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

5   At the end of Division 205

Add:

205-70 Tax offset arising from franking deficit tax liabilities

When does the tax offset arise?

(1) A *corporate tax entity is entitled to a *tax offset for an income year for which it satisfies the *residency requirement (the relevant year ) if at least one of the following applies:

(a) the entity has incurred a liability to pay *franking deficit tax in the relevant year;

(b) the entity incurred such a liability in a previous income year for which it did not satisfy the residency requirement, and that liability has not been taken into account in working out a tax offset under this section;

(c) when the entity was last entitled to a tax offset under this section for a previous income year, that offset exceeded the amount that would have been its income tax liability for that year if it did not have that offset (but had all its other tax offsets).

The amount of the tax offset

(2) Work out the amount of the *tax offset for the relevant year as follows:

Method statement

Step 1. Work out the total amount of *franking deficit tax that is covered by paragraph (1)(a).

Then reduce it by 30% if it exceeds 10% of the total amount of *franking credits that arose in the entity's *franking account in the relevant year.

Step 2. Work out the total amount of *franking deficit tax that is covered by paragraph (1)(b) for a previous income year.

Then reduce it by 30% if it exceeds 10% of the total amount of *franking credits that arose in the entity's *franking account in that previous income year.

Step 3. Add up the results of step 2 for all the previous income years covered by paragraph (1)(b).

Step 4. Work out the excess that is covered by paragraph (1)(c).

Step 5. Add up the results of steps 1, 3 and 4. The result is the *tax offset to which the entity is entitled under this section for the relevant year.

Note: This method statement is modified for certain late balancing entities: see section 205-70 of the Income Tax (Transitional Provisions) Act 1997.

Priority of the tax offset

(3) Apply the *tax offset by subtracting the tax offset from the amount that would have been the entity's income tax liability for the relevant year if it did not have the tax offset (but had all its other tax offsets).

Note: If the tax offset exceeds that amount, the excess will be included in a tax offset for the next income year for which the entity satisfies the residency requirement: see paragraph (1)(c) and step 4 of the method statement.

Example: The following apply to a corporate tax entity that satisfies the residency requirement for an income year:

· the entity's income tax liability for that year would be $100,000 if its tax offsets were disregarded;

· for that year, the entity has a tax offset of $60,000 under this section (the franking deficit offset ) and a tax offset of $80,000 in respect of overseas tax paid by the entity (the foreign tax credit ).

Under subsection (3), the foreign tax credit must be applied before the franking deficit offset is applied. As a result, that credit and $20,000 of the franking deficit offset combine to reduce the entity's income tax liability to nil. The remaining $40,000 of the franking deficit offset will be included in a franking deficit offset for the next income year for which the entity satisfies the residency requirement.

Residency requirement

(4) To determine whether the entity satisfies the *residency requirement for the relevant year, section 205-25 has effect as if each of the following were an event specified in a relevant table for the purposes of that section:

(a) the entity incurring a liability to pay *franking deficit tax in the relevant year;

(b) the assessment of the entity's income tax liability for the relevant year that is made on the *assessment day for that year.