Franking deficit tax offset calculations, reduction rule and exclusions
The following method shows you how to calculate your franking deficit tax (FDT) offset for an income year. The amount you can claim is reduced by 30% where the FDT offset reduction rule applies. This is when certain franking debits exceed 10% of the amount of franking credits that arise in the income year.
An exclusion to the FDT offset reduction rule may apply either:
- in your first income year
- where the Commissioner of Taxation exercises his discretion in your favour because of events outside your control.
On this page:
How to calculate the amount of FDT offset
You can calculate the amount of franking deficit tax (FDT) offset for an income year using the following method. The calculations are also subject to special rules for private companies without any previous tax liabilities and for late-balancing entities.
Calculating the FDT-offset amount
Step
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What you need to do
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1
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Work out the amount of FDT liability that the entity has incurred in the income year.
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2
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Did any franking debits arise in your franking account under items 1, 3, 5 or 6 of section 205-30 Income Tax Assessment Act (ITAA) 1997?
If yes, go to step 3.
If no, the FDT offset reduction does not apply. Claim the amount of FDT liability from step 1 as a tax offset. Show this amount at the Offsettable portion of current year FDT label on the franking account return. Go to step 5.
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3
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Work out the amount of FDT liability attributable to items 1, 3, 5 and 6, plus any item 2 franking debits.
To do this, add together the opening balance (if any) of the franking account and any franking credits that arose in the account for the year (*see note below). Subtract from this amount the total of the items 1, 2, 3, 5 and 6 debits.
If the result is zero or positive, the FDT offset reduction does not apply. Claim the amount of FDT liability from step 1 as a tax offset. Show this amount at the Offsettable portion of current year FDT label on the franking account return. Go to step 5.
If the result is negative, this is the amount of franking deficit tax attributable to items 1, 2, 3, 5 and 6. Go to step 4.
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4
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If the step 3 amount for the year is negative and is less than or equal to 10% of the total franking credits that arose in the franking account in the same year, the FDT offset reduction does not apply. Claim the amount of FDT liability from step 1 as a tax offset. Show this amount at label C – Offsettable portion of current year FDT on the franking account return. Go to step 5.
If the step 3 amount for the year is negative and is greater than 10% of the total franking credits that arose in the franking account in the same year, the FDT-offset reduction applies as follows:
Work out 30% of the step 3 amount. This is the reduction amount. Reduce the amount of FDT liability from step 1 by the reduction amount. The result is the amount you can claim as a tax offset. Show this amount at the Offsettable portion of current year FDT label on the franking account return. Go to step 5.
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5
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Repeat steps 1 to 4 for each previous income year in which the entity did not meet the residency requirement. Use this to work out the amount of a previous year's FDT liability that is eligible to be claimed as an offset and that has not previously been claimed as an offset.
Add up the amounts covered by step 5 for all previous income years the entity did not meet the residency requirements.
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6
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Work out the amount of any excess FDT offset from a previous year (that has not been utilsed in a previous year after applying all other tax offsets).
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7
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Add up any amounts in the Offsettable portion of current year FDT label on the franking account return from steps 2, 3 or 4 plus any offsettable portions of previous year FDT amounts from step 5 and 6. This is the total amount of current year and previous year FDT offset the entity is entitled to claim for the income year. Show this amount at the FDT offset label in the calculation statement on the company tax return.
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Any FDT offset in excess of the income tax liability for the income year will be taken into account in calculating the amount of FDT offset in the following income year.
*Note: When you calculate the total amount of franking credits that arise in the franking account in the income year:
- do not include the opening balance of the franking account for the income year
- include credits that arise at the beginning of the income year as a result of a franking deficit tax liability that was incurred at the end of the previous income year.
Example: Calculating the FDT offset
EKW Ltd had a deficit in its franking account at the end of the 2015–16 income year of $80,000 and is liable to franking deficit tax (FDT) of $80,000. EKW Ltd had an opening balancing in its franking account at the beginning of the 2015–16 income year of $10,000. The only franking credits to arise in the franking account during the income year were PAYG instalments of $500,000 that were paid by the entity.
During the income year the entity made the following debits to the franking account:
- $510,000 of franking credits allocated to distributions (item 1 franking debits)
- $60,000 as a consequence of a refund of income tax (item 2 franking debits)
- $20,000 as a consequence of the Commissioner making a determination under the dividend streaming provisions (item 7 franking debits)
- In addition, EKW Ltd had a $900 excess FDT offset from the 2014–15 income year.
EKW Ltd's FDT offset for 2015–16 is calculated as follows:
Steps to calculate FDT-offset
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Step 1: FDT liability for the 2015–16 income year.
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$80,000
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Step 2: Did any item 1, 3, 5 or 6 franking debits arise in your franking account?
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Yes, go to step 3
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Step 3: Work out the amount of FDT liability attributable to items 1, 3, 5 and 6, plus any item 2 franking debits:
To do this add together the opening balance (if any) of the franking account and any franking credits that arose in the account for the year and subtract the item 1, 2, 3, 5 and 6 debits.
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[$10,000 + $500,000] - [$510,000 + $60,000]
= ($60,000)
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Step 4: If this amount is greater than 10% of the total amount of franking credits, work out 30% of the step 3 amount. This is the FDT offset reduction amount.
Reduce the amount of FDT liability by the reduction amount.
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$60,000 is greater than $50,000 (10% of the credits that arose in the account of $500,000). As a result the reduction applies. The reduction amount is $18,000 (60,000 x 30%)
$80,000 – 18,000 = $62,000
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Step 5: For each previous income year in which the entity did not meet the residency requirement, repeat steps 1 to 4.
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This step does not apply as EKW Ltd has always met the residency requirement.
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Step 6: Work out the amount of any excess FDT offset from a previous year.
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$900 carried forward from 2014–15 income year
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Step : Add up all the amounts from steps 2, 3 or 4 plus any offsettable portions of previous year FDT amounts from step 5 and 6. This is the total amount of previous and current year FDT offset the entity is entitled to claim for the income year in the calculation statement label E on the company tax return.
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$62,000 + $900 = $62,900
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EKW Ltd calculated that it is entitled to an FDT offset of $62,900 in 2015–16.
EKW Ltd's tax liability for 2015–16 is calculated as follows:
Description
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Amount $
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Amount $
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Taxable income
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$210,000
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Tax on taxable income (30%)
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$63,000
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Less franking credits from franked distributions received
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$3,000
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$60,000
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Less FDT offset
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$62,900
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Excess FDT offset
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($2,900)
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Tax payable
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$0
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This means that $2,900 of EKW Ltd's FDT offset cannot be offset in the 2015–16 income year. Therefore, when calculating the FDT offset for the 2016–17 income year, this $2,900 will be included at step 6. It can be offset against any tax liability for the 2016–17 income year.
The rules also provide that an FDT offset is applied against an entity's income tax liability after taking into account all other tax offsets to which the entity is entitled, including foreign tax credits.
End of exampleSee also:
FDT offset reduction rule
The amount of FDT offset you can claim is reduced by 30% when the FDT offset reduction rule applies.
The 30% FDT offset reduction rule is triggered when certain franking debits give rise to a deficit (debit greater than credits) that is greater than 10% of the total franking credits in the franking account in an income year.
These franking debts arise where an entity has either directly or indirectly franked a distribution or received a refund of income tax.
The applicable franking debits are specified at subsection 205-70(8) of the Income Tax Assessment Act 1997 (and section 205-71 of the Income Tax (Transitional provisions) Act 1997.
The applicable franking debits that would trigger the reduction rule are:
- item 1– when an entity franks a distribution
- item 3 – when an entity franks a distribution in contravention of the benchmark rule
- item 5 – when a distribution by one entity is substituted by a distribution by another entity
- item 6 – when a tax-exempt bonus share is issued in substitution for a franked distribution.
Provided franking debits first arose under any of the above items, then the applicable franking debits also includes:
- item 2 – when an entity receives a refund of income tax.
There are two situations where this reduction rule may not apply. These are in a private company's first taxable income year, or when the Commissioner has exercised his discretion in your favour because of events outside an entity's control.
See also:
Exclusions to the FDT offset reduction rule
There are two exclusions to the 30% franking deficit tax (FDT) offset reduction rule. The rule will generally not apply either:
- in the first income year in which a private company has an income tax liability where it meets certain conditions
- or where the Commissioner is satisfied that the franking deficit arose from events outside the entity's control.
Private company’s first taxable income year
The 30% FDT offset reduction rule does not apply to determine the amount of the offset from the 2004–05 and later income years in the following conditions:
- the entity is a private company (defined at section 767-90) for the relevant year (the income year in which it satisfies the residency requirements for a FDT offset)
- if the company did not have the tax offset (but had all its other tax offsets) it would have had an income tax liability for the relevant year
- the amount of the income tax liability for the relevant year is at least 90% of the amount of the deficit in the company's franking account at the end of the relevant year
- the company has not had an income tax liability for any income year before the relevant year.
Commissioner's discretion
The Commissioner of Taxation can make a determination in writing to disregard the FDToffset reduction rule where the franking deficit was due to circumstances that could not be anticipated or events outside of the entity's control.
The Commissioner will generally consider if the events that gave rise to the deficit were not readily foreseeable and could not be influenced by the company or did not involve the broader exploitation of the imputation system.
The Commissioner does not consider that a franking deficit arising due to improper tax planning, bad management, inadvertent errors, or expansion of business are circumstances that are unanticipated or beyond the entity’s control.
You can make an application for the Commissioner to exercise discretion in the approved form for events that occur on or after 1 July 2002.
Example 1: Commissioner's discretion – unexpected circumstances
A company franks a distribution part way through an income year. It has a reasonable expectation that future quarterly PAYG instalment payments will be similar in that year.
However, an unexpected downturn in business results in the company's future quarterly PAYG instalment payments being less than expected. This results in a deficit in its franking account at the end of the income year.
In this case, it would be expected that the Commissioner would make a determination to allow the full tax offset because of unexpected circumstances.
Example 2: Commissioner's discretion – circumstances outside your control
A tax consolidated group’s franking account is in deficit because it receives refunds of tax paid in earlier income years. This happens as a result of retrospective changes to the consolidation legislation.
At the time that it allocated franking credits, it did not have a reasonable expectation that the franking account would be in deficit. For example, the Tax Laws Amendment (2010 Measures No 1) Act 2010 introduced many changes which applied retrospectively from the commencement of the consolidation regime on 1 July 2002.
In this case, it would be expected that the Commissioner would make a determination to allow the full tax offset because of circumstances outside the entity's control.
End of exampleNext step:
This page explains how to calculate your franking deficit tax (FDT) offset. The amount of FDT offset you can claim is reduced by 30% where the FDT offset reduction rule applies. There are two exclusions where this reduction rule may not apply.