Tax Laws Amendment (2004 Measures No. 2) Act 2004 (83 of 2004)

Schedule 10   Franked distributions received through certain partnerships and trustees

Part 2   Amendments commencing on 29 June 2002

Income Tax Assessment Act 1997

8   Subdivision 207-D

Repeal the Subdivision, substitute:

Subdivision 207-D - No gross-up or tax offset where distribution would not be taxed

Guide to Subdivision 207-D

207-80 What this Subdivision is about

This Subdivision creates the appropriate adjustment to cancel the effect of the gross-up and tax offset rules where a franked distribution (or a share of it) is, or would be, exempt income or an amount that is neither assessable income nor exempt income in the relevant entity's hands (and therefore would not be taxed in any case).

Table of sections

Operative provisions

207-85 Applying this Subdivision

207-90 Distribution that is made to an entity

207-95 Distribution that flows indirectly to an entity

Operative provisions

207-85 Applying this Subdivision

This Subdivision applies subject to Subdivisions 207-E and 207-F.

Note 1: Subdivision 207-E sets out exceptions to the rules in this Subdivision.

Note 2: Where both this Subdivision and Subdivision 207-F apply to an entity, the application of this Subdivision is subject to the rules in Subdivision 207-F: see subsections 207-145(3) and 207-150(7) and (8).

207-90 Distribution that is made to an entity

Whole of distribution not assessable

(1) If:

(a) a *franked distribution is made to an entity; and

(b) the distribution does not *flow indirectly through the entity to another entity; and

(c) the distribution is *exempt income or an amount that is neither assessable income nor exempt income in the hands of the entity;

then, for the purposes of this Act:

(d) the amount of the *franking credit on the distribution is not included in the assessable income of the entity under section 207-20; and

(e) the entity is not entitled to a *tax offset under this Division because of the distribution.

Part of distribution not assessable

(2) If:

(a) a *franked distribution is made to an entity; and

(b) the distribution does not *flow indirectly through the entity to another entity; and

(c) a part of the distribution (the relevant part ) is *exempt income or an amount that is neither assessable income nor exempt income in the hands of the entity;

then, for the purposes of this Act:

(d) the amount of the distribution is taken to have been reduced by the relevant part; and

(e) the amount of the *franking credit on the distribution is to be worked out as follows:

([Franked distribution apart from this section - Relevant part] / Franked distribution apart from this section) * Franking credit on the franked distribution apart from this section

207-95 Distribution that flows indirectly to an entity

Whole of share of distribution not assessable

(1) If:

(a) a *franked distribution *flows indirectly to an entity in an income year; and

(b) the entity's *share of the distribution would, in its hands, be *exempt income or an amount that is neither assessable income nor exempt income (whether or not it had actually received that share);

then, for the purposes of this Act:

(c) subsection (2), (3) or (4) (as appropriate) applies to the entity in relation to that income year; and

(d) the entity is not entitled to a *tax offset under this Division because of the distribution; and

(e) if the distribution flows indirectly through the entity to another entity - subsection 207-35(3) and section 207-45 do not apply to that other entity.

Note: This section can therefore apply, for example, where the entity is a partner in a partnership that has a partnership loss and the entity does not actually receive any of the distribution.

Partner

(2) If the *franked distribution *flows indirectly to the entity as a partner in a partnership under subsection 207-50(2), the entity can deduct an amount for that income year that is equal to its *share of the *franking credit on the distribution.

Beneficiary

(3) If the *franked distribution *flows indirectly to the entity as a beneficiary of a trust under subsection 207-50(3), the entity can deduct an amount for that income year that is equal to the lesser of:

(a) its share amount in relation to the distribution that is mentioned in that subsection; and

(b) its *share of the *franking credit on the distribution.

Trustee

(4) If the *franked distribution *flows indirectly to the entity as the trustee of a trust under subsection 207-50(4), the entity's share amount in relation to the distribution that is mentioned in that subsection is to be reduced by the lesser of:

(a) that share amount; and

(b) its *share of the *franking credit on the distribution.

Example: A franked distribution of $70 is made to a partnership.

Under section 207-35, an additional amount of $30 is included in the partnership's assessable income because of the distribution.

The partnership has 2 equal partners, X and Y. X is a non-resident individual whose share of partnership's net income for the income year is $50 (share of distribution of $35 and share of franking credit of $15). That share of distribution is not assessable income and not exempt income under section 128D of the Income Tax Assessment Act 1936.

X's assessable income of $15 (share of franking credit) is reduced to nil because of the deduction of $15 under subsection (2). Because of subsection (1), X is not entitled to a tax offset under section 207-45.

Part of share of distribution not assessable

(5) If:

(a) a *franked distribution *flows indirectly to an entity in an income year; and

(b) a part of the entity's *share of the distribution (the relevant part ) would, in its hands, be *exempt income or an amount that is neither assessable income nor exempt income (whether or not it had actually received that part);

then, subsection (2), (3) or (4) (as appropriate) applies to the entity on the basis that the amount of its *share of the *franking credit on the distribution is worked out as follows:

(Relevant part / Entity's share of the franked distribution) * Entity's share of the franking credit on the franked distibution apart from this section

(6) In addition, the following apply to an entity covered by subsection (5):

(a) if the distribution would otherwise *flow indirectly through the entity - the entity's *share of the distribution for the purposes of this Act (other than subsection (2), (3) or (4)) is to be reduced by the relevant part mentioned in subsection (5);

(b) if the entity would otherwise be entitled to a *tax offset under this Subdivision because of the distribution - the amount of the tax offset is to be worked out as follows:

Entity's share of the franking credit on the franked distribution apart from this section - Amount worked out under subsection (5)