## What must an early balancing entity do to convert its franking account deficit so that it reflects a tax paid basis from 1 July 2002?

If the early balancing corporate tax entity has a franking account deficit at the end of the day on 30 June 2002 (called the original deficit), then it would convert this deficit so that it reflects a tax paid basis as follows:

1. At the end of the day on 30 June 2002, it would immediately credit its franking account with an amount equal to the deficit that existed. This will close off the old franking account, which operated on a taxed income basis.
2. On 1 July 2002, it would establish a franking account under the simplified imputation system rules and would debit this franking account with an amount calculated using the following formula:
 Original deficit X 30 70

Note: This conversion will not result in a franking deficit tax liability arising as a result of the deficit position at the end of the day on 30 June 2002.

End of attention
 Example 3Tidy Developments is a private company whose 2001-2002 income year ended on 31 December 2001 in lieu of 30 June 2002. At the end of the day on 30 June 2002, it had a class C franking account deficit of \$3,500Dr (called the original deficit). To convert this class C franking account deficit so that it reflects a tax paid amount from 1 July 2002, Tidy Developments would do the following: At the end of the day on 30 June 2002, it would credit its class C franking account with an amount equal to the original deficit that is, \$3,500Cr. This entry will ensure that the class C franking account is closed off. On 1 July 2002, it would establish a franking account under the simplified imputation rules and credit this account with the amount calculated using the following formula: \$3,500 X 3070 = \$1,500 Assuming that no other entries occur in the franking account, then on 1 July 2002, Tidy Developments will have a franking account balance of \$1,500Dr. This is reflective of a tax paid amount.