Taxation Laws Amendment Act (No. 2) 1999 (93 of 1999)

Schedule 5   Franking of dividends by exempting companies and former exempting companies

Income Tax Assessment Act 1936

44   After section 160APP

Insert:

160APPA Receipt of certain franked dividends by exempting companies

(1) Subject to this section, if, on a particular day, a class A franked dividend is paid by an exempting company (the first company ) to a shareholder being another exempting company (the second company ) and:

(a) the second company is a resident at the time the dividend is paid; and

(b) either of the following subparagraphs applies:

(i) the first company and the second company are members of the same effectively wholly-owned group of companies;

(ii) the second company holds more than 5% of the shares in the first company (other than finance shares or dividend access shares within the meaning of section 160APHBC or shares that do not carry the right to receive dividends) and it would be reasonable to conclude that the risks involved in, and the opportunities resulting from, holding those shares are substantially borne by, or substantially accrue to, the second company;

there arises on that day a class A franking credit of the second company equal to the class A franked amount of the dividend.

(2) Subject to this section, if, on a particular day, a class C franked dividend is paid by an exempting company (the first company ) to a shareholder being another exempting company (the second company ) and:

(a) the second company is a resident at the time the dividend is paid; and

(b) either of the following subparagraphs applies:

(i) the first company and the second company are members of the same effectively wholly-owned group of companies;

(ii) the second company holds more than 5% of the shares in the first company (other than finance shares or dividend access shares within the meaning of section 160APHBC or shares that do not carry the right to receive dividends) and it would be reasonable to conclude that the risks involved in, and the opportunities resulting from, holding those shares are substantially borne by, or substantially accrue to, the second company;

there arises on that day a class C franking credit of the second company equal to the class C franked amount of the dividend.

(3) In deciding whether it would be reasonable to conclude as mentioned in subparagraph (1)(b)(ii) or (2)(b)(ii):

(a) regard is to be had to any arrangement in respect of shares (including unissued shares) in the first company (including any derivatives held or issued in connection with those shares); but

(b) no regard is to be had to risks involved in the ownership of shares in the first company that are substantially borne by any person in the person's capacity as a secured creditor.

(4) No franking credit arises if the dividend is wholly exempt income of the second company.

(5) If a determination is made under paragraph 160AQCBA(3)(b) or 177EA(5)(b) in respect of the whole of the dividend, no franking credit arises in respect of the dividend.

(6) If a determination is made under paragraph 177EA(5)(b) in respect of a part of the dividend, the franking credit that would otherwise arise in respect of the dividend is reduced by the same proportion as that part of the dividend bears to the whole of the dividend.

(7) If the dividend is partly exempt income of the second company, the franking credit arising under subsection (1) or (2) is reduced by the amount worked out by using the formula:

Franking credit * (Exempt part of dividend / Dividend)

where:

dividend means the number of dollars in the total amount of the dividend.

exempt part of dividend means the number of dollars in the part of the dividend that is exempt income.

franking credit means the franking credit determined under whichever of subsections (1) and (2) is applicable.

(8) In determining for the purposes of subsection (3) or (7) whether the dividend is wholly or partly exempt income of the second company, section 124ZM (which exempts dividends paid by PDFs) is to be disregarded.

(9) The franking credit arising under subsection (1) or (2) is to be reduced by 80% if:

(a) the second company is a life assurance company; and

(b) the assets of the second company from which the dividend was derived were included in insurance funds of the second company at any time during the period beginning at the start of the year of income of the second company in which the dividend was paid and ending at the time the dividend was paid.

(10) No franking credit arises if the dividend was paid as part of a dividend stripping operation.