Frankability of non-share dividends

An anomaly that existed in the imputation rules relating to the frankability of non-share dividends was rectified on 21 October 2003 when the Taxation Laws Amendment Bill (No.8) 2003 received royal assent.

The previous process ignored expected profits when calculating whether there were sufficient profits to frank a non-share dividend. This could result in franking credits not being able to be used to frank the distributions on a non-share equity interest even though franking credits were available.

Under the amendments, expected profits can now be taken into account in calculating whether a non-share dividend may be franked.

The amendments were needed as the debt/equity provisions created a new category of equity interest - a non-share equity interest. For example, an income security which provides returns contingent on profits, but is not legally a share, is an equity interest.

Non-share dividends are returns made on interests, characterised under the debt/equity rules as equity interests that are not in the form of shares. These interests are intended to be frankable in the same way that dividends on shares that are equity interests are frankable.

Under the existing income tax law, dividends on shares have to be paid out of realised profits to be frankable. To ensure that non-share dividends are treated in a similar way, the imputation rules align a company's ability to frank non-share dividends with the amount of its profits. This is achieved by calculating a company's 'available frankable profits' immediately before the payment of the non-share dividend.

The following distributions on non-share equity interests will be made unfrankable:

  • distributions made in respect of certain non-share equity interests that are hybrid instruments issued by Australian authorised deposit-taking institutions for the purposes of the Banking Act 1959. These distributions were specifically made unfrankable under the old imputation system, and
  • distributions made in respect of non-share equity interests and the distribution is attributable to non-profit sources. That is, a company cannot frank a non-share distribution unless it has available profits.

Both of these rules replicate imputation rules from the former imputation system that were repealed from 1 July 2002.

    Last modified: 09 Jul 2014QC 17505