Corporate tax entities
The same gross-up and credit approach applies to a corporate tax entity.
However, because the corporate tax rate (30%) results in the same taxable amount as the credit attached to a fully franked distribution, the corporate tax entity does not pay any additional tax.
This is because the income was already fully taxed at the level of the corporate tax entity making the distribution.
A corporate tax entity also receives a credit to its franking account. This credit can be passed on (imputed) to the members of the entity by way of a distribution.
The introduction of a gross-up and credit approach for a company replaces the inter-corporate dividend rebate that was formerly available to companies in receipt of franked dividends.
Consistent with the former imputation rules a corporate tax entity, other than certain income tax exempt charities and deductible gift recipients, will not be entitled to refunds of excess franking credits. However it will be entitled to convert any excess franking offsets to a carry forward loss. Refer to the 'No wastage of losses' section below.
On 15 August 2002, Edwards Pty Ltd receives a franked distribution of $700 with $300 franking credits attached to the franked distribution.
Edwards Pty Ltd includes $1,000 ($700 franked distribution plus $300 franking credits) in its assessable income and is entitled to a $300 tax offset to reduce against its income tax liability.
In addition to this, on 15 August 2002 Edwards Pty Ltd would generate a franking credit of $300 in its franking account.
End of example
Indirect receipt of a distribution
A franked distribution to certain partnerships and trusts is treated as flowing indirectly to members of the partnership or trust.
Only the ultimate recipients of the distribution, who are assessed on the share of the net income that flows indirectly to them, are entitled to the tax offset.
Each member's share of the franking credit on the distribution is included in that member's assessable income. Each member is then entitled to a tax offset equal to that share of the franking credit, provided the member is not itself a partnership or trust through which the distribution flows indirectly.
Where the trustee, rather than the member, is the taxpayer on a share of the distribution, it is the trustee in that capacity who is entitled to the tax offset.