Franking Credits: benchmark portfolio method - revocation of election

Does the Commissioner consent to the taxpayer revoking an earlier election to apply the benchmark portfolio method in determining whether it qualifies to receive franking rebates?

Yes. The Commissioner consents, pursuant to subsection 160APHR(6) of the Income Tax Assessment Act 1936 (ITAA 1936), to the taxpayer revoking its earlier election, under subsection 160APHR(1) of the ITAA 1936, to apply the benchmark portfolio method in determining whether it qualifies to receive franking rebates.

The taxpayer invests in various unit trusts. Accordingly, the taxpayer does not hold assets directly, only indirectly through investment in other unit trusts.

Under subsection 160APHP(1) of the ITAA 1936 the taxpayer is a 'qualified person' as a beneficiary of a number of widely held trusts and, subject to the satisfaction of the holding period rule contained in section 160APHO of the ITAA 1936, is entitled to claim the benefit of franking rebates distributed from such trusts. For the 1997-98 and 1998-99 income years the taxpayer applied the holding period rule to determine the extent to which the taxpayer was eligible to obtain the benefits of the franking rebates distributed by its underlying investments. However, for the 1999-2000 income year, the taxpayer elected to apply the benchmark test under section 160APHR of the ITAA 1936, primarily to accommodate the move to a new custodian and their systems.

The taxpayer is now in the process of being wound up for reasons including that the underlying investments are being liquidated.

The taxpayer requests that the Commissioner consent to the revocation of its earlier election to apply the benchmark portfolio method under subsection 160APHR(1) of the ITAA 1936.

The election mechanism in section 160APHR of the ITAA 1936 is intended as a concession to certain institutional investors for whom compliance with the holding period rules would be onerous. There is no requirement to explain why an election has been made, although there is a de facto requirement to explain why, having made an election, a taxpayer wants to resile from it.

An election under subsection 160APHR(1) of the ITAA 1936 is intended to be irrevocable, but the legislation contemplates that there will be circumstances whereby it is appropriate to permit the taxpayer to revoke its election.

However, it is not intended that revocation will be permitted at will, otherwise the taxpayer would be expressly permitted to elect in or out on a yearly basis, without the Commissioner being involved at all. Therefore, it is not enough for the taxpayer to show that it satisfies the holding period rules, and would be entitled to a greater amount of franking rebates under their application.

In the present case: • the taxpayer is in the process of being wound up, and this circumstance presents difficulties for the ongoing application of the benchmark method • there is little or no risk that the taxpayer is pursuing a deliberate policy of picking the best result under the benchmark method or holding rules on an ongoing basis • the circumstances that resulted in the taxpayer making the election involved the appointment of a new service provider taking over the administration duties of the taxpayer, where the service provider did not have adequate systems in place to monitor compliance with the holding period rules, and • the taxpayer is able to easily ascertain its compliance with the holding period rules because it has had those systems in place over the relevant period.

Furthermore there is no suggestion that the taxpayer has been involved in any conduct in the nature of franking credit trading, or any mischief that the integrity rules were designed to address.

Accordingly, this is an appropriate case for the Commissioner to give the consent required for the revocation to take effect under subsection 160APHR(6) of the ITAA 1936.