Early balancers with deficit balance

The conversion of the franking account on 1 July 2002 does not produce any liability for franking deficit tax for an early balancing entity. Any deficit in the old franking account on 30 June 2002 is converted and results in a tax paid debit to the new franking account.

There is no liability for franking deficit tax at the time of conversion. However, there may be a liability in the future where the new tax paid franking account is in deficit at the end of an income year.

Example: Early balancer - conversion of franking deficit

Worm Catchers Ltd is an early balancing company and its 2001-02 income year ends on 31 March 2002.

It continues to maintain its franking account under the former system from 1 April 2002, and has a deficit in the class C franking account of $700 on 30 June 2002.

Worm Catchers Ltd credits its franking account with $700 on 30 June 2002 to close off the old account operating under the former imputation system.

On 1 July 2002 it establishes a new franking account using the tax paid basis.

$700 is converted to a tax paid amount and debited to the new account using the formula :

$700 x (30/70) = $300

Worm Catchers is not liable for any franking deficit tax at the time of the conversion.

End of example
    Last modified: 09 Jul 2014QC 17505