House of Representatives

Explanatory Memorandum

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

Chapter 9 - Section 46FA - deductions for dividends on-paid to non-resident owner

Outline of chapter

9.1 Schedule 9 to this bill will amend Part III of the ITAA 1936 to ensure that the section 46FA deduction, which allows certain resident companies a deduction for on-payments of certain unfranked or partly franked non-portfolio dividends to their wholly-owned foreign parents, continues to be available to taxpayers.

9.2 This deduction was inadvertently made inoperative with the removal of the inter-corporate dividend rebate paid within wholly-owned companies applying generally after 30 June 2003.

Context of amendments

9.3 The income tax law was amended, with effect from 1 July 2000, to generally deny the inter-corporate dividend rebate under sections 46 and 46A of the ITAA 1936 on unfranked dividends received by all resident companies, except for dividends paid within a wholly-owned group.

9.4 However, it was recognised that the removal of the rebate may adversely affect non-residents investing indirectly in Australia through a resident subsidiary. As a result, the income tax law was amended by introducing a special deduction in section 46FA which allows certain resident companies, subject to certain conditions, a deduction for payments of unfranked or partly franked non-portfolio dividends on-paid to a wholly-owned foreign parent.

9.5 One of the conditions for the deduction is that the resident company would be entitled to the rebate under section 46 in respect of the unfranked amount of the dividend but for the rebate being denied.

9.6 However, this deduction was inadvertently made inoperative because as part of the introduction of the consolidation regime, the inter-corporate dividend rebate under sections 46 and 46A for unfranked dividends paid within company groups has been removed. As a result, the above condition that the resident company would otherwise be entitled to the rebate can no longer be satisfied.

9.7 The rebate has been removed for the unfranked part of a dividend paid after 30 June 2003, subject to the transitional rule in section 46AC.

Summary of new law

9.8 The new law will ensure that the deduction under section 46FA continues to be available to taxpayers.

Detailed explanation of new law

9.9 Subsections 46F(1), 46FA(11) and 46FB(6) have been amended to ensure the definition of group company continues to operate properly following the repeal of section 160AFE. The amendments will ensure that the definition of 'group company' defined in repealed section 160AFE will continue to have effect for the purposes of these subsections. Section 160AFE was changed as part of the removal of grouping rules following the introduction of the consolidation regime. [Schedule 9, items 1, 5 and 7, subsections 46F(1), 46FA(11) and 46FB(6)]

9.10 Paragraph 46FA(1)(c) is amended by adding after the words "but for", the words "subsection 46AB(1) or 46AC(2) or". This will ensure that, although the inter-corporate dividend rebate has been turned off for dividends paid within wholly-owned companies, the deduction will continue to be available to taxpayers. [Schedule 9, item 2, paragraph 46FA(1)(c)]

9.11 Subsection 46FA(5) is repealed and replaced with a provision that deems the unfranked part of a dividend on-paid to the foreign parent to be an unfrankable distribution within the meaning of section 202-45 of the ITAA 1997 if the deduction is allowed under this section in relation to that amount. [Schedule 9, item 3, subsection 46FA(5)]

9.12 This amendment will ensure that the penalties under the benchmark franking rules in Division 203 of the ITAA 1997 are not inappropriately triggered where the section 46FA deduction applies and the resident company pays another distribution during the same franking period with a franking percentage other than zero percent.

9.13 Items 4, 6 and 8 update the definitions in subsections 46FA(11) and 46FB(6) to ensure consistency with the terminology in the simplified imputation system. [Schedule 9, items 4, 6 and 8 subsections 46FA(11) and 46FB(6)] Application and transitional provisions

9.14 The amendment made by item 2 will generally apply to dividends paid after 30 June 2003. For taxpayers that are subject to the provisions in section 46AC of the ITAA 1936, this amendment applies to dividends paid on or after the consolidation day referred to in that section. [Schedule 9, subitems 9(1) and 9(2)]

9.15 The tiered application date is needed because for some taxpayers, the sections 46 and 46A rebate is not turned off for the unfranked part of a dividend paid to the taxpayer until the consolidation day.

9.16 The amendments made by items 1 and 3 to 8 of Schedule 9 apply to dividends paid on or after 1 July 2002, that is, the start date of the simplified imputation system. [Schedule 9, subitem 9(3)]