Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 5 Franking rebate on indirect distributions to exempt institutions

Outline of chapter

5.1 Schedule 5 to this bill makes technical corrections to the franking rebate provisions in the ITAA 1936 to clarify that registered charities and gift-deductible organisations which are trusts are eligible for refunds of excess imputation credits in respect of distributions attributable to franked dividends received indirectly through another trust.

Context of amendments

5.2 Certain registered charities and gift-deductible organisations are entitled to a refund of imputation credits in respect of franked dividends paid on or after 1 July 2000. Entities which are eligible for the refund are described in section 160ARDAB.

5.3 The entitlement to refunds is intended to arise in relation to franked dividends received by relevant entities, whether the dividends are received directly as a shareholder or indirectly as a beneficiary of a trust. However, there is some uncertainty regarding the eligibility of charitable trusts to refunds of imputation credits in respect of distributions received indirectly through another trust because of a technical issue relating to the franking rebate provisions.

Summary of new law

5.4 The amendment will remove any uncertainty about the entitlement of registered charities and gift-deductible organisations which are trusts to refunds of excess imputation credits in respect of distributions attributable to franked dividends received indirectly through another trust.

Detailed explanation of new law

5.5 As part of the legislative mechanism for making registered charities and gift-deductible organisations eligible for refunds of imputation credits, these tax exempt entities are given an entitlement to franking rebates under section 160AQU in respect of dividends and under section 160AQX in respect of indirect distributions received through another trust.

5.6 Registered charities and gift-deductible organisations are currently eligible for a franking rebate under subparagraph 160AQX(1)(b)(iii), provided that they are not trustees. This exclusion is consistent with the exclusion of trustees from each category of taxpayer entitled to a rebate under section 160AQX, because the rebate is intended to be available once only to the final beneficiary. It has been argued that charitable trusts may not be entitled to a franking rebate. The exclusion of trustees under subparagraph 160AQX(1)(b)(iii) is not intended to deny the franking rebate to a charitable trust.

5.7 Subparagraph 160AQX(1)(b)(iii) will be amended to remove the express exclusion of trustees from eligibility for the rebate to clarify that a charitable trust is entitled to a franking rebate, and therefore to a refund of imputation credits, in respect of an indirect distribution attributable to a franked dividend. [Schedule 5, item 1, subparagraph 160AQX(1)(b)(iii)]

5.8 The treatment under section 160AQX of an indirect distribution to a charitable trust will therefore be the same as that of a direct dividend paid to the same entity under section 160AQU.

5.9 Where there is a chain of charitable trusts, existing subsection 160ARDAB(8) would operate in circumstances of both direct and indirect distributions to ensure that only the first charitable trust to receive the dividend or distribution would be entitled to the rebate.

Application and transitional provisions

5.10 The franking rebate amendments are to apply to trust amounts that are attributable to dividends paid on or after 1 July 2000, that is, from the commencement of the imputation credit refunds measure. [Schedule 5, item 2]