Benchmark franking percentage
The benchmark franking percentage for a franking period is the franking percentage allocated to the first frankable distribution made by the franking entity within that franking period.
The benchmark rule provides that all frankable distributions made by a franking entity during a franking period must be franked to the same extent.
Conduit foreign income
Broadly, conduit foreign income is income from foreign sources that is non-assessable and non-exempt. It might be a disregarded capital gain or foreign income for which a foreign tax credit has been claimed. It also includes conduit foreign income received by a corporate tax entity (directly or indirectly) from another corporate tax entity as part of a distribution. Search our website for more information on conduit foreign income.
A co-operative established under state legislation but which qualifies as a co-operative under the tax act.
Corporate tax entity
A corporate tax entity is a:
- corporate limited partnership
- corporate unit trust, or
- public trading trust.
Early balancing corporate tax entities
An early balancing corporate tax entity is one that has an approved substituted accounting period which ends before 30 June.
All distributions are frankable unless they are unfrankable distributions. The legislation specifically lists unfrankable distributions.
Franking is the act of stamping or marking the distribution with income tax credit, called franking credit, that the entity can pass onto it members.
The franking account is an account that a corporate tax entity maintains to track the income tax credits (franking credit) that it can pass onto its members. The franking account is credited with franking credits and debited with franking debits.
Franking credit is income tax credit that a corporate tax entity can pass on to its members. Franking credit is credited in a corporate tax entity's franking account. 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.
A franking debit arises when a corporate tax entity:
- receives a refund of income tax
- makes a franked distribution
- underfranks a distribution (that is, a 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 Part III Income Tax Assessment Act 1936), or
- buys back a share on-market.
A franking deficit occurs when total franking debits in the franking account exceed total franking credits.
A franking entity is a corporate tax entity which meets the residency requirements. A franking entity can be a company, a corporate limited partnership, a corporate unit trust, a public trading trust, or a co-operative. It does not include mutual life insurance companies or a company acting as a trustee of a trust.
The franking period for a private company is the same as its income year. The franking period for a corporate tax entity other than a private company is determined by the length of its income year.
A franking surplus occurs when total franking credits in the franking account exceed total franking debits.
Gross-up and credit approach
The gross-up and credit approach describes the approach where the entity's assessable income is grossed up to include franking credit attached to franked dividends and the entity is entitled to a franking offset equal to the amount of the gross-up included in its assessable income. The gross-up and credit approach applies to both individuals and corporate tax entities.
The 'imputation system' refers to the tax law governing how and when income tax paid by a corporate tax entity is imputed to the entity's members. It may also be referred to as the franking system, because the tax is imputed to members by means of franking distributions of the entity to its members.
Members of a corporate tax entity include company shareholders, trust beneficiaries and partners in partnerships.
Over-franking tax is a penalty imposed on a corporate tax entity if the franking percentage for the distribution exceeds the benchmark franking percentage.
Simplified imputation system
The simplified imputation system is the area of Australian tax law that covers franked distributions to members of corporate entities. Simplified imputation rules operate from 1 July 2002 and are referred to as 'the imputation system'.
Substituted accounting period (SAP)
An early balancing corporate tax entity is one that has obtained the Commissioner's permission to use an income year that ends on a date other than 30 June (the standard income year). These companies are granted an approved substituted accounting period which is in lieu of an income year ending on 30 June. Such companies can therefore also be known as 'SAPs'. Generally, an early balancing corporate tax entity is one that has its income year end before 30 June.
Tax paid basis
This phrase relates to the way that the new franking accounts under the simplified imputation system are to be maintained. For example, if a corporate tax entity pays tax of $5,000, it would credit its franking account with $5,000.