The benchmark rule provides that all frankable distributions made within the franking period must be franked to the extent established by the benchmark franking percentage.
The rule is designed to ensure that one member of a corporate tax entity is not preferred over another when distributions are franked.
The franking percentage for the first frankable distribution made in the franking period will establish the benchmark franking percentage for that franking period. If the franking entity does not make any frankable distributions within the franking period then it will not have a benchmark franking percentage.
Example 3: Establishing the benchmark franking percentage
On 31 August 2002, Do Pty Ltd made its first frankable distribution of $7,000 to its shareholders. The balance in its franking account at the time was $10,000. The maximum franking credit that Do Pty Ltd could allocate to this distribution is $3,000 (ie. $7,000 x (30% 70%)). Do Pty Ltd chooses to allocate franking credits of $1,500 to the distribution. The franking percentage for this distribution is 50% (i.e $1,500 $3,000). As this is the first frankable distribution made in the franking period by Do Pty Ltd its benchmark franking percentage is also 50%.
In the event a franking entity franks a frankable distribution in excess of its benchmark franking percentage it will be liable to pay overfranking tax. The amount of overfranking tax will be equal to the amount of franking credit that was allocated on the distribution in excess of the benchmark rate. This overfranking tax does not generate a credit in the franking account.
On the other hand if a franking entity franks a frankable distribution to an extent that is less than the benchmark franking percentage, then it will be required to debit its franking account with an underfranking penalty debit. The underfranking penalty debit is in addition to the franking debit that would arise as a result of paying the franked dividend. The underfranking penalty debit together with the franking debit for franking credits actually allocated to the distribution, will result in a franking debit equal to the debit that should have resulted had the distribution been franked at the benchmark rate.
The method of calculating the overfranking tax and the underfranking penalty debit is the same.
Example 4: Calculating the underfranking penalty debit
Note: The example continues on from Example 3.
On 18 December 2002, Do Pty Ltd made a frankable distribution of $7,000 to its shareholders. The balance in its franking account at the time was $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 an underfranking penalty debit of $1,500. Whilst Do Pty Ltd must debit its franking account with this underfranking penalty, 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 would show, amongst other things, that the amount of franking credit allocated to the distribution was $0.
A corporate tax entity may apply to the Commissioner in writing, either before or after a distribution is made, for permission to depart from the benchmark rule.
The power to permit a departure from the benchmark rule will be exercised by the Commissioner only in extraordinary circumstances. Generally, the circumstances justifying a departure would need to be unforeseeable and beyond the control of the entity, its members and controllers. A change in ownership of an entity would rarely amount to extraordinary circumstances sufficient to warrant a departure from the benchmark rule.
For more information on the benchmark rule and the consequences of breaching this rule, refer to the Simplified imputation: the benchmark and anti-streaming rules.