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  • Allocating franking credits

    A corporate tax entity allocates franking credits to members by attaching the credits to the distributions it makes.

    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.

    Proposed law changes

    On October 18, 2017, the government introduced a Bill to change the definition of a base rate entity. If passed, these proposed changes will impact how a company calculates their corporate tax rate for imputation purposes. This is not yet law.

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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.

    To work out your corporate tax rate for imputation purposes you need to assume your aggregated turnover will be the same as the previous income year.

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

    • your aggregated turnover in 2016–17 was less than $25 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 will be 30%.

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    Example 1: Franking a distribution at 27.5% tax rate

    Pederman Plastics is carrying on a business, and in the 2016–17 income year they had an aggregated turnover of $18 million.

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

    As their 2016–17 aggregated turnover was less than $25 million and they are carrying on a business, their corporate tax rate for imputation purposes will be 27.5% and they will frank their 2017–18 distributions based on this rate.

    Pederman Plastics wants to distribute $10,000 profit to its shareholders.

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

    • Applicable gross up rate = (100% − 27.5%) ÷ 27.5% = 2.636363.
    • Maximum franking credit = $10,000 × (1 ÷ 2.636363) = $3,793.10.
    End of example

     

    Example 2: Franking a distribution at 30% tax rate

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

    Even though Dillmore Manufacture's 2017–18 first quarter sales declined and they only expect a $20 million aggregated turnover in 2017–18, they will assume their aggregated turnover for 2017–18 will be $27 million when franking their 2017–18 distributions. As their 2016–17 aggregated turnover was over $25 million, their 2017–18 corporate tax rate for imputation purposes will be 30% and they will frank their distributions based on this rate.

    Dillmore Manufacture wants to distribute $10,000 profit to shareholders.

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

    • Applicable gross up rate = (100% − 30%) ÷ 30% = 2.333333.
    • Maximum franking credit = $10,000 × (1 ÷ 2.333333) = $4,285.71.
    End of example

    Calculating the maximum franking credit for prior years

    For the 2016–17 income year, to have a 27.5% corporate tax rate for imputation purposes, a company needed to be carrying on a business and have an aggregated turnover of less than $10 million.

    For the 2015–16 income year, the corporate tax rate for companies that are small business entities was 28.5%, although they could continue to frank distributions up to 30%.

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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 its 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.
    Last modified: 19 Dec 2017QC 47305