Subject to certain conditions being met, if an entity, that is:
- an individual
- a corporate tax entity
- an eligible superannuation fund, approved deposit fund or pooled superannuation trust, or
- an eligible income tax exempt charity or a deductible gift recipient,
receives a franked distribution directly, then:
- the entity must include in assessable income, both the franked amount of distribution and the franking credits attached to the distribution. That is, the entity's assessable income must be 'grossed-up' to include the franking credits attached to the distribution, and
- the entity will be entitled to a tax offset equal to the amount of franking credit included in its assessable income.
This process is commonly called the 'gross-up and credit' approach.
The introduction of a gross-up and credit approach for a corporate tax entity replaces the intercorporate dividend rebate that was formerly available in respect of franked dividends received by these entities.
Consistent with 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, and
- the corporate tax entity would also record the franking credit attached to the franked distribution in its new franking account. For more information about the franking account, see Simplified Imputation: the franking account (NAT 7136).
Example 1: Receiving a franked distribution (tax offset reduces income tax liability)
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 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.
Example 2: Receiving a franked distribution (tax offset exceeds income tax liability)
On 11 December 2002, Rodney receives a franked distribution of $700 with $300 franking credits attached to it. Rodney includes $1,000 ($700 franked distribution plus $300 franking credits) in his assessable income and is entitled to a tax offset of $300 to reduce his income tax liability.
Rodney's basic income tax liability is $200. As his tax offset exceeds his basic income tax liability Rodney is entitled to a refund of the excess (that is, $100).