3.

3 Franking account
Restrictions on allocation of franking credits to distributions
Maximum franking
credit rule s202-55
-Is the max amt of tax the
co has paid on profits

s202-65 acts to cap the

franking credits to the
max amt

s202-60

Franking account has a

deficit balance at year end
(ie DR)

YES

Working out FDT for franking acct purposes

Company liable to pay FDT [s20545(2)]
Amount of FDT? [s214-150]
- if co tax instalments are paid, FDT is
FDT = Franking Deficit
payable 14 days after tax refund is
Payable on 31 July
given by ATO s205-45

Working out FDT Offset for income tax purposes

FDT Offset
Company entitled to
tax offset if it incurred
FDT [s205-70(1)]

Is FDeficit > Sum of FCr x 10%?

[s205-70(2)]
REFER TO NB

YES

Reduced Tax Offset by 30%

[s205-70(2)]
FDeficit (FDeficit x 30%)
REFER TO NB

NB: When determining whether penalty is applicable, only look at

FDr from Item 1 (franked dist) , 3 (contravention of benchmark dist) ,
5 (linked dist) , 6 (tax-exempt bonus shares), 30% penalty will be
determined based on these amounts
Private Company
[s103A(1)]
- not a public company

Franking period = 1
[s203-45]
1 jul 30 jun

Franking Credit for FDT

given immediately after
liability is incurred ie
1July [s205-15 Item 5]

Credit franking account for

next year for FDT amount
bringing the balance to nil.
FDT offset included in
calculation of income tax

Commissioners discretion to
have FDT not apply s205-70(6)

Under-franking [s203-50(1)(b)]
Penalty Debit to the companies
franking account = shortfall

Debit franking account

- imputation credits wasted

(Should Attach Attached)

Benchmark Rule [s203-25]
- first frankable distribution in a
franking period sets the
benchmark franking % [s203-30]

Benchmark Franking
Percentage [s203-35(1)]
[Franking Credit Attached /
Maximum Franking Credit] x 100
*first frankable dist est benchmark
franking % s203-30

Public Company
[s103A(3)]
- <= 20 people held >= 75% of
shares, voting power, dividends

Franking Period = 2
[s203-40]
1 july 31 dec & 1 jan
30 jun

Dividend Streaming/Anti-avoidance
1) Disclosure rule s204-75
-Need to notify commissioner in writing if benchmark % differs
significantly from last franking period (#franking period x 20%)
2) Linked distributions s204-15
-when one or more entity makes dist that are linked in some way (ie
from higher/lower benchamrks)
-penalty debt arise to the higher benchmark entitys acct
3) Tax-exempt bonus shares s204-25
-penalty debit = benchmark %
4) Streaming distributions
-give imputation credits to members who benefit the most
-Comissioner may determine franking debit arises, no imputation credit
arises to favoured member
5) General Anti-avoidance s177EA(3)
-Comissioner may determine franking debit arises, no imputation credit
Captured if:
a) Scheme relating to shares, b) Frankable distribution paid, c) Franking
credit benefits, d) Purpose of obtaining imputation benefit
Unfrankable distributions s202-40, s202-45
1) Share buyback treated as dividend under s159GZZZP
2) Deemed dividends Div 7A
3) Deemed dividends s108, s109
4) Dividends debited against share capital account

Distribution Statements s202-75

-Private cos
within 4 mths
on/before dist.
-Other entities
-approved form of stat s202-80
Over-franking [s203-50(1)(a)]
Company liable for Over-Franking
Tax = excess

Pay Over-Franking Tax

- no franking credit available!

(Should Attach Attached)

Other info
-Company has a franking account s205-10
-FCr>FDr = Surplus s205-40(1)
-FDr>FCr = Deficit s205-40(2)
Tax Treatment of Dividends
-Gross up for individuals of dividends AI under s207-20(1)
-Gross up for partnerships/trusts of dividends AI under s207-35(1)
-Imputation credits available under s207-20(2)
-Dividend assessable under s44(1)
no imputation credit available, not
-Dividend paid to non-res
assessable s128D, withholding tax applies to unfranked component
s128B(ga) (30%).
-Share of franking credits for partners in partnerships s207-57(2)
non-assessable, non-exempt
-Franked dividend to non-resident
deductions disallowed s8-1(2)(c) incurred in gaining nons128D
ass/exempt income

Qualified Person
To be entitled to franking credit/rebate, need to
satisfty:
1) Minimum holding period (45-day rule)
CLP68
2) TP applied franking credit/rebate ceiling
3) Franking rebate <$5000 s160APHT
4) Dividend paid in connection with winding up
Tainting share capital account CLP69
-when you can pay frankable dividends from a
tainted share cap acct

Ken Choi 2007