What is a distribution?

When a corporate tax entity distributes profits to its members, it has the option of passing to those members credits for income tax paid by the entity. This is called franking the distribution.

Franking means 'stamping' or marking distributions as carrying franking credits that can be passed (imputed) to members.

An entity can only frank a distribution if the following conditions are met:

  • the entity is a franking entity and satisfies the residency requirement
  • the distribution is a frankable distribution, and
  • the entity allocates a franking credit to the distribution.

Example: Franking a distribution

Smoel Pty Ltd has taxable income of $15,000 for the year ended 30 June 2003. The company tax rate for year ending 30 June 2003 is 30%. Smoel Pty Ltd will pay tax of $4,500 (15,000 x 30%).

This means that Smoel Pty Ltd has the option of passing to its members the $4,500 income tax that it has paid. Generally, the company can do this by attaching a franking credit to any distribution of realised profit.

A dividend can be fully franked or partly franked depending on the decisions made by the franking entity.

End of example
    Last modified: 09 Jul 2014QC 17505