An entity that directly or indirectly receives a franked distribution will be denied a tax offset if the imputation system has been manipulated.
The imputation system is being manipulated if:
- the entity obtaining the benefit of franking credits does not satisfy the holding period rule, or
- the Commissioner makes a determination under the income tax law that either:
- no imputation benefit arises because a corporate tax entity has streamed distributions in a certain way, or
- no imputation benefit arises because the distribution was paid as part of a scheme to obtain a franking credit benefit. For example:
- the distribution is paid as part of a dividend stripping operation.
- the entity's share of the distribution is the equivalent to the payment of interest on a loan.
In these cases the assessable income of an entity that receives the distribution directly will not be grossed-up. An entity that receives the distribution indirectly will be allowed a deduction (or reduction) to ensure its assessable income does not include its share of the franking credit.