When does franking deficit tax arise?

The franking account under the simplified imputation system is never closed off. Instead, it is a rolling balance account, which means that the balance of the franking account rolls from one income year to another.

However if, at the end of the income year, a corporate tax entity has a franking deficit in its franking account then it is liable to pay franking deficit tax.

A franking deficit is when total franking debits in the franking account exceeds total franking credits.

If a franking deficit would have arisen at the end of an income year, but does not because of a payment of tax that is refunded within three months of the end of the income year, the refund of tax will be treated for the purpose of franking deficit tax as though it had been paid at the end of that income year. This will result in a recalculation of franking deficit tax. This rule achieves the same outcome as the deficit deferral tax that was imposed under the former system, but removes the need for a separate tax.

Franking deficit tax can generally be offset against future income tax liabilities. If the franking deficit at the end of the year exceeds 10% of the total franking credits that arose in the franking account in that income year the amount of the FDT tax offset will be reduced by 30%. Any FDT tax offset that exceeds tax liability in an income year will be included in calculating the FDT tax offset for the following income year. For more information see Simplified imputation system: Franking deficit tax offset.

    Last modified: 17 Dec 2015QC 16621