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  • Utilising franking tax offsets and effect on losses– corporate tax entities

    The following information assists corporate tax entities with franking tax offsets to determine their current year tax loss position. It also explains the extent to which they can utilise prior year tax losses.

    When a corporate tax entity receives a franked dividend, the receipt is effectively neutral from a tax perspective. This is because it is entitled to a franking tax offset for the franking credit attached to the dividend. The offset generally matches the tax liability of the dividend income derived.

    If a corporate tax entity (such as a company) has taxable income, the franking tax offsets it receives can reduce its income tax liability to nil, but is not refunded if it exceeds its liability. This is likely to occur when the entity's other taxable income is in a net loss position disregarding the dividend income derived.

    In this situation, a corporate tax entity doesn't lose these excess franking tax offsets, but can convert the excess franking offsets to an equivalent tax loss. The converted tax loss is then aggregated with any current year tax losses. These current year losses are carried forward to future years along with any other prior year losses.

    Where a corporate tax entity has no current year losses (and despite having franking tax offsets it has no excess franking credits) it may be able to choose to deduct an amount of prior year losses. This choice is subject to certain limitations. Alternatively, it may choose not to deduct prior year losses so it can pay enough tax to frank its distributions.

    Note: You should record any offset and loss amounts in the income tax return of the corporate tax entity receiving the franked dividend. This includes both the excess franking offset and any current year tax loss created by converting the excess franking offset.

    See also:

    On this page:

    Converting excess franking tax offsets into a current year loss

    A current year tax loss arises when both:

    • the taxpayer's allowable deductions exceed their assessable income in the income year
    • their excess is greater than any net exempt income (NEI) for the year.

    A corporate tax entity will have an amount of excess franking offsets to the extent that its franking tax offsets exceed its income tax liability. In this case, the entity will convert the excess amount to an equivalent amount of tax loss by dividing it by the corporate tax rate (CTR).

    This converted tax loss is then aggregated with any current year tax loss under the general provisions. If a corporate tax entity has any NEI, this amount is subtracted from the aggregate loss amount. The final aggregated amount becomes the tax loss for the income year resulting is a current year tax loss.

    Note: The term 'excess franking offset' has the same meaning as 'excess franking rebate' as it appears in the company tax return instructions 2016.

    The meaning of 'current year tax loss' and 'loss year' for a corporate tax entity with excess franking offsets was modified for a corporate tax entity with an amount of excess franking offset, from 2002.

    See also:

    Method statement to work out tax loss

    Follow the steps in the method statement below to work out a corporate tax entity's current year tax loss. These steps also explain how to determine the excess franking credits and to what extent they can be converted to tax losses and form part of the entity's current year tax losses. These calculations are based on the provisions of the Income Tax Assessment Act 1997 (ITAA 1997), particularly section 36-55 of the ITAA 1997.

    Method statement – steps to determine current year tax loss and excess franking offsets

    Step 1

    Work out the current year tax loss (if any) under the general provisions. See section 36-10, 165-70,175-35 or 701-30 of the ITAA 1997 disregarding net exempt income (NEI).

    See also:

     

    Step 2

    Convert the excess franking offsets into a tax loss, using the following approach:

    (a) Calculate franking tax offsets:

    • add the amount of franking tax offset from receiving franked distributions (including those received indirectly)
    • add the amount of venture capital tax offsets
    • subtract any amount of franking tax offsets that are refundable tax offsets (refer to section 67-25 of the ITAA 1997 Refundable tax offset rules). Note: corporate tax entities will generally not be entitled to refundable franking tax offsets.

    The sum of this calculation will be the entity's total franking offsets. These are available for consideration in calculating the entity's excess franking offsets.

    (b) Calculate the amount of income tax:

    • Subtract allowable deductions from assessable income. Then apply the corporate tax rate (the assessable income includes the gross-up amount of franked dividends).
    • Reduce the amount of income tax by all tax offsets (this includes foreign tax credits) with the exception of the following tax offsets
      • franking tax offsets calculated under (a)
      • offsets subject to tax offset carry forward rules
      • offsets subject to refundable tax offset rules
      • offsets subject to franking deficit tax offset rules.
       

    That is, don't reduce the income tax by the above tax offsets but by all other tax offsets.

    (c) Determine if there is an amount of excess franking offsets:

    • Where the amount of franking tax offsets exceeds the amount of income tax calculated at (b), the amount of the excess franking offsets is equal to the difference.

    (d) Convert the excess franking offsets into a loss:

    • To convert this excess into a tax loss, divide the excess franking offsets by the corporate tax rate.
     

    Step 3

    Add the loss amounts from Step 1 and Step 2.

    That is add the amount of the loss, if any, under the general provisions plus the tax loss from the converted excess franking offsets.

    Step 4

    Reduce the amount of loss determined at Step 3 by the entity's NEI (if any).

    If the result is a:

    • Positive amount – the corporate tax entity is taken to have a current year tax loss equal to that amount. The entity will be able to carry forward its current year tax loss and any prior year tax loss to the next income year.
    • Nil or a negative amount – the corporate tax entity does not have a current year tax loss. It will need to determine whether it can choose to deduct a prior year tax loss. Refer to Limitations on deducting prior year tax losses.
     

     

    Example 1: Company A – determining the excess franking tax offset amount that can be converted

    In the 2015–16 income year, Company A has:

    • assessable income (AI) of $100 ($70 franked dividends and $30 franking credits)
    • $200 allowable deductions (DED)
    • no net exempt income.

    Determine if the entity has a current year tax loss, as follows (using the method statement):

    Determine current year tax loss

    Step 1

    Tax loss disregarding NEI

    $100 ($200 DED – $100 AI)

    Step 2

    (a) Franking tax offsets (FTO)

    $30

    (b) Income tax (IT)

    $Nil

    (c) Excess franking offsets (EFO)

    $30 (FTO exceeds IT)

    (Show amount at Item 8 Label H – Excess franking rebate of the company tax return)

    (d) EFO/CR tax rate

    $100 ($30/30%)

    Step 3

    Step 1 + Step 2

    $200

    Step 4

    Step 3 – NEI

    $200

    The amount of $200 yielded by using the method statement is a positive amount. The entity is taken to have a $200 current year tax loss. The entity does not need to choose to deduct a prior year tax loss.

    The tax position of Company A for the 2015–16 income year is:

    • $200 current year tax loss (include amount at Item 13, Label U – Tax losses carried forward to later income years of the company tax return)
    • $30 is recorded as an excess franking offset (Item 8, Label H)
    • Nil tax is payable.
    End of example

    Limitations on deducting prior year tax losses

    A corporate tax entity that has no current year tax loss (despite having franking tax offsets, it has no excess franking credits) can choose to deduct prior year tax losses in an income year, subject to certain limitations. Alternatively, it may choose not to deduct prior year losses so it can pay enough tax to frank its distributions, also subject to certain limitations.

    The limitation applies where the method statement used to determine current year tax losses with franking tax offsets results in a nil or negative amount.

    A corporate tax entity will only have a choice in how much prior year tax losses it can deduct where:

    • the entity's total assessable income exceeds the entity's total deductions and the entity does not have net exempt income – see example 2 and example 3
    • the entity's total assessable income exceeds the entity's total deductions and the entity has net exempt income – see example 4.

    However, a corporate tax entity will not have a choice in how much prior year tax losses it can deduct where its total deductions exceed the entity's total assessable income.

    See also:

    Limits to prior year tax losses an entity can choose

    Where there is a choice, there are two limits restricting when a corporate tax entity can choose the amount of prior year tax losses it applies. This stands whether or not it has net exempt income.

    These restrictions prevent the refreshing of prior year tax losses into current year tax losses. This impacts on the application of the tests for deductibility of prior year tax losses, specifically the continuity of ownership tests.

    See also:

    • Companies information under How to claim a tax loss.

    Limits

    There are two limits where an entity cannot deduct prior year tax losses. The entity must apply one of these limits.

    Limits where an entity can't deduct prior year tax losses

    Limit

    Description and choice

    Limit 1

    Where there is an amount of excess franking offsets – the choice is limited to a nil amount.

    The entity must choose a nil amount if, disregarding tax losses, the entity would have an amount of excess franking offsets for that year.

    The choice is limited to a nil amount. This is because the tax on taxable income has already been fully absorbed by the franking tax offset.

    If Limit 1 applies, the entity will be in a nil tax payable position.

    Limit 2

    Where there is no amount of excess franking offsets – the entity must not choose an amount of prior year losses that would result in excess franking offsets.

    If, disregarding tax losses, the entity would not have an amount of excess franking offsets for that year, the entity must not choose an amount of prior year tax losses that would generate excess franking offsets for that year.

    Limit 2 will need to be considered where there is an amount of income tax payable after applying the franking tax offsets. Refer to Determining the extent of prior year losses that can be used.

    Determining the extent of prior year losses that can be used

    An entity will need to consider Limit 2 when determining what the amount of prior year losses that can be used against income tax payable (after applying the franking tax offsets).

    Limit 2 will apply to restrict the losses deducted so that excess franking offsets are not generated to avoid refreshing prior year tax losses to current year losses.

    Rules for optional use of prior year tax losses

    Determine if Limit 2 applies

    Follow these steps to determine if Limit 2 applies:

    (a) Calculate franking tax offsets.

    (b) Calculate the amount of income tax. (Note that this amount does not take into account the franking tax offsets.)

    Note: Calculate (a) and (b) in same way as you would in determining excess franking credits in Step 2 (a) and Step 2 (b) in the method statement to determine current year losses.

    (c) Determine the amount of income tax payable after applying franking tax offsets against income tax:

    Where the amount of income tax exceeds the amount of franking tax offsets –this amount is the income tax payable. Limit 2 may apply. Go to paragraph (d) below.

    (d) Calculate the maximum prior year tax loss amount that can be utilised without generating excess franking offsets:

    Divide the amount of the income tax payable by the corporate tax rate. This will yield the maximum prior year tax loss amount that can be utilised that would not generate excess franking offsets.

    Making a choice

    The entity can choose an amount of prior year tax loss (if available) that does not exceed this maximum amount.

    The entity can choose a nil amount. If they choose nil, the entity will have income tax payable which will generate franking credits. It will carry forward any unused prior year tax losses.

    Example 2

    Example 2: Company B – no current year tax loss and no net exempt income

    In the 2014–15 income year, Company B has:

    • assessable income (AI) of $200 (franked dividend of $70 and franking credits of $30 and $100 other income)
    • $50 allowable deductions (DED)
    • $120 prior year tax losses (P/Y).

    Firstly determine if the entity has a current year tax loss, as follows (using the method statement):

    Step 1:

    Tax loss, disregarding net exempt income (NEI)

    $Nil ($150 taxable income (TI) = $200 AI less $50 DED)

    Step 2:

    (a) Franking tax offsets (FTO):

    $30

     

    (b) Income tax (IT):

    $45 ($150 TI x 30%)

     

    (c) Excess franking offsets (EFO):

    $Nil (IT exceeds FTO)

     

    (d) EFO/CR tax rate:

    $Nil

    Step 3:

    Step 1 + Step 2

    $Nil

    Step 4:

    Step 3 – NEI

    $Nil

    The amount yielded by using the method statement is a nil amount. Therefore, the entity is taken not to have a current year tax loss.

    The entity should now consider whether to deduct prior year tax losses. They can determine the extent to which prior year tax losses can be absorbed or choose not to use them.

    The entity needs to determine the extent of prior year losses that can be used.

    Determine if Limit 2 applies

    (a) Franking tax offsets (FTO):

    $30

    (b) Income tax (IT):

    $45 ($150 TI x 30%)

    (c) Apply FTO against IT:

    $15 ($45 IT – $30 FTO) (income tax payable)

    (d) Divide the amount of income tax payable (ITP) by the corporate tax rate (CTR) to get the maximum amount of P/Y loss that can be utilised that would not generate EFO:

    $50 ($15 ITP/30%)

    Making a choice

    The maximum prior year tax loss amount the entity can choose from its available amount of prior year tax loss of $120 is $50.

    Alternatively, the entity may choose a nil amount and pay $15 income tax, thereby generating franking credits in their franking account.

    The tax position of the entity for the 2014–15 income year, assuming that it chooses $50 prior year tax losses (include amount at Item 7 Label R – Tax losses deducted of the company tax return), is:

    • nil current year tax loss
    • $70 prior year tax losses remaining (include amount at Item 13 Label U – Tax losses carried forward to later income years of the company tax return)
    • nil tax payable.
    End of example
    Example 3

    Example 3: Company C – no current year tax loss and no net exempt income

    In the 2014–15 income year, Company C has:

    • assessable income (AI) of $300 ($70 franked dividends, $30 franking credits and $200 other income)
    • $100 allowable deductions (DED)
    • $50 prior year tax losses (P/Y).

    Firstly the entity should determine if it has a current year tax loss, as follows (using the method statement):

    Step 1:

    Tax loss disregarding NEI

    $Nil ($200 TI = $300 AI – $100 DED)

    Step 2:

    (a) Franking tax offsets (FTO):

    $30

     

    (b) Income tax (IT):

    $60 ($200 TI x 30%)

     

    (c) Excess franking offsets (EFO):

    $Nil (IT exceeds FTO)

     

    (d) EFO/CR tax rate:

    $Nil

    Step 3:

    Step 1 + Step 2

    $Nil

    Step 4:

    Step 3 – NEI

    $Nil

    As the amount yielded by using the method statement is a nil amount, the entity is taken not to have a current year tax loss.

    The entity should now consider:

    • whether to deduct prior year tax losses
    • the extent to which prior year tax losses can be absorbed
    • if a choice is available.

    The entity needs to determine the extent of prior year losses that can be used.

    Determine if Limit 2 applies

    (a) Franking tax offsets (FTO):

    $30

    (b) Income tax (IT):

    $60 ($200 TI x 30%)

    (c) Apply FTO against IT:

    $30 ($60 IT – $30 FTO)
    (income tax payable)

    (d) Divide the amount of income tax payable (ITP) by the CTR to get the maximum amount of prior year losses that can be utilised that would not generate EFO:

    $100 ($30 ITP/30%)

    Making a choice

    The maximum prior year tax loss amount the entity can choose is $100. However because the amount of available prior year tax loss is $50, the entity can only choose a maximum of $50.

    Alternatively, the entity could choose a nil amount and pay $30 income tax, thereby generating franking credits in their franking account.

    The tax position of the entity for the 2014–15 income year, assuming that it chooses $50 prior year tax losses (insert amount at Item 7 Label R –- Tax losses deducted of the company tax return), is:

    • nil current year tax loss
    • nil prior year tax loss to carry forward
    • $15 tax payable.

    This is because after applying P/Y loss of $50 against TI of $200, there will be an amount of $150 TI remaining. The IT on this amount will be $45, which will be offset by $30 FTO. There will be $15 income tax payable.

    End of example
    Example 4

    Example 4: Company D – no current year tax loss and has net exempt income

    In the 2014–15 income year, Company D has:

    • assessable income (AI) of $150 ($70 franked dividends, $30 franking credits and $50 other income)
    • $100 allowable deductions (DED)
    • $50 prior year tax losses (P/Y)
    • $100 net exempt income (NEI).

    Firstly the entity should determine if it has a current year tax loss, as follows (using method statement):

    Step 1:

    Tax loss disregarding NEI

    $Nil ($50 TI = $150 AI – $100 DED)

    Step 2:

    (a) Franking tax offsets (FTO):

    $30

     

    (b) Income tax (IT):

    $15 ($50 TI x 30%)

     

    (c) Excess franking offsets (EFO):

    $15 (FTO exceeds IT)

     

    (d) EFO/CR tax rate:

    $50 ($15 EFO/30%)

    Step 3:

    Step 1 + Step 2

    $50

    Step 4:

    Step 3 – NEI

    – $50 ($50 – $100 NEI)

    The amount yielded by using the method statement is a negative amount of $50. Therefore, the entity is taken not to have a current year tax loss.

    If the amount of tax loss is disregarded there is an amount of excess franking offsets. As a result, Limit 1 applies. Company D's choice is limited to a nil amount. That is, the corporate entity is unable to utilise any of the $50 prior year losses.

    The tax position of the entity for its 2014–15 income year is:

    • Nil current year tax loss
    • $15 excess franking offset is not recorded but used to reduce NEI
    • $50 prior year tax loss remains unutilised (continues to be recorded at Item 13, Label U)
    • nil tax payable.

    Note: Limit 2 has no application in this example as excess franking offsets exist.

    End of example
      Last modified: 01 Dec 2016QC 50655