• Which franking debits trigger the application of the FDT offset reduction rule?

    The FDT offset reduction rule will only apply in an income year in which franking debits arose in an entity's franking account under:

    • items 1, 3, 5 and 6
    • item 2, provided franking debits arose under any of the above items

    of the table in section 205-30 of the Income Tax Assessment Act 1997 (ITAA 1997). These debits arise where an entity has either directly or indirectly franked a distribution or received a refund of income tax respectively.

    The amount that can be claimed as a tax offset in relation to an FDT liability is reduced where the deficit attributable to franking debits that arose in the franking account under items 1, 2, 3, 5 and 6 is greater than 10% of the total credits that arose in the franking account for the year. The tax offset is reduced by an amount equal to 30% of the portion of the deficit attributable to the item 1,2,3,5 and 6 franking debits. The 30% reduction does not apply to franking debits attributable to items 4, 7, 7A, 7B and 9.

    The total amount of franking credits that arose in the franking account in an income year does not include the opening balance of the franking account for the income year. The total amount of franking credits that arose in the income year does include a credit that arises at the beginning of the income year as a result of a franking deficit tax liability that is incurred at the end of the previous income year.

    The following table lists all franking debits that can arise in a franking account.

    Section 205-30 Income Tax Assessment Act 1997
    Debits in the franking account

    Item 1

    Franking debits that arise when an entity franks a distribution

    Item 2

    Franking debits that arise when the entity receives a refund of income tax

    Item 3

    Franking debits that arise when an entity franks a distribution in contravention of the benchmark rule

    Item 4

    Franking debits that arise when an entity ceases to be a franking entity

    Item 5

    Franking debits that arise when a distribution by one entity is substituted for a distribution by another entity

    Item 6

    Franking debits that arise when a tax exempt bonus share is issued in substitution for a franked distribution

    Item 7

    Franking debits that arise when the Commissioner makes a determination under paragraph 204-30(3)(a) of the ITAA 1997

    Item 7A

    Franking debits that arise under subsection 197-45(1) of the ITAA 1997 when an amount is transferred to an entity's share capital account in contravention of the share capital tainting rules

    Item 7B

    Franking debits that arise under subsection 197-65(2) of the ITAA 1997 because an entity chooses to untaint its share capital account

    Item 9

    Franking debits that arise when a company buys a membership interest in an on-market buy back

    Note: Item 8 - franking debits that arise when an entity is taken to have paid a dividend under Division 7A of Part III of the Income Tax Assessment Act 1936 was repealed with effect from 1 July 2006 by Tax Laws Amendment (2007 Measures No.3) Act 2007 (79 of 2007).

      Last modified: 02 Dec 2016QC 25289