Over-franking occurs when a distribution is franked at a rate higher than the benchmark rate.
If the corporate tax entity over-franks a distribution it will be liable to pay over-franking tax.
The over-franking tax is equal to the amount of franking credits allocated in excess of the benchmark.
This tax, when paid, does not generate a credit in the corporate tax entity's franking account. The over-franking tax is included in the franking account tax return which is lodged by the last day of the month following the end of the income year.
The penalty applies to the franking entity only. The member receiving the distribution can still claim a tax offset for the amount of the franking credit shown on the distribution statement.
The amount of overfranking tax is worked out using the following formula:
For the purposes of the formula, the franking percentage differential is the difference between:
- the franking percentage for the distribution, and either:
- the entity's benchmark franking percentage for the franking period in which the distribution is made, or
- the franking percentage permitted by the Commissioner in a determination made under section 203-55.
The amount of over-franking tax is imposed by a separate Act, The New Business Tax System (Over-franking Tax) Act 2002.
Example: over-franking tax
Jeneris Ltd, a corporate tax entity, has a benchmark franking percentage for the current franking period of 80%. Using this benchmark would mean that a frankable distribution of $700 would have $240 of franking credits attached.
However, Jeneris Ltd makes a fully franked distribution of $700 within that franking period. In other words, it allocates a $300 franking credit (resulting in a franking percentage of 100%).
The entity has over-franked this distribution and over-franking tax will be imposed.
The amount of the over-franking tax will be equivalent to the franking credit allocated in excess of the benchmark.
(100% - 80%) x $700 x (30/70) = $60
End of example
Example: Over-franking tax
ORR Pty Ltd made a distribution of $500 to its members and allocated franking credit of $214 resulting in a franking percentage of 100%.
The benchmark franking percentage for the franking period was 50%.
As ORR Pty Ltd has franked the distribution to more than the benchmark franking percentage it is liable to pay over-franking tax calculated as follows:
(100% - 50%) x $500 x (30/70) = $107
Payment of the over-franking tax does not give rise to any credit in ORR's franking account. However, the shareholder receiving the distribution can claim the full tax offset of $214 in their income tax return.
ORR is required to lodge a franking account tax return by the last day of the month following the end of their income year. They should include an amount of $107 at label D in the franking account tax return.
End of example