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  • Allocating franking credits

    A corporate tax entity allocates franking credits to shareholders by attaching the credits to the distributions they make.

    The maximum franking credit that can be allocated to a frankable distribution paid by a corporate tax entity is based on its applicable corporate tax rate for imputation purposes.

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    Corporate tax rate for imputation purposes

    From the 2017–18 income year, to work out your corporate tax rate for imputation purposes you need to assume your aggregated turnover, assessable income and base rate entity passive income will be the same as the previous income year.

    For the 2017–18 income year, your corporate tax rate for imputation purposes is 27.5% if either of the following apply:

    • your aggregated turnover in the 2016–17 income year was less than $25 million, and 80% or less of your assessable income was base rate entity passive income
    • the entity didn't exist in the previous income year.

    Otherwise, your corporate tax rate for imputation purposes is 30%.

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    Calculating the maximum franking credit

    From the 2016–17 income year onwards, the maximum franking credit is calculated using the following formula:

    • Amount of the frankable distribution × (1 ÷ Applicable gross-up rate).

    The 'applicable gross-up rate' is the entity's corporate tax gross-up rate for the income year in which the distribution is being made.

    The 'applicable gross-up rate' is calculated using the following formula:

    • (100% - your corporate tax rate for imputation purposes for the income year) ÷ your corporate tax rate for imputation purposes for the income year.

    Example 1: Franking a distribution at 27.5% tax rate

    Pederman Plastics is carrying on a business, and in the 2016–17 income year have an aggregated turnover of $18 million. Their assessable income is $20 million which includes $2 million of base rate entity passive income.

    When franking their distributions for the 2017–18 income year, Pederman Plastics assume their aggregated turnover will be the same in 2017–18 as it was in 2016–17.

    Their 2016–17 aggregated turnover was under $25 million and only 10% of their assessable income was base rate entity passive income. This means their corporate tax rate for imputation purposes for the 2017–18 income year is 27.5% and they will frank their 2017–18 distributions based on this rate.

    Pederman Plastics wants to distribute $100,000 profit to their shareholders.

    The maximum franking credit they can attach to that distribution (based on the above formulas) is calculated as follows:

    • applicable gross up rate = (100% − 27.5%) ÷ 27.5% = 2.6364
    • maximum franking credit = $100,000 × (1 ÷ 2.6364) = $37,930.51.
    End of example

    Example 2: Franking a distribution at 30% tax rate

    In the 2016–17 income year, Dillmore Manufacture have an aggregated turnover of $27 million.

    Even though Dillmore Manufacture's 2017–18 first quarter sales decline and they only expect a $20 million aggregated turnover in 2017–18, they assume their aggregated turnover for 2017–18 will be $27 million when working out their corporate tax rate for imputation purposes.

    As their prior year aggregated turnover was over $25 million, their 2017–18 corporate tax rate for imputation purposes is 30%. They will frank their distributions based on this rate.

    Dillmore Manufacture wants to distribute $100,000 profit to their shareholders.

    The maximum franking credit they can attach to that distribution (based on the above formulas) is calculated as follows:

    • applicable gross up rate = (100% − 30%) ÷ 30% = 2.3333
    • maximum franking credit = $100,000 × (1 ÷ 2.3333) = $42,857.75.
    End of example

    Previous years

    For the 2016–17 income year, your corporate tax rate for imputation purposes is 27.5% if either of the following apply:

    • your 2015–16 aggregated turnover was less than $10 million, and you are carrying on a business
    • this is the first year you are in business.

    Otherwise, your corporate tax rate for imputation purposes is 30%.

    For the 2015–16 and previous income years, the maximum franking credit that can be allocated to a frankable distribution for all companies was 30%.

    Distributions issued using an incorrect tax rate

    You may have issued 2016–17 or 2017–18 distribution statements using an incorrect corporate tax rate for imputation purposes if:

    • based on Draft Taxation Ruling 2017/D7, you now consider you are carrying on a business and are a small business entity eligible for the lower company tax rate (2016–17 distributions)
    • more than 80% of your assessable income is base rate entity passive income, making you ineligible for the lower company tax rate (2017–18 distributions).

    If you have issued your 2016–17 or 2017–18 distribution statements using an incorrect corporate tax rate for imputation purposes, you should notify your shareholders of the correct dividend and franking credit amounts. You can do this by sending a letter or email to your shareholders, or a revised distribution statement. You also need to ensure the correct amounts are reflected in your franking account.

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    The franking percentage

    The extent to which an entity has allocated franking credits to a frankable distribution is referred to as the franking percentage. This is calculated by dividing the franking credit allocated to the distribution by the maximum franking credit that may be allocated to the distribution. It is expressed as a percentage of the frankable distribution, rather than the whole of the distribution. This means that in circumstances where only part of the total distribution is frankable, the franking percentage could still be 100%.

    Example: Identifying the franking percentage for a distribution

    On 30 June 2018, Marlyn Pty Ltd distributes $11,667 to their shareholders. Marlyn Pty Ltd allocates franking credits of only $3,000 to the distribution, rather than the $5,000 maximum allowable in their circumstances.

    The franking percentage for this distribution is calculated as follows:

    • ($3,000 ÷ $5,000) × 100% = 60%.
    End of example

    You may choose the extent to which you want to allocate franking credits to a distribution. You will need to take into account the existing and expected surplus in your franking account and the rate at which earlier distributions have been franked. However you cannot frank a distribution at a percentage greater than 100%.

    Generally the only restriction on your ability to frank a distribution is the requirement to frank all frankable distributions within the franking period to the same extent – known as the benchmark rule.

    If you issue a distribution statement showing an amount of franking credit that exceeds the maximum amount allowable, then:

    • your franking account is debited by the amount of the maximum franking credit allocation rather than the amount shown on the distribution statement
    • the recipient of the franked distribution will only include the franked distribution and the amount of franking credit up to the maximum that could have been allocated on the distribution in their assessable income
    • the recipient is only entitled to a franking credit equal to the maximum amount.

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    Last modified: 03 Sep 2018QC 47305