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Do the provisions of section 160AQCBA of the Income Tax Assessment Act 1936 ('ITAA 1936') apply where a private resident company pays a fully franked dividend to a resident individual shareholder in one income year and the same fully franked dividend to another resident individual shareholder in a later income year?

No. In the absence of a strategy to avoid the wastage of franking benefits section 160AQCBA of the ITAA 1936 does not apply.

Two resident individuals are equal shareholders in a resident private company. One shareholder holds all C class shares, while the other shareholder holds all D class shares. The resident private company is winding down business operations. Each shareholder will share equally in both the retained profits and the franking credits of the company. One shareholder will be paid a fully franked dividend in one income year, while the other shareholder will be paid the same fully franked dividend in a later income year. Both shareholders are 'qualified persons' under Division 1A, Part IIIA of the ITAA 1936 with respect to the dividends to be paid.

Section 160AQCBA of the ITAA 1936 was introduced as a specific anti-avoidance provision to apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most, in preference to other shareholders.

Broadly speaking, any strategy directed to defeating the policy of the law by avoiding wastage of franking benefits through directing the flow of franked dividends to those shareholders who can most benefit from them, to the exclusion of disadvantaged shareholders, may amount to dividend streaming (Explanatory Memorandum to Taxation Laws Amendment Bill [No 3] 1998).

In the year that the first franked dividend is paid both shareholders are resident individuals and both would be 'qualified persons' (Division 1A, Part IIIA, of the ITAA 1936). Because Division 67 of the ITAA 1997 now allows the refund of excess imputation credits to resident individuals receiving franked dividends, both shareholders would be entitled to receive an equivalent benefit from franked dividends regardless of their basic tax liability.

In view of this, there can be no wastage of franking benefits. Therefore, no strategy to avoid wastage of franking benefits can be inferred by the deferral of the second dividend. In the absence of such a strategy, streaming will not have occurred and section 160AQCBA of the ITAA 1936 cannot apply.