Research and Development Tax Offset and Franking Accounts: companies in loss

Does a refund of a research and development tax offset generate a franking debit under section 205-30 of the Income Tax Assessment Act 1997 (ITAA 1997)

No. A refund of a research and development tax offset does not generate a franking debit under section 205-30 of the ITAA 1997.

A company has received a refund of a research and development tax offset.

The company has not paid any tax for the income year and has no franking credits. (Therefore, any franking debit balance at the end of the year could potentially give rise to franking deficit tax.)

The company has no income tax liability.

Section 205-10 of the ITAA 1997 provides that each entity that is, or has ever been, a corporate tax entity has a franking account. The payment of a PAYG instalment or income tax will generate a franking credit in that account under items 1 and 2 of the table in section 205-15 of the ITAA 1997. Conversely, the receipt of a refund of income tax will generate a franking debit in the franking account under item 2 of the table in section 205-30 of the ITAA 1997.

Subsection 205-35(1) of the ITAA 1997 provides that an entity receives a refund of income tax if and only if: (a) either: (i) the entity receives an amount as a refund; or (ii) the Commissioner applies a credit, or an RBA surplus against a liability or liabilities of the entity; and (b) the refund of the amount, or the application of the credit, represents in whole or in part a return to the entity of an amount paid or applied to satisfy the entity's liability to pay income tax.

Under section 73I of the Income Tax Assessment Act 1936 (ITAA 1936), a company can choose a research and development tax offset instead of a deduction, if it is eligible to make that choice under section 73J of the ITAA 1936.

The research and development tax offset is subject to the refundable offset rules in Division 67 of the ITAA 1997. Section 67-30 of the ITAA 1997 provides that you can get a refund of a tax offset that is subject to the refundable tax offset rules if the total of those offsets exceeds the amount of income tax that you would have to pay if you had not got those tax offsets (but had got all your other tax offsets).

Subsection 4-10(3) of the ITAA 1997 provides that a tax offset reduces the amount of income tax you have to pay.

The company had no liability to pay, and did not pay, any income tax. In these circumstances, the amount refunded to the company in the form of a research and development tax offset is not a return of an amount paid or applied to satisfy its liability to pay income tax. There is no amount that has been returned to the company because the research and development tax offset arises from the operation of the tax law, and not from a payment made by the company in satisfaction of an income tax liability.

Therefore, a refund of a research and development tax offset will not give rise to a franking debit under item 2 of the table in section 205-30 of the ITAA 1997.