Commonwealth of Australia Explanatory Memoranda

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TAX LAWS AMENDMENT (2006 MEASURES NO. 2) BILL 2006

                      2004-2005-2006



THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA




             HOUSE OF REPRESENTATIVES




 TAX LAWS AMENDMENT (2006 MEASURES No. 2) BILL 2006




  CORRECTIONS TO THE EXPLANATORY MEMORANDUM




                (Circulated by authority of the
            Treasurer, the Hon Peter Costello MP)
Correction to the General outline and
financial impact

Correction: Tax exemption of F-111 deseal/reseal ex-gratia
lump sum payments
Omit the following words from page 3:

            `charitable institutions was announced in the Treasurer's Press
            Release No. 031 of 11 May 2004.

            Financial impact: These amendments are expected to result in a small
            but insignificant gain to GST revenue.

            Compliance cost impact: This measure is not expected to impact
            significantly on compliance costs.'




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Corrections to Chapter 5 -- Franking
deficit tax

Detailed explanation of new law
         Example 5.1

         Replace the following sentence in Example 5.1 at page 28:

         `At the end of the income year, the company has a deficit of $80,000 in its
         franking and is liable to franking deficit tax.'

         With:

         `At the end of the income year, the company has a deficit of $80,000 in its
         franking account and is liable to franking deficit tax.'

         In addition, the following change is to be made to further explain the
         operation of the provisions.

         Remove paragraph 5.15 and substitute a new paragraph 5.15. Also insert
         new paragraph 5.16 and new Example 5.3:

         5.15      This measure was announced by the former Minister for
         Revenue and Assistant Treasurer in Press Release No. 30 of 10 May 2005.
         That press release stated that the Commissioner's discretion would apply
         `where, broadly, events that caused the over franking were outside of the
         company's control or were unanticipated, and did not involve any broader
         exploitation of the imputation system'. Subsection 205-70(6) has not
         been drafted using the same words as the press release. However, it is
         considered that the wording of the subsection has the same effect as the
         wording in the press release.

         5.16       That is, an event that is outside an entity's control includes (but
         is not limited to) an event that is unanticipated. In addition, in exercising
         the discretion, the Commissioner must consider whether the taxpayer has
         any broader intention to exploit the imputation system. That is, if the
         deficit in the franking account arose in circumstances where the taxpayer
         intended to exploit the imputation system, the events that gave rise to the
         deficit would be within the taxpayer's control and the Commissioner's
         discretion would not be exercised.



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Tax Laws Amendment (2006 Measures No. 2) Bill 2006



            Example 5.3

                      A company pays a fully franked dividend part way through an income
                      year (with a resulting debit to its franking account) in the reasonable
                      expectation that its future quarterly PAYG instalment payments in the
                      income year would be sufficient to ensure that it would not have a
                      deficit in its franking account at the end of the income year. An
                      unexpected downturn in business results in the company's future
                      quarterly PAYG instalment payments being less than expected.
                      Consequently, the company has a deficit in its franking account at the
                      end of the income year.

                      The franking deficit arose in circumstances that were unanticipated and
                      beyond the company's control. In addition, the company had no
                      broader intention to exploit the imputation system. Therefore, the
                      Commissioner would exercise his discretion and make a determination
                      so that the 30 per cent franking deficit tax offset reduction would be
                      disregarded.'




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