Receiving a distribution
The new key concepts introduced as a result of the changes to the simplified imputation system are:
- the concept of 'member'
- replacement of the inter-corporate dividend rebate with the consistent gross-up and credit approach, and
- refund of excess imputation credits (REIC) now known as franking credits.
The simplified imputation system will ensure consistent treatment across most members in receipt of franked distributions by applying the gross-up and credit approach.
Generally, the introduction of the simplified imputation system has not changed the way taxpayers who are individuals treat a franked distribution. However, the introduction of the gross-up and credit approach for companies replaces the inter-corporate dividend rebate that was formerly available to companies in receipt of franked dividends.
A distribution may be received directly by the member, or indirectly through a partnership or trust.
Where a member receives a franked distribution directly, the receiving member includes both the distribution and any franking credit in their assessable income. The member is then entitled to a tax offset equal to the franking credit.
Where a franked distribution is received indirectly through a partnership or trust, there are provisions to allocate franking credits to the ultimate recipients in proportion to their share of the underlying distribution. Although the method has changed, the outcome is generally the same as the previous legislation.
A refund of excess franking credits is available to resident individuals, superannuation funds and other eligible entities where the amount of franking credit they receive exceeds their basic tax liability.
The general application of the rule relating to receiving a franked distribution are modified:
- by residency requirements for the receiving entity
- by adjustments for indirect distribution to non-residents
- where the distribution is not taxed, and
- where the imputation system has been manipulated.