Maximum franking credit
The concept of a maximum franking credit for a distribution ensures that a corporate tax entity does not attach more franking credits to distributions than the tax it has paid.
The maximum franking credit is calculated using the following formula:
Thus the maximum franking credit broadly represents the tax that the entity could have paid at the current corporate tax rate on the income giving rise to the distribution.
Example: maximum franking credit
Popsicle Pty Ltd has $7,000 to distribute to its shareholders.
The maximum franking credit that Popsicle Pty Ltd could allocate to this frankable distribution is:
Where a corporate tax entity purports to attach more than the maximum franking credits to a distribution, the credit allowed to the member receiving the distribution is limited to the maximum franking credit.
The corporate tax entity debits its franking account only to the extent of the maximum franking amount.
End of example