Amendment of Distribution Statement: Commissioner's determination

Will the Commissioner allow the entity to amend its distribution statement under section 202-85 of the Income Tax Assessment Act 1997 (ITAA 1997) to treat a previous distribution as franked to 100%?

No. The Commissioner will not allow the entity to amend its distribution statement under section 202-85 of the ITAA 1997 to treat a previous distribution as franked to 100% because the decision by the entity to frank the distribution at the earlier rate was not unintended.

Company A, company B and company C are all Australian resident public companies and ultimately 100% subsidiaries of Foreign company, a foreign company listed on an overseas stock exchange.

The Australian companies have a substituted accounting period which commences on 1 January and concludes on 31 December each year.

The Australian companies are franking entities and will have franking periods of six months ending 30 June and 31 December.

The Australian companies propose to form a Multiple Entry Consolidated (MEC) group retrospectively from 1 January 2004 with company A as the provisional head company.

In August 2004, company B paid to Foreign company a distribution that, in an abundance of caution, was franked to 0%. At that time, the MEC group had not finalised its franking account balance to take into consideration tax consolidation and therefore was unable to determine whether sufficient franking credits existed to frank the distribution to 100%. Subsequent to the August 2004 distribution, the MEC group determined that there were sufficient franking credits to frank the August 2004 distribution to 100%.

Company B has not given Foreign company a distribution statement.

Company B and company C propose to make, by 31 December 2004, distributions franked to 100%.

Section 202-75 of the ITAA 1997 provides that an entity that makes a frankable distribution must give the recipient a distribution statement. Although a distribution statement has not been given by company B to Foreign company, the distribution statement would, in the absence of the Commissioner exercising his discretion under section 202-85, reflect company B's decision to pay a distribution franked to 0%.

Subsection 202-85(1) of the ITAA 1997 provides that the Commissioner may, on an application by an entity, determine that an entity may change the franking credit on a specified distribution by amending the distribution statement.

Subsection 202-85(2) of the ITAA 1997 further provides that in deciding whether to make a determination under subsection (1), the Commissioner must have regard to the following: (a) Whether the date for lodgement of an income tax return by the recipient of the specified distribution for the income year in which the distribution was made has passed. The specified distribution was made in August 2004. Consequently, the relevant income year would be the income year ended 31 December 2004. Therefore, the date for lodgement of the tax return by the recipient, if required, has not yet passed. (b) Whether, if the franking credit on the specified distribution were changed in accordance with the entity's application, there would be any difference in the withholding tax liability of the recipient. The recipient, Foreign company, is a non-resident company and would have been liable for withholding tax upon receipt of the specified distribution franked to 0%. However, in the event that the Commissioner permits the franking credit on the distribution to be changed to reflect a franking percentage of 100%, paragraph 128B(3)(ga) of the Income Tax Assessment Act 1936 (ITAA 36) will relieve Foreign company from liability to withholding tax. (c) Whether amending the distribution statement as requested by the entity would lead to a breach of the benchmark rule, or any of the rules in Division 204 of the ITAA 1997 (the anti-streaming rules). The specified distribution was the first frankable distribution made by the entity in the relevant franking period. In accordance with section 203-30 of the ITAA 1997, the benchmark franking percentage for that period was set at 0%. Consequently, should the Commissioner exercise his discretion to permit the entity to change the franking credit on the distribution statement, no breach of the benchmark rule would occur. Furthermore, the anti-streaming rules contained in Division 204 of the ITAA 1997 will not be triggered as the distribution was made to the sole member of the entity. (d) Whether amending the distribution statement as requested by the entity would lead to a new benchmark franking percentage being set for the entity for the franking period in which the distribution was made. As the specified distribution was the first distribution made by the entity in the relevant franking period, permitting the entity to change the franking credits on the distribution statement will effectively result in the setting of a new benchmark franking percentage of 100%. This discretion was not designed to change the benchmark franking percentage. (e) Any other matters that the Commissioner considers relevant. The Explanatory Memorandum to the New Business Tax System (Imputation) Act 2002 provides some insight as to the legislative intent behind the discretion available to the Commissioner under section 202-85. It states at paragraph 2.36: The legislation provides that the amount of franking credit on a distribution is the amount stated on the distribution statement. In the event that the franking credit stated on the distribution statement was not intended, steps may be taken by the entity to amend the distribution statement. At the time of the payment of the specified distribution, the group had not yet finalised its franking account balance to take into consideration the impact of Tax Consolidations. As a result, neither company A nor company B were able to confirm if the MEC group had sufficient franking credits to fully frank the distribution. Therefore, in an abundance of caution, company B made a distribution franked to 0%. Subsequently the group determined that there were sufficient franking credits to frank the distribution to 100%. This demonstrates that the MEC group did give consideration to the franking of the distribution and clearly intended to frank to 0%. It cannot be concluded that the decision to frank the distribution to 0% was not intended.

Accordingly, the Commissioner will not exercise his discretion under section 202-85 of the ITAA 1997 to permit the taxpayer to amend the franking credits stipulated on the distribution statement as the franking credit stipulated was not unintended.