Simplified imputation - the franking account

Simplified imputation - the franking account

This fact sheet provides information on the changes to the franking account with the introduction of the simplified imputation system. It also contains links to other fact sheets in the series on imputation.

For information on how early balancing corporate tax entities convert their class C franking account to an equivalent tax-paid basis refer to the fact sheet Simplified imputation: consequential amendments for an early balancing corporate tax entity to convert its franking account to a tax paid basis.

Key points

  • The simplified imputation system took effect from 1 July 2002.
  • Entries in the franking account are recorded on a tax-paid basis.
  • The franking account will operate on a rolling balance account.
  • The new rules replicate the former rules relating to franking credits and debits and the times at which they arise.
  • Franking deficit tax will be imposed if a franking account is in deficit at the end of the income year; or at 30 June for certain late balancing corporate tax entities.
  • Franking deficit tax will continue to be creditable against income tax.

Status and changes

This fact sheet replaces a previous fact sheet published on 11 July 2002.

To whom do the franking account rules apply?

The imputation provisions introduce the concept of a 'corporate tax entity' and a 'franking entity'. The franking account rules apply to all corporate tax entities rather than only to franking entities.

Corporate tax entities are companies, corporate unit trusts, public trading trusts and corporate limited partnerships. Franking entities are corporate tax entities that are not mutual life insurance companies.

What is a franking account?

A franking account is an account that a corporate tax entity maintains to keep track of the income tax credits that it can pass on to its members.

The franking account is credited with franking credits and debited with franking debits.

When does a franking credit arise?

A franking credit arises when a corporate tax entity:

  • makes a payment of a PAYG instalment or income tax
  • receives a franked distribution, or
  • incurs a liability for franking deficit tax.

When does a franking debit arise?

A franking debit arises when a corporate tax entity:

  • receives a refund of income tax
  • makes a franked distribution
  • under franks a distribution (that is, the corporate tax entity makes a distribution with a franking percentage that is less than the entity's benchmark franking percentage for the franking period)
  • ceases to be a franking entity (to eliminate any franking surplus in the franking account)
  • makes a linked distribution
  • issues tax-exempt bonus shares (instead of making a distribution)
  • streams imputation benefits to members most able to benefit from them
  • pays a distribution under the rules governing payments and loans to a shareholder (Division 7A of Part III of the Income Tax Assessment Act 1936), or
  • buys back a share on-market.

How will franking credits and debits be recorded?

Under the new imputation system, franking account entries are recorded on a tax-paid basis.

Example 1: Recording a Franking Credit

On 31 October 2002 Savcor Pty Ltd has $100 taxable income and pays $30 in income tax, Savcor Pty Ltd will record a $30 franking credit in its franking account.

How are franking surpluses prior to 1 July 2002 converted?

There are a number of transactions that need to be performed to an existing franking account at the end of 30 June 2002 and at the start of 1 July 2002 to facilitate the transition from the former imputation system to the simplified imputation system.

For corporate tax entities whose income year ends on 30 June or who are late balancing entities (that is, their income year ends after 30 June):

  1. On 30 June 2002, corporate tax entities that have a class C franking account under the former imputation system will close off that franking account. This includes squaring off franking accounts that have a franking deficit (total franking debits exceed total franking credits) to crystallise their franking deficit tax liability.
  2. Franking credits arise in the class C franking account to cancel any outstanding franking debits that arose due to an estimated debit determination made before 1 July 2002.
  3. At the start of 1 July 2002 franking accounts under the simplified imputation system are established.
  4. Class C Franking account surpluses (total franking credits exceeds total franking debit) from the former imputation system are rolled over into the new franking account and the new franking period by applying a factor of 30/70.

Example 2: Converting franking surpluses

At the end of the day on 30 June 2002, Trixie Pty Ltd has a Class C franking surplus of $7,000.

On 30 June, Trixie Pty Ltd closes off the Class C franking account. It opens a new franking account on 1 July 2002 and credits the new franking account with $3,000 ($7,000 x 30/70).

When does franking deficit tax arise?

The franking account under the simplified imputation system is never closed off. Instead, it is a rolling balance account, which means that the balance of the franking account rolls from one income year to another.

However if, at the end of the income year, a corporate tax entity has a franking deficit in its franking account then it is liable to pay franking deficit tax.

A franking deficit is when total franking debits in the franking account exceeds total franking credits.

If a franking deficit would have arisen at the end of an income year, but does not because of a payment of tax that is refunded within three months of the end of the income year, the refund of tax will be treated for the purpose of franking deficit tax as though it had been paid at the end of that income year. This will result in a recalculation of franking deficit tax. This rule achieves the same outcome as the deficit deferral tax that was imposed under the former system, but removes the need for a separate tax.

Franking deficit tax can generally be offset against future income tax liabilities. If the franking deficit at the end of the year exceeds 10% of the total franking credits that arose in the franking account in that income year the amount of the FDT tax offset will be reduced by 30%. Any FDT tax offset that exceeds tax liability in an income year will be included in calculating the FDT tax offset for the following income year. For more information see Simplified imputation system: Franking deficit tax offset.

More information

Other fact sheets in this series on the imputation system are also available, see:

You can obtain these publications and other information about the imputation system by:

If you do not speak English and need help from the Tax Office, phone the Translating and Interpreting Service on 13 14 50.

People with a hearing or speech impairment with access to appropriate TTY or modem equipment should phone 1300 130 478.

Last Modified: Monday, 24 May 2004

Our commitment to you

We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice.

Copyright

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products)