Issue
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)?
Decision
No. A refund of a research and development tax offset does not generate a franking debit under section 205-30 of the ITAA 1997.
Facts
During the income year, the company paid PAYG instalments totalling $20,000.
The company was eligible to choose, and did choose, a research and development tax offset, instead of a deduction under section 73B of the Income Tax Assessment Act 1936 (ITAA 1936), in its return of income, under subsection 73I(4) of the ITAA 1936.
The company's taxable income for the income year is $100,000 and the company tax rate is 30%.
The amount the company could have deducted under section 73B of the ITAA 1936 was $160,000. Therefore, the company's research and development tax offset for the income year is $48,000.
Reasons for Decision
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.
The company has a basic income tax liability of $30,000 for the income year, based on its taxable income of $100,000. In addition, the company is eligible for a tax offset of $48,000 under section 73I of the ITAA 1936, being 30 cents in the dollar of its $160,000 research and development deduction.
The research and development tax offset is subject to the refundable tax 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. Where a tax offset is refundable, that is, where it is subject to the refundable tax offset rules, the amount by which it exceeds the amount of income tax liability may be refunded.
Under section 4-10 of the ITAA 1997, the company will work out its income tax liability as follows: Step 1 (Work out taxable income for the income year) $100,000 Step 2 (Work out basic income tax liability) $30,000 (company tax rate x $100,000) Step 3 (Work out tax offsets for the income year) $48,000 (research and development tax offset) Step 4 (Income tax liability for the year) 0 (but $18,000 refundable to the company due to Division 67)
Step 1 | (Work out taxable income for the income year) | $100,000
Step 2 | (Work out basic income tax liability) | $30,000 | (company tax rate x $100,000)
Step 3 | (Work out tax offsets for the income year) | $48,000 | (research and development tax offset)
Step 4 | (Income tax liability for the year) | 0 | (but $18,000 refundable to the company due to Division 67)
The company has no liability to tax and will receive a refund of $18,000 generated by the research and development tax offset. In addition, the company will also have refunded to it the amount of $20,000 it paid in PAYG instalments.
A franking debit is generated where an entity receives a refund of income tax. 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.
The $20,000 representing a refund of PAYG instalments paid to satisfy the entity's previous liability to income tax will generate a franking debit equal to that amount.
The amount of $18,000 generated by the research and development tax offset is not a refund of income tax because it does not represent a return to the company 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.