Comparison with former imputation system

The major changes introduced by the simplified imputation system are shown in the following table.

Simplified imputation system

Former imputation provisions

Currency of the franking account
Franking credits arising from income tax paid are expressed on a tax-paid basis.

Franking credits arising from income tax paid were expressed based on a notion of 'qualified dividend'. This meant that the balance reflected the undistributed profits sourced from taxed income.

Management of franking account
The franking account is a rolling balance account. An entity is not required to carry forward a surplus balance to the following income year. If the account is in deficit, the entity will be liable for franking deficit tax for that year. A franking credit will arise immediately after the liability is incurred.

If the franking account is in surplus at year-end, the amount of that surplus will be carried forward and registered in the account as a credit on the first day of the following year. If the account is in deficit, that deficit will not be carried forward. However, the company will be liable to pay franking deficit tax.

Franking a distribution
There are no formal declaration processes that must be followed when franking a distribution. It is simply a matter of allocating franking credits to the dividend. The mechanism for allocating franking credits is determined by the entity.

Companies were required to follow complex franking rules when franking a distribution including the requirement of making a declaration stipulating the extent to which a distribution was franked.

Distribution statements
Generally, companies will continue to provide distribution statements at the time, or before, the distribution is made. However, private companies are permitted to provide distribution statements up to four months after the end of the income year in which the distribution is made. This allows private companies to retrospectively frank distributions.

Companies were required to provide distribution statements to members at the time, or before, the dividend is paid.

Receiving franked distributions
Resident corporate tax entities that receive a franked distribution from another corporate tax entity use the same gross-up and credit method as resident individuals and superannuation entities.

Resident companies that received a franked dividend from another company included the net amount of the dividend in assessable income and were eligible for an inter-corporate dividend rebate.

Benchmark rule
The benchmark rule allows companies to select their franking percentage having regard to their existing and expected franking account surplus and the rate at which they franked earlier distributions.

In order to avoid adverse consequences, all frankable distributions made by a company during a franking period are required to be franked to the same extent - this is known as the benchmark franking percentage.

If a company franks a dividend in excess of the benchmark franking percentage, ie over-franked, the entity is subject to over-franking tax equal to the excess part of the franking credit applied. This is a new tax and is not creditable to the franking account.

If a company franks a dividend less than the benchmark franking percentage, ie under-franked, the entity incurs a debit penalty to the franking account equal to the deficiency in the franking credit.

Companies could declare a dividend to be franked to any percentage less than, or equal to, 100%. If they wanted to avoid penalties and other adverse consequences they had to conform to the complex required franking account rules (RFA).

The RFA rules required a dividend to be franked to the minimum extent possible. Generally, this minimum extent is determined on the basis of using as much of the franking account surplus at the time of payment as possible, after allowance is made for future committed dividends and other dividends which have the same reckoning day.

If a company franked less than the required franking amount, ie under-franked, there would be a penalty debit to the franking account.

If a company franked more than the required franking amount, there would be no direct penalty, however franking deficit tax (FDT) could arise at the end of the franking year.

Franking periods
The benchmark rule requires a new time interval. It is called the franking period and it varies according to the type of company. For private companies, it is equal to its income year. For other companies, there are generally two franking periods (being the two, six-month periods) in an income year.

The relevant period for applying the RFA rules is the 'franking year'. A company's franking year depended on the balance date it used to return its taxable income.

For normal balancers and early balancers the franking year was aligned to its income year whilst late balancers had a franking year that ended on 30 June.

Period for determining FDT
The concept of 'franking year' has been discontinued. Generally, the income year becomes the relevant period for determining FDT for all balancers. There are some transitional exceptions to this rule.

The concept of 'franking year' was relevant for determining FDT and RFA rules.


    Last modified: 09 Jul 2014QC 17505