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:
- 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
- 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.