How can an entity obtain a tax offset where the franked distribution it receives is exempt from income tax?

Generally, an entity will not be entitled to a tax offset if the franked distribution or a share of the franked distribution is exempt income.

If the entity has received the franked distribution directly, its assessable income will not be grossed-up.

If the entity receives the franked distribution indirectly, a deduction (or reduction) will be allowed to remove the entity's share of the franking credit from assessable income.

There are however, two exceptions to this rule:

  1. complying superannuation funds, approved deposit funds, pooled superannuation trusts and life insurance companies will be entitled to a tax offset in respect of certain exempt income, for example, income derived by a complying superannuation fund from segregated pension assets, and
  2. eligible income tax exempt charities and deductible gift recipients will be entitled to a tax offset. Although these bodies are exempt from income tax, they are given an entitlement to the tax offset to make them eligible for a refund of excess franking credits under the income tax law.
    Last modified: 28 Jul 2016QC 16622