Commonwealth Consolidated Acts

TAXATION LAWS AMENDMENT ACT (NO. 8) 2003 - SCHEDULE 7

Part   1 -- Amendment of the Income Tax Assessment Act 1997

1   Division   205 (heading)

Repeal the heading, substitute:

Division   205 -- Franking accounts, franking deficit tax liabilities and the related tax offset

2   Section   205 - 1

Omit:

substitute:

3   Section   205 - 5 (heading)

Repeal the heading, substitute:

205 - 5   Franking accounts, franking deficit tax liabilities and the related tax offset

4   At the end of section   205 - 5 (before the note)

Add:

  (6)   A tax offset is available to an entity that has incurred a liability to pay franking deficit tax.

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:

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.

6   At the end of subsection 219 - 50(1)

Add:

Note:   The operation of this section is affected by section   219 - 75 if a tax offset under section   205 - 70 is applied to work out the company's income tax liability.

7   At the end of subsection 219 - 55(1)

Add:

Note:   The operation of this section is affected by section   219 - 75 if a tax offset under section   205 - 70 is, or has been, applied to work out the company's income tax liability.

8   At the end of Division   219

Add:

219 - 70   Tax offset under section   205 - 70

  (1)   In applying section   205 - 70 to a * life insurance company, that section has effect as if:

  (a)   the reference in paragraph 205 - 70(1)(c) to the amount that would have been an entity's income tax liability for a previous income year were a reference to the part of such an amount in respect of the company that is attributable to its shareholders; and

  (b)   the reference in subsection 205 - 70(3) to the amount that would have been an entity's income tax liability for the relevant year were a reference to the part of such an amount in respect of the company that is attributable to its shareholders.

  (2)   In working out the part of an amount that is attributable to the company's shareholders for the purposes of this section, regard is to be had to the accounting records of the company.

Example:   The following apply to a life insurance company that satisfies the residency requirement for an income year:

•   the company has a tax offset of $60,000 under section   205 - 70 (the franking deficit offset ) for that year;
•   the company's income tax liability for that year would be $100,000 if the franking deficit offset were disregarded;
•   20% of the $100,000 is attributable to the company's shareholders (the shareholders' part ).

  As a result of applying $20,000 of the franking deficit offset to reduce the shareholders' part to nil, the company's income tax liability becomes $80,000. The remaining $40,000 of the offset will be included in a franking deficit tax offset for the next income year for which the company satisfies the residency requirement.

219 - 75   Working out franking credits and franking debits where a tax offset under section   205 - 70 is applied

Revised shareholders' ratio--modification of section   219 - 50

  (1)   Subsection   (2) applies to a * life insurance company if a * tax offset under section   205 - 70 is applied to work out the company's income tax liability for an income year.

Note:   This means subsection   (2) applies if the tax offset is applied to reduce the part of the amount mentioned in paragraph 219 - 70(1)(b) in relation to the income year.

  (2)   For the purposes of working out the amount of a * franking credit or * franking debit for the company in relation to the income year (other than a franking credit covered by item   1 of the table in section   219 - 15), section   219 - 50 has effect as if:

  (a)   steps 1 and 2 of the method statement in section   219 - 50 were omitted; and

  (b)   the reference in step 3 of that method statement to the * shareholders' ratio were a reference to the revised shareholders' ratio worked out as follows:

Example:   For the 2002 - 2003 income year X Co (which is a life insurance company) has a tax offset of $68,000 under section   205 - 70. Its income tax liability for that year would have been $400,000 on the assessment day (1   February 2004) if the tax offset were disregarded. Of that liability, $80,000 is attributable to the shareholders. The step 1 result is therefore $12,000 ($80,000 minus $68,000).

X Co's income tax liability after applying the tax offset is $332,000 ($400,000 minus $68,000). The revised shareholders' ratio is therefore 3/83 ($12,000 divided by $332,000).

For that income year, the company paid $249,000 of PAYG instalments before the assessment day and $83,000 of income tax one month after that day.

On the assessment day, a franking credit of $9,000 arises under item   2 of the table in section   219 - 15 ($249,000 multiplied by 3/83). On the day the additional amount of tax is paid, another franking credit of $3,000 arises under item   4 of that table ($83,000 multiplied by 3/83).

Adjustment resulting from amended assessment--modification of section   219 - 55

  (3)   Subsection   (4) applies to a * life insurance company if:

  (a)   the assessment of the company's income tax liability for an income year (the previous assessment ) is amended; and

  (b)   at least one of the following applies:

  (i)   a * tax offset under section   205 - 70 is applied in making that amended assessment;

  (ii)   a tax offset under section   205 - 70 was applied in making the previous assessment.

  (4)   Section   219 - 55 has effect in relation to the company as if:

  (a)   if subparagraph   (3)(b)(i) of this section applies--a reference in that section to the new ratio were a reference to the revised shareholders' ratio that is based on the amended assessment; and

  (b)   if subparagraph   (3)(b)(ii) of this section applies--the reference in paragraph   (1)(b) of that section to the * shareholders' ratio used previously were a reference to the revised shareholders' ratio that is based on the previous assessment.

Example:   Continuing the example in subsection   (2), the assessment of X Co for the 2002 - 2003 income year is amended o n 31   March 2004. Under the amended assessment, X Co's income tax liability would be $300,000 if the tax offset were disregarded.

Of that liability, $60,000 is attributable to the shareholders. That amount is reduced by the tax offset of $68,000 to nil.

X Co's liability to pay income tax is therefore reduced to $240,000 ($300,000 minus $60,000) and it will receive a refund of $92,000 ($332,000 minus $240,000). As the revised shareholders' ratio has become nil, no franking debit arises from the refund.

The franking credits that previously arose from the payments of PAYG instalments and income tax would not have arisen if the new revised shareholders' ratio had been used. Section   219 - 55 (as applied by subsection   (4) of this section) therefore operates to create an adjustment to cancel those franking credits. The adjustment is a franking debit of $12,000 that arises on the day of the amendment of the assessment.

9   Application

Subject to the rules on the application of Part   3 - 6 of the Income Tax Assessment Act 1997 set out in the Income Tax (Transitional Provisions) Act 1997 , the amendments made by items   1 to 8 apply to events that occur on or after 1   July 2002.

Part   2 -- Amendment of the Income Tax (Transitional Provisions) Act 1997

10   At the end of Division   205

Add:

[The next section is section   205 - 70.]

205 - 70   Tax offset arising from franking deficit tax liabilities

General application rule

  (1)   Section   205 - 70 of the Income Tax Assessment Act 1997 has effect in relation to a corporate tax entity's assessments for the 2002 - 2003 income year and later income years, except as provided in the following subsections.

Late balancing entities--2001 - 2002 income year

  (2)   If a corporate tax entity's 2001 - 2002 income year ends after 30   June 2002, section   205 - 70 of the Income Tax Assessment Act 1997 has effect in relation to the entity's assessment for that income year as if the following method statement had replaced the method statement in that section.

Late balancing entities--2002 - 2003 income year

  (3)   If:

  (a)   a corporate tax entity's 2002 - 2003 income year ends after 30   June 2003; and

  (b)   the entity makes a valid election under section   205 - 20 in that income year;

section   205 - 70 of the Income Tax Assessment Act 1997 has effect in relation to the entity's assessment for that income year as if the following method statement had replaced the method statement in that section.

Late balancing entities--later income years

  (4)   If:

  (a)   an income year of a corporate tax entity ends after 30   June 2004; and

  (b)   the entity makes a valid election under section   205 - 20 in that income year;

section   205 - 70 of the Income Tax Assessment Act 1997 has effect in relation to the entity's assessment for that income year as if the following method statement had replaced the method statement in that section.

Application of the 30% reduction rule

  (5)   If a franking credit has been taken into account previously in reducing an amount worked out under a step in the method statement in:

  (a)   subsection   (3) or (4); or

  (b)   section   205 - 70 of the Income Tax Assessment Act 1997 ;

that credit is not to be taken into account again in reducing another amount worked out under a step in such a method statement.

205 - 75   Working out the tax offset for the first income year

First income year and relevant liabilities

  (1)   This section applies to a corporate tax entity in relation to:

  (a)   this income year of the entity (the first income year ):

  (i)   the 2001 - 2002 income year if subsection 205 - 70(2) applies to the entity; or

  (ii)   the 2002 - 2003 income year if subsection 205 - 70(2) does not apply to the entity; and

  (b)   amounts of liabilities incurred by the entity (the relevant liabilities ) that:

  (i)   are covered by paragraph   (1)(a) of section   160AQK or of 160AQKAA (as appropriate) of the Income Tax Assessment Act 1936 ; and

  (ii)   have not been applied under that Act to reduce the entity's income tax liabilities for an earlier income year.

Relevant liabilities carried forward to the first income year

  (2)   Section   205 - 70 of the Income Tax Assessment Act 1997 has effect in relation to the entity as if:

  (a)   so much of the relevant liabilities as were incurred by the entity during the first income year were liabilities to pay franking deficit tax under that Act; and

  (b)   so much of the relevant liabilities as were incurred by the entity before the start of the first income year were the excess mentioned in paragraph   (1)(c) of that section.

  (3)   Subsection   (2) has effect only for the purposes of working out:

  (a)   whether or not the entity is entitled to a tax offset under section   205 - 70 of the Income Tax Assessment Act 1997 for the first income year or a later income year; and

  (b)   the amount of that tax offset.

205 - 80   Application of Subdivision C of Division   5 of the Income Tax Assessment Act 1936

  (1)   This section applies if Subdivision C of Division   5 of the Income Tax Assessment Act 1936 would, apart from section   160AOAA of that Act, apply in relation to an entity's assessment for a year of income that ends before 1   July 2002.

  (2)   Section   160AOAA of that Act does not prevent:

  (a)   the making of a determination under that Subdivision on or after that date for an offset to reduce the entity's income tax liability for that year of income; and

  (b)   the operation of any provision in that Subdivision in relation to that determination.

  (3)   However, in working out the amount of that offset, any liabilities to pay franking deficit tax or deficit deferral tax that have been taken into account in working out a tax offset under section   205 - 70 of the Income Tax Assessment Act 1997 must be disregarded.

Part   3 -- Consequential amendments

Income Tax Assessment Act 1936

11   Subsection 160AO(2)

Omit all the words from and including "the amount of Australian tax", substitute:

the amount of Australian tax that:

  (a)   before the allowance of that credit or those credits (as the case may be); and

  (b)   before the application of any tax offset under section   205 - 70 of the Income Tax Assessment Act 1997 ;

is payable by the person in respect of the person's taxable income of that year of income.

12   Application

The amendment made by item   11 applies in relation to an entity's assessments for the first income year (within the meaning of section   205 - 75 of the Income Tax (Transitional Provisions) Act 1997 ) and later income years.

Income Tax Assessment Act 1997

13   Section   13 - 1 (after table item headed "foreign tax")

Insert:

14   Section   13 - 1 (table item headed "imputation")

Omit "see dividends ", substitute "see dividends and franking deficit tax ".

15   After subparagraph 36 - 55(1)(b)(ii)

Insert:

  and (iii)   it did not have any tax offset under section   205 - 70;

17   Subsection 995 - 1(1) (paragraph   (b) of the definition of residency requirement )

Omit "section   220 - 205", substitute "section   205 - 70 or 220 - 205".

18   Application

The amendments made by items   13 to 17 apply in relation to an entity's assessments for the first income year (within the meaning of section   205 - 75 of the Income Tax (Transitional Provisions) Act 1997 ) and later income years.

Taxation Administration Act 1953

19   Section   45 - 340 in Schedule   1 (after paragraph   (a) of step 1 of the method statement)

Insert:

20   Application

  The amendment made by item   19 applies in relation to the calculation of an entity's adjusted tax:

  (a)   for a base year that is the first income year (within the meaning of section   205 - 75 of the Income Tax (Transitional Provisions) Act 1997 ) or a later income year; and

  (b)   only for the purposes of a PAYG instalment period that includes, or starts after, the day on which this Act receives the Royal Assent.

21   Section   45 - 375 in Schedule   1 (after paragraph   (a) of step 1 of the method statement)

Insert:

22   Application

The amendment made by item   21 applies in relation to the calculation of an entity's benchmark instalment rate, or benchmark tax, for an income year that is the first income year (within the meaning of section   205 - 75 of the Income Tax (Transitional Provisions) Act 1997 ) or a later income year.

Notes to the Taxation Laws Amendment Act (No. 8) 2003

Note 1

The Taxation Laws Amendment Act (No.   8) 2003 as shown in this compilation comprises Act No.   107 , 20 03 amended as indicated in the Tables below.

Table of Acts

(a)   Subsection 2(1) (item   8 ) of the Tax Laws Amendment (2004 Measures No.   6) Act 2005 provides as follows:

  (1)   Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms.

Table of Amendments