Franking Accounts - early payment of company tax

Is a company allowed franking credits for the early payment of company tax if it pays its income tax prior to being liquidated?

Yes. A company is allowed franking credits under either former section 160APMG of the Income Tax Assessment Act 1936 (ITAA 1936) or section 205-15 of the Income Tax Assessment Act 1997 (ITAA 1997)for the early payment of its income tax prior to its liquidation.

The taxpayer is a privately owned company with a franking account surplus that had arisen from the payment of income tax and the receipt of franked dividends over many years. The directors want to put the company into voluntary liquidation before the end of the financial year. The directors want to claim an offset for the franking account credits against the final tax liability of the company.

The company intends to extinguish all of its liabilities prior to the completion of the liquidation.

The company will pay the full amount of its income tax for the current and following financial years by the end of the first quarter of the following financial year.

The payment of PAYG instalments does not discharge a company's tax debt. The tax debt is not discharged until the Commissioner actually applies the instalments against the debt. The Commissioner cannot apply instalments against a tax debt until such time as that debt comes into existence, which generally occurs after the completion of the income year. It is the application of the instalments against the tax debt which constitutes payment of that debt. In other words, a debt cannot be discharged until it comes into existence.

Where a company is able to ascertain its final tax liability for an income year prior to the end of that income year, the early payment of company tax will give rise to a franking credit in accordance with former section 160APMG of the ITAA 1936 which applies before 1 July 2002 or section 205-15 of the ITAA 1997, which applies on or after 1 July 2002. This is because the debt would have come into existence at the time that the final tax liability was ascertained, even though that liability was ascertained prior to the end of the income year.

The liquidator of a company is required, in accordance with section 260-45 of the Taxation Administration Act 1953 , Schedule 1, to notify the Commissioner within 14 days of being appointed liquidator. The Commissioner is then required to notify the liquidator of the amount of tax due and payable by the company. It is at this point in time that the final tax liability of the company is ascertained, and the tax debt comes into existence. When the liquidator pays this amount, the company will then become entitled to the franking credits under either former section 160APMG of the ITAA 1936 or section 205-15 of the ITAA 1997.

Date of Amendment Part Comment 30 November 2016 Decision Include reference to "either former" before section 160APMG. Include reference to section 205-15 of the ITAA 1997 Reasons for Decision Delete "However" capitalise W. Include "former" before section 160APMG and "which applies before 1 July 2002 or section 205-15 of the ITAA 1997, which applies on or after 1 July 2002" after ITAA 1936. Include "under either section 160APMG of the ITAA 1936 or section 205-15 of the ITAA 1997" after credits. Legislative References Insert " Income Tax Assessment Act 1997 " and " section 205-15 "

Date of Amendment | Part | Comment

30 November 2016 | Decision | Include reference to "either former" before section 160APMG. Include reference to section 205-15 of the ITAA 1997

Reasons for Decision | Delete "However" capitalise W. Include "former" before section 160APMG and "which applies before 1 July 2002 or section 205-15 of the ITAA 1997, which applies on or after 1 July 2002" after ITAA 1936. Include "under either section 160APMG of the ITAA 1936 or section 205-15 of the ITAA 1997" after credits.

Legislative References | Insert " Income Tax Assessment Act 1997 " and " section 205-15 "