Posting of franking credits in respect of income tax paid by Pooled Development Funds

Do the imputation effects vary between Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) and Part 3-6 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to income tax paid by a Pooled Development Fund (PDF) in respect of unregulated investments?

No. The imputation effects do not vary between Part IIIAA of the ITAA 1936 and Part 3-6 of the ITAA 1997 in relation to income tax paid by a PDF in respect of unregulated investments.

The taxpayer is an eligible investment company registered under the Pooled Development Funds Act 1992 as a PDF. The PDF has taxable income of $100 for each of the 1998-99 and 2002-03 income years. For both income years, the taxable income of the PDF only compromises income generated from unregulated investments. The PDF distributes all of its after-tax profits to its sole shareholder in both years so as to bring its franking account to nil.

Old imputation system under Part IIIAA of the ITAA1936

According to the facts, the taxable income of the PDF only comprises income generated from unregulated investments. Accordingly, the PDF will not be able to frank any dividends with venture capital credits.

However, the PDF may still frank a dividend with a class C franking credit if its satisfies subsection 160AQF(1AAA) of the ITAA 1936.

For the 1998-99 income year, the tax rate for PDFs on the unregulated investment component is 25%. Accordingly, the tax on taxable income of the PDF is $25 (100 x 25%).

Pursuant to section 160APMG of the ITAA1936, if a company pays company tax on a particular day, a class C franking credit arises on that day equal to the 'adjusted amount' in relation to the amount of company tax paid. The 'adjusted amount' is calculated in accordance with the formula under the definition of 'adjusted amount' in section 160APA of the ITAA1936. This formula converts tax paid amounts into after tax amounts based on the 'applicable general company tax rate'. In relation to payment of company tax in respect of a year of income, the 'applicable general company tax rate' is defined in section 160APA to mean the general company tax rate for the year of tax to which the year of income relates. The general company tax rate for the 1998-99 income year is 36%. Thus, on payment of the 1999 company tax, the PDF will credit its franking account with a class C franking credit equal to $44.44 ($25 x ((1 - 0.36)/0.36)).

Pursuant to subsection 160AQB(3) of the ITAA 1936, when the PDF distributes the remainder of the after-tax profits of $75 to its shareholder in the 1999-2000 income year and franks that dividend, a class C franking debit will arise equal to the 'class C franked amount'. The 'class C franked amount' is defined in section 160APA of the ITAA 1936 to mean so much of the dividend as has been franked in accordance with subsection 160AQF(1AAA) of the ITAA 1936. Provided the conditions in subsection 160AQF(1AAA) are satisfied, the 'class C franked amount' equals the current dividend x specified percentage.

In this case, the current dividend is $75 (that is, the amount which remains to distribute after payment of company tax on $100). The specified percentage in this case will be 59.26%. The 59.26% is obtained by dividing the required franking amount by the amount of the current dividend (that is, $44.44/$75). Accordingly, the 'class C franked amount' (and hence the class C franking debit) will be $44.44 ($75 x 59.26%).

In terms of the shareholder, pursuant to subsections 160AQT((1AB) and 160AQU(1) of the ITAA 1936, the gross-up and franking rebate each equal $25 ($44.44 x 0.36/(1 - 0.36)).

New imputation system under Part 3-6 of the ITAA 1997

According to the facts, the taxable income of the PDF only comprises income generated from unregulated investments. Accordingly, the PDF will not be able to frank any dividends with venture capital credits.

However, the PDF may still frank a distribution with a franking credit if it satisfies section 202-5 of the ITAA 1997.

For the 2002-03 income year, the tax rate for PDFs on the unregulated investment component is 25%. Accordingly, the tax on taxable income of the PDF is $25 (100 x 25%).

Pursuant to Item 2 of section 205-15 of the ITAA 1997, if a franking entity pays income tax and satisfies the residency requirement for the income year for which the tax is paid, a franking credit equal to the tax paid arises in the franking account on the day the tax is paid. Thus, on payment of the 2003 income tax, the PDF will credit its franking account with a franking credit equal to $25.

Pursuant to Item 1 of section 205-30 of the ITAA 1997, when the PDF distributes the remainder of the after-tax profits of $75 to its shareholder in the 2003-04 income year and franks that distribution, a franking debit will arise equal to the amount of the franking credit on the distribution. According to the facts, the PDF desires to bring its franking account balance to nil after payment of the distribution. Accordingly, the amount of the franking credit on the distribution is $25. The franking percentage is therefore 77.78% ($25/$32.14 x 100), where $32.14 represents the maximum franking credit calculated in accordance with subsection 202-60(2) of the ITAA 1997 utilising a corporate tax rate of 30%.

In terms of the shareholder, pursuant to section 207-20 of the ITAA 1997, the gross-up and franking rebate each equal $25 since this is the amount of the franking credit on the distribution.

In conclusion, as seen from the above analysis, it is clear that both the former and new imputation system yield the same result since they both reduce the PDF's franking account balance to zero while providing the shareholder with the same gross-up and franking rebate amounts.

Date of Amendment Part Comment 23 January 2015 Legislative References Remove reference to section 160ASED of the ITAA 1936 Include reference to section 160APA of the ITAA 1936 Remove reference to section 210-105 of the ITAA 1997 Include reference to section 202-5 of the ITAA 1997 Include reference to subsection 202-60(2) of the ITAA 1997 Include reference to section 205-15 of the ITAA 1997

Date of Amendment | Part | Comment

23 January 2015 | Legislative References | Remove reference to section 160ASED of the ITAA 1936 Include reference to section 160APA of the ITAA 1936 Remove reference to section 210-105 of the ITAA 1997 Include reference to section 202-5 of the ITAA 1997 Include reference to subsection 202-60(2) of the ITAA 1997 Include reference to section 205-15 of the ITAA 1997