-20 of the Income Tax Assessment Act 1997 (ITAA 1997), is that for the income year in which the distribution is made, an entity that receives a franked distribution includes the amount of the franking credit as assessable income (in addition to the amount of the dividend itself under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)). Section 207-20 also provides that the entity is entitled to a tax offset equal to the franking credit.

However, there are exceptions to the above general rule. In particular an exception is created where the relevant entity would not have paid tax on the distribution or share of the distribution. Sections 207-90 and 207-95 of the ITAA 1997 specify that an entity that receives exempt income is not entitled to a franking credit or the tax offset.

Subdivision 207-E of the ITAA 1997 contains special rules for dividends received by certain exempt entities that are eligible for a refund so that those specific exempt entities may be entitled to a tax offset. In particular, subsection 207-110(1) states that section 207-110 will apply to ‘an entity to whom a franked distribution is made’ if the entity is an ‘exempt institution eligible for a refund’. The use of the words ‘an entity to whom a franked distribution is made’ infers that the relevant time to determine if the entity is an ‘exempt institution eligible for a refund’ is when the dividend is made. Subsection 207-110(2) states that if the entity is an ‘exempt institution eligible for a refund’, sections 207-90 and 207-95 do not apply and therefore the entity is entitled to the franking credit and tax offset.

Section 207-115 of the ITAA 1997 sets out the circumstances in which an entity is an 'exempt institution that is eligible for a refund.' Subsection 207-115(2) of the ITAA 1997 provides that an entity is an ‘exempt institution that is eligible for a refund’ where it:

(a) is covered by item 1.1 of the table in section 50-5; and

(b) is endorsed as exempt from income tax under Subdivision 50-B; and

(c) satisfies the residency requirements.

Item 1.1 of the table in section 50-5 of the ITAA 1997 specifies ‘registered charity’ as a type of exempt entity.

The residency requirements are provided in section 207-117 of the ITAA 1997, which states:

An entity satisfies the residency requirement for the purposes of determining whether, at the time a franked distribution is made, the entity is an exempt institution that is eligible for a refund if:

(a) the entity has a physical presence in Australia; and

(b) to that extent, incurs its expenditure and pursues its objectives principally in Australia;

at all times during the income year in which the distribution is made.

The Entity incurs its expenditure and pursues its objectives principally in Australia.

The Entity was a registered charity and was endorsed as exempt from income tax under subdivision 50-B of the ITAA 1997. The Entity satisfied the requirements in subsection 207-115(2) of the ITAA 1997 for part of the 2018 income year as it was an exempt institution for a certain period.

Therefore, the Entity was an exempt institution that is eligible for a refund for part of the financial year. However, once the Entity ceased to be a registered charity it was not an exempt institution eligible for a refund.

Refundable tax offset rules

Section 67-10 of the ITAA 1997 provides that the tax offsets available under Division 207 are subject to the refundable tax offset rules, unless the operation of the rules is excluded by section 67-25 of the ITAA 1997.

The refundable tax offset rules are contained in section 63-10 of the ITAA 1997. It is these rules that ultimately determine whether an entity is entitled to a refund of franking credits. If an entity is not subject to the rules, they are not eligible for a refund. The rules contained in section 63-10 of the ITAA 1997 and the wording of section 67-10 of the ITAA 1997 implies that you determine whether you get a refund based upon an assessment of your whole year’s income. That is, you determine your entitlement at the end of the financial year.

Section 63-10 of the ITAA 1997 states:

If you have one or more tax offsets for an income year, apply them against your basic income tax liability in the order shown in the table. To the extent that an amount of tax offset remains, this table tells you what happens to it. (Emphasis added)

Section 67-10 of the ITAA 1997 states that you are entitled to a refund:

If your total tax offsets exceed your basic income tax liability, and some of those offsets are subject to the refundable tax offset rules, you may get a refund instead of paying income tax. This Division tells you which tax offsets are subject to the refundable tax offset rules. (Emphasis added)

Section 4-10 of the ITAA 1997 confirms that your income tax is worked out by reference to your taxable income for a financial year.

Section 67-25(1C)(a) of the ITAA 1997 provides that a where a corporate tax entity is entitled to a tax offset under Division 207 because a franked distribution is made to the entity, the tax offset is not subject to the refundable tax offset rules unless the entity is an exempt institution that is eligible for a refund.

Conclusion

In the Entity’s case, the tax offsets that are prima facie available under Division 207 for the period which the Entity was an exempt institution eligible for a refund are not subject to the operation of the refundable tax offset rules. Although the Entity was an exempt institution eligible for a refund for part of the financial year when certain franking credits were derived, the Entity was not an exempt institution eligible for a refund at the critical time - the time their basic income tax liability is calculated. The Entity is not entitled to a refund of franking credits.

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