Income Tax: Deferred company tax instalments and franking credits

Will corporate tax entities that pay deferred company tax instalments on or after 1 July 2002, record franking credits arising from these payments on a tax paid basis pursuant to section 205-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Corporate tax entities that pay deferred company tax instalments on or after 1 July 2002 will record franking credits arising from these payments on a tax paid basis in their franking account from 1 July 2002.

A corporate tax entity makes two deferred company tax instalments of $2,000 each, on 30 September 2003 and 31 December 2003 respectively, in relation to the income year ending 30 June 2000. The corporate tax entity has been assessed for income tax in relation to that income year.

Deferred company tax instalments are arrangements entered into by corporate tax entities to pay, in instalments, the tax liability for the income year ending 30 June 2000. The corporate tax rate for the income year ending 30 June 2000 was 36%. Some of these arrangements will continue until the income year ending 30 June 2006.

Where a corporate tax entity makes a deferred company tax instalment after 1 July 2002, it will record the franking credits attributed to this payment in its franking account on a tax paid basis. This is in accordance with subsection 205-5(2) of the ITAA 1997.

An entity which pays a deferred company tax instalment satisfies the definition of 'pays income tax' in subsection 205-20(3) of the ITAA 1997. The entity has a liability to pay income tax for the 2000 income year. The payment of a deferred company tax instalment generates an entitlement to a credit under section 221AZM of the Income Tax Assessment Act 1936 , which is applied to reduce that liability to pay income tax. Pursuant to Item 2 of section 205-15 of the ITAA 1997, a franking credit equal to that part of the payment that is attributable to the period during which the entity was a franking entity arises on the day on which the payment is made.

Based upon the facts in this case, the entity will enter a $2,000 credit in the franking account on 30 September 2003 and a further credit of the same amount on 31 December 2003.