Refund of franking credits after 1 July 2002
Excess imputation credits could be refunded to resident individuals and complying superannuation funds from 1 July 2000.
The refunding of excess franking credits measure is contained in Division 67 of the ITAA and was inserted by Schedule 2 of the New Business Tax System (Miscellaneous) Act (No. 1) 2000. This bill received royal assent on 30 June 2003.
The changes also help achieve taxation of dividend income at the appropriate rate for individuals and complying superannuation funds.
Under the simplified imputation system, excess imputation credits are now called franking credits.
Example: Self funded retiree
Kitty is a single self-funded retiree with a taxable income of $12,000 a year. She has $100,000 worth of shares. The average dividend on her share portfolio is 4%, providing dividend income of $4,000 a year and imputation credits worth $2,250.
However, as Kitty benefits from the low income aged persons rebate, she does not have to pay income tax and, consequently (under pre-reform law), she could not make use of her imputation credits.
The introduction of refundable imputation credits means that Kitty can receive the full benefit of these credits of $2,250.
End of example
Example: Complying superannuation fund
HEA, a complying superannuation fund has $100,000 worth of shares. The average dividend on its share portfolio is 4%, providing dividend income of $4,000 a year and imputation credits worth $2,250.
HEA's tax on income of $6,250 at 15% is $937.50.
The introduction of refundable imputation credits means that HEA complying superannuation fund can receive the full benefits in relation to these credits instead of merely the tax offset of $937.50.
End of example
The right to refunds of excess franking credits was extended to registered charities and deductible gift recipients from 1 July 2000, following amendment to the New Business Tax System (Miscellaneous) Bill 1999.