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INCOME TAX ASSESSMENT ACT 1997 - SECT 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, some of the offset remained after applying section 63-10 (tax offset priority rules).

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, subject to subsections (5) and (6), reduce so much of it as is attributable to * franking debits to which subsection (8) applies by 30% if that part exceeds 10% of the total amount of * franking credits that arose in the entity's * franking account for 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, subject to subsections (5) and (6), reduce so much of it as is attributable to * franking debits to which subsection (8) applies by 30% if that part exceeds 10% of the total amount of * franking credits that arose in the entity's * franking account for 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 remaining amount of a * tax offset 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 .

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 foreign income tax paid by the entity (the foreign income tax offset ).

                   Under section 63-10 (about tax offset priority rules), the foreign income tax offset must be applied before the franking deficit offset is applied. As a result, that offset 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.

30% reduction will generally not apply to private company's first year of tax liability

             (5)  The 30% reductions in steps 1 and 2 of the method statement in subsection (2) do not apply in working out the amount of the * tax offset to which the entity is entitled for the relevant year if:

                     (a)  the entity is a * private company for the relevant year; and

                     (b)  if the company did not have the tax offset (but had all its other tax offsets) it would have had an income tax liability for the relevant year; and

                     (c)  the company has not had an income tax liability for any income year before the relevant year; and

                     (d)  the amount of the liability referred to in paragraph (b) is at least 90% of the amount of the * deficit in the company's * franking account at the end of the relevant year.

Commissioner's discretion

             (6)  The 30% reductions in steps 1 and 2 of the method statement in subsection (2) do not apply in working out the amount of the * tax offset to which the entity is entitled for the relevant year if the Commissioner determines in writing, on application by the entity in the * approved form, that the excess referred to in those steps was due to events outside the control of the entity.

             (7)  A determination under subsection (6) is not a legislative instrument.

Applicable franking debits

             (8)  This subsection applies to * franking debits in the * franking account of an entity:

                     (a)  that arise under table item 1, 3, 5 or 6 in section 205-30 for an income year; and

                     (b)  if the entity has franking debits covered by paragraph (a) for that income year--that arise under table item 2 in that section for that income year.

   

Table of Subdivisions

             Guide to Division 207

207-A   Effect of receiving a franked distribution generally

207-B    Franked distribution received through certain partnerships and trustees

207-C    Residency requirements for the general rule

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

207-E    Exceptions to the rules in Subdivision 207-D

207-F    No gross-up or tax offset where the imputation system has been manipulated

Guide to Division 207

Table of sections

207-5        Overview



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