Issue
Is a refund resulting from a film tax offset 'a return to the entity of an amount paid or applied to satisfy the entity's liability to pay income tax' for the purposes of subparagraph 205-35(1)(b)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. A refund resulting from a film tax offset is not 'a return to the entity of an amount paid or applied to satisfy the entity's liability to pay income tax' for the purposes of subparagraph 205-35(1)(b)(i) of the ITAA 1997.
Facts
The entity is an Australian private company that operates in the film industry.
In the income year, the entity was entitled to the film tax offset, pursuant to Division 376 of the ITAA 1997.
The amount of the film tax offset exceeds the entity's tax on taxable income.
The entity operates a franking account.
Reasons for Decision
Subparagraph 205-35(1)(b)(i) of the ITAA 1997 requires that, for an entity to 'receive a refund of income tax', a refund of an amount, or an application of a credit, must represent a return to the entity of an amount paid or applied to satisfy the entity's liability to pay income tax.
Accordingly, it is necessary to determine whether the entity's income tax refund, which results from the entitlement to a film tax offset under Division 376 of the ITAA 1997, is an amount paid to satisfy the entity's liability to pay income tax.
Division 376 of the ITAA 1997 outlines a number of tax offsets in relation to Australian expenditure incurred in making films that an entity may be entitled to (film tax offsets).
Item 20 of the table in section 67-23 of the ITAA 1997 states that a film tax offset is subject to the refundable tax offset rules.
Item 40 of the table in section 63-10 of the ITAA 1997 allows a refund for any remaining amount of a tax offset that is subject to the refundable tax offset rules in Division 67 of the ITAA 1997.
Step 3 of the method statement in subsection 4-10(3) of the ITAA 1997 defines tax offsets as amounts that reduce the amount of income tax an entity is required to pay.
Step 4 of the method statement in subsection 4-10(3) of the ITAA 1997 states that tax offsets are subtracted from an entity's basic income tax liability. An entity's income tax liability (to be differentiated from an entity's basic income tax liability determined at Step 2 of the method statement) is calculated after tax offsets have been subtracted.
As the entity's entitlement to a film tax offset exceeds its tax on taxable income, the refundable tax offset rules allow the entity to receive a refund of the remaining amount of the film tax offset. The refund as a result of the film tax offset arises by operation of item 40 of the table in section 63-10 of the ITAA 1997. The refund of the film tax offset is not a payment made by the entity to satisfy its tax liability. As a result, the refund of the film tax offset cannot be said to be a return to the entity of an amount that was paid.
In addition, the refund of the film tax offset cannot be considered to be a return of an amount applied to satisfy the entity's liability for income tax. This is because the entity's liability for income tax is determined after tax offsets are subtracted from its basic income tax liability.
Consequently, a refund resulting from a film tax offset is not 'a return to the entity of an amount paid or applied to satisfy the entity's liability to pay income tax' for the purposes of subparagraph 205-35(1)(b)(i) of the ITAA 1997.