Qualified dividend approach
The balance in the franking account under the former system represented the amount of fully franked dividends that could be paid to shareholders.
Example: The former approach
A company with $10,000 in taxable income paid $3,400 in tax at the company tax rate of 34%. The $6,600 left after tax can be paid as a fully franked dividend. Under the former system $6,600 is credited to the franking account.
End of example
One of the consequences of adopting this approach is the difficulty created with company tax rate changes. Because the franking account balance is based on a calculation involving the corporate tax rate, certain anomalies occur when that tax rate is changed.
By using a tax paid basis for maintaining the franking account there is no conversion needed when the tax rate is changed, nor is there a need for additional supporting legislation.