Entitlement to Class A franking credits for an early balancing life insurance company where taxable contributions are transferred from an unrelated superannuation fund under section 275 of the Income Tax Assessment Act 1936 (ITAA 1936)

Is an amount referable to taxable income derived before 1 July 2000 when it is included in the assessable income of an early balancing life insurance company under section 275 of the ITAA 1936, for the purposes of determining the availability of Class A franking credits under section 160AQCNCG of the ITAA 1936?

Yes. Where the assessable income of an early balancing life insurance company includes taxable contributions under section 275 which are sourced before 1 July 2000, the life insurance company will be entitled to Class A franking credits under section 160AQCNCG.

A superannuation fund with a 30 June 2000 balance date invested its taxable superannuation contributions with an early balancing life insurance company with a 31 December 2000 balance date (2000/01 year of income). The superannuation fund is unrelated to the life insurance company. After 30 June 2000, the life insurance company and the superannuation fund entered into a written agreement to transfer taxable contributions. This agreement was made before the date of lodgment of the return of income of the superannuation fund.

The life insurance company claimed Class A franking credits in respect of tax paid on the taxable contributions.

Sections 160AQCNCF to 160AQCNCJ of the ITAA 1936 contain special transitional rules for early and late balancing life insurance companies to ensure that franking credits and debits arise appropriately to reflect that their income tax liability is referable to income derived both before and after 1 July 2000. Subsection 160AQCNCG(2) determines the franking credits referable to a period before 1 July 2000 for an early balancing life insurance company. Subsection 160AQCNCG(2) defines the pre 1 July 2000 proportion of company tax as follows: 'the pre 1 July 2000 proportion is the company tax for 2000/01 year of income that is referable to taxable income derived before 1 July 2000 ...' (emphasis added)

Subsection 160QCCNCG(2) defines the post 1 July proportion of company tax as follows: 'the post 1 July 2000 component is the company tax for 2000/01 year of income that is referable to taxable income derived on or after 1 July 2000 ...' (emphasis added)

Taxable contributions received by a life insurance company under section 275 are statutory income under subsection 6-10(2) of the Income Tax Assessment Act 1997 ('ITAA 1997'). Statutory income is not subject to a general timing rule based on derivation under subsection 6-5(2) of the ITAA 1997. The relevant sections of the ITAA 1997 and the ITAA 1936 rely on section 275 to determine when an amount is included in assessable income. However section 275 is not specific enough to provide guidance as to the manner in which it interacts with subsection 160AQCNCG(2), in that it only allows for the taxable contribution to be attributed to the income year to which the agreement relates.

An examination of the judicial decisions on the meaning of the word 'derived', as that word is used generally in the ITAA 1936 and ITAA 1997, shows that income is derived on an annual basis unless there is a specific statutory provision in operation. This would give an unintended result in this case because subsection 160AQCNCG(2) divides company tax into pre and post 1 July 2000 proportions.

An alternative interpretation is to use the ordinary dictionary meaning of the word 'derived' in preference to its judicial meaning. The relevant Macquarie Dictionary definition of 'derived' is 'to receive or obtain from some source or origin.'

In Cooper Brooks (Wollongong) Pty Ltd v. FCT (1981) 147 CLR 297; 81 ATC 4292; (1981) 11 ATR 949, the High Court stated that: 'Where two constructions are open the court will prefer the construction which avoids inconvenience or injustice.' (per Gibbs CJ at 305)

In FC of T v. Consolidated Press Holdings Limited & Anor (2001) ATC 4343; 47 ATR 229, the High Court held that the words of an Act should be interpreted in the light of the legislative purpose. The legislative purpose is determined by having regard to the context of the Act in its widest sense so as to prefer a competing interpretation which is more in accord with logic and policy.

In interpreting subsection 160AQCNCG(2) a purposive approach to statutory interpretation should be used to give effect to the intention of the provision. This is achieved by adopting the dictionary definition of 'derived.'

The dictionary definition of the word 'derived' supports the view that section 275 taxable contributions were sourced before 1 July 2000. Therefore a life insurance company is entitled to Class A franking credits for taxable contributions received under section 275.