Income Tax (Franking Deficit) Act 1987

Overview

The Income Tax (Franking Deficit) Act 1987, enacted by the Commonwealth Parliament, was introduced to address the issue of franking deficits in company dividends. The policy objective was to impose a tax on these deficits to ensure that the tax benefit of franked dividends is not passed on to shareholders in excess of the company tax rate. This Act was part of a broader legislative framework aimed at maintaining the integrity of the tax system by preventing the underpayment of company tax through the mechanism of franked dividends. The Act was repealed by the Taxation Laws Amendment Act 2009, which introduced new measures to address the issue of franking deficits. The Act established a tax payable under section 160AQJ of the Income Tax Assessment Act 1936, ensuring that the tax benefit derived from franked dividends does not exceed the company tax rate. This was achieved by imposing a tax on the difference between the amount of franking credit attached to a dividend and the corresponding tax that would have been payable if the dividend had been unfranked. This mechanism was designed to prevent the erosion of the company tax base by ensuring that the tax paid by companies on their profits is not undermined by the imputation system.

Scope and Application

The Income Tax (Franking Deficit) Act 1987 applies to companies that experience franking deficits, which occur when a company's franking credits are less than the franking deficit tax rate for the financial year. The Act imposes a tax on these deficits, as outlined in section 160AQJ of the Income Tax Assessment Act 1936. The tax is levied to ensure that companies with franking deficits contribute their fair share to the revenue of the Commonwealth. The Act extends to the entire Commonwealth of Australia, governing the taxation of eligible entities regardless of their state or territory of operation. The application of the Act is not restricted by any specific thresholds or exemptions, except as may be defined or modified through subordinate legislation. Any amendments or extensions to the application of the Act would be enacted through additional legislative instruments, ensuring the law remains responsive to economic and fiscal policy changes.

Key Provisions

The Income Tax (Franking Deficit) Act 1987, as amended, imposes a tax on franking deficits of companies under section 3. This Act requires the imposition of a specific tax as outlined in section 160AQJ of the Income Tax Assessment Act 1936. The Act was repealed by the Act No. 111 of 2009, effective from 17 November 2009. The text of any amendments not in force on 17 October 2000 is appended in the Notes section. This compilation was prepared by the Office of Legislative Drafting, Attorney-General’s Department, Canberra. The Act imposes obligations on companies that have franking deficits. It requires these companies to account for the deficit and ensure that the tax is paid. Specifically, the tax is levied on the difference between the amount of franking credits attached to dividends and the tax paid by the company on the profits from which the dividends were derived. Companies must calculate their franking deficit accurately and declare this amount in their tax returns, ensuring that they comply with the provisions of section 160AQJ. Failure to comply with the requirements of the Income Tax (Franking Deficit) Act 1987 can result in both civil and criminal consequences. Civilly, companies may be liable for penalties and interest on unpaid taxes. The penalties for non-compliance can be significant, and the Australian Taxation Office (ATO) has the authority to impose these penalties. Criminally, wilful or reckless disregard of the tax obligations can lead to prosecution, with individuals potentially facing fines and imprisonment. The specific penalties for non-compliance are detailed in the relevant sections of the Income Tax Assessment Act 1936, which governs the broader tax framework.