Under-franking debit penalty

Under-franking occurs when the franking percentage of a distribution is lower than the benchmark franking percentage.

The penalty for under-franking is a debit to the franking account equal to the amount of the under franking.

This means a loss of credits that would otherwise be available to attach to future distributions.

The penalty debit for under-franking arises on the day on which the frankable distribution is made. The penalty debit is in addition to the franking debit that arises from the payment of a franked distribution.

The penalty debit is equivalent to the difference between the franking credit that was attached to the distribution and the franking credit that should have been attached to comply with the benchmark rule.

The amount of the penalty debit is calculated using the same formula as the over-franking tax:

Franking % differential times amount of the frankable distribution times [corporate tax rate divided by (100% minus corporate tax rate)]

The penalty debit effectively cancels out the unused credit. The penalty for under-franking is that a franking credit that could otherwise have been passed on to members, is wasted. The member receiving the under-franked distribution can only claim the amount of credit shown on the distribution statement.

Example: Under-franking penalty debit
ORR Pty Ltd made a distribution of $500 to its members and allocated a franking credit of $107 resulting in a franking percentage of 50%.

The benchmark franking percentage for the franking period was 100%. The distribution should have had $214 in franking credit attached.

As ORR Pty Ltd has franked the distribution at a lower rate than the benchmark franking percentage a penalty to the franking account is calculated as follows:

(100% - 50%) x $500 x (30/70) = $107

The penalty debit of $107 occurs on the day the distribution is made.

The shareholder receiving the distribution should only gross-up their income by, and claim a tax offset for, the $107 shown on the distribution statement.

End of example
    Last modified: 09 Jul 2014QC 17505