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  • How to calculate over-franking tax and under-franking debit

    If a franking entity over-franks a distribution, it must pay over-franking tax. This is equal to the amount of franking credits in excess of the benchmark. If the entity under-franks a distribution, it must debit its franking account. This amount is equivalent to the franking credits that would have been used if the entity franked the distribution to its benchmark percentage.

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    Over-franking tax

    If the franking entity over-franks a distribution it must pay over-franking tax. This is equal to the amount of franking credits allocated in excess of the benchmark.

    When paid, this tax does not generate a credit in the entity’s franking account. The over-franking tax is included in the franking account tax return. This must be lodged by the last day of the month following the end of the income year.

    Formula to calculate over-franking tax

    Work out the amount of over-franking tax using the following formula:

    Amount of the
    frankable distribution

    ×

    Franking % differential

    ÷

    Corporate tax
    gross-up rate

    The franking percentage differential is the difference between the franking percentage for the distribution, and either:

    • the entity’s benchmark franking percentage for the franking period in which the distribution is made
    • the franking percentage permitted by us in response to an application from the entity.

    Formula to calculate corporate tax gross-up rate

    The corporate tax gross-up rate is calculated using the following formula:

        100% − your corporate tax rate for imputation purposes    
    your corporate tax rate for imputation purposes 

    For the 2017–18 income year, your corporate tax rate for imputation purposes will be 27.5% if either of the following apply:

    • your aggregated turnover in 2016–17 was less than $25 million, and 80% or less of your assessable income was base rate entity passive income
    • this is the first year you are in business.

    Otherwise, your corporate tax rate for imputation purposes will be 30%.

    Under-franking debit

    If an entity franks a distribution at a rate lower than the benchmark franking percentage, it is required to debit its franking account with an amount equivalent to the unused franking credits.

    This debit arises on the day on which the frankable distribution is made.

    The debit is equal 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.

    Formula to calculate under-franking debit

    The amount of under-franking debit is worked out using the same formula as the over-franking tax.

    Work out the amount of under-franking debit using the following formula:

    Amount of the
    frankable distribution

    ×

    Franking % differential

    ÷

    Corporate tax
    gross-up rate

    The franking debit cancels the unused credit. The franking credit that could have been passed on to members is wasted. The member receiving the distribution can only claim the amount of credit on the distribution statement.

    Example 1: Under-franking debit

    On 31 August 2017, Do Pty Ltd makes its first frankable distribution of $7,000 to its shareholders. The balance in its franking account at the time is $10,000. As Do Pty Ltd has a 30% corporate tax rate for imputation purposes, the maximum franking credit that Do Pty Ltd can allocate to this distribution is $3,000 ($7,000 x (1 ÷ the corporate tax gross-up rate which is 2.33333)). Do Pty Ltd chooses to allocate franking credits of $1,500 to the distribution. The franking percentage for this distribution is 50% ($1,500/$3,000). As this is the first frankable distribution made in the franking period its benchmark franking percentage is also 50%.

    On 18 December 2017, Do Pty Ltd makes a frankable distribution of $7,000 to its shareholders. The balance in its franking account at the time is $8,500. Do Pty Ltd chooses not to allocate any franking credits to this frankable distribution. Do Pty Ltd's benchmark franking percentage is 50% which means that Do Pty Ltd should have allocated $1,500 of franking credits on the distribution. As Do Pty Ltd did not allocate any franking credits to the distribution it will be subject to a franking debit of $1,500 ($7,000 x 50% ÷ 2.33333).

    Whilst Do Pty Ltd must debit its franking account with this amount, its shareholders will not be entitled to any tax offset in relation to the amount of franking credits that should have been allocated to the distribution. That is, the distribution statement will show that the amount of franking credit allocated to the distribution is $0.

    Example 2: Over-franking tax

    Using the facts above, if on the 31 January 2018, Do Pty Ltd makes a frankable distribution of $7,000 (franked to 70%), Do Pty Ltd will incur an over-franking tax of $600 ($7,000 x 20% ÷ 2.33333).

    End of example

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      Last modified: 27 Apr 2018QC 50652