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  • Receiving dividends and other distributions

    Corporate entities can pay distributions to their members, who include:

    • shareholders in a company
    • unit holders in a corporate unit trust or a public trading trust
    • partners of a corporate limited partnership.

    Members may be individuals or other entities.

    The franking entity must issue a distribution statement to each member who receives a distribution, showing the amount of franking credit attached to the distribution and the extent to which it's franked.

    Only Australian resident taxpayers can claim a tax offset for a franking credit attached to a distribution. For non-residents, a distribution is exempt from withholding tax to the extent that it's franked.

    Grossing up a distribution

    Where a member such as an individual or company receives a franked distribution directly, they include the grossed up distribution (that is, both the distribution and any franking credit) in their assessable income. They are then entitled to a tax offset equal to the franking credit. This is called the ‘gross-up and credit’ approach. It applies to most members who receive franked distributions directly, including:

    • individuals
    • corporate tax entities
    • eligible superannuation funds, approved deposit funds and pooled superannuation trusts.

    A franked distribution made to partnerships and trusts is generally treated as flowing indirectly to the partners or beneficiaries respectively. The taxable amount is the distribution grossed up by the amount of the franking credit, but only the ultimate recipients of the distribution, who are assessed on the share of the net income that flows indirectly to them, are entitled to the tax offset.

    If the franked distribution is exempt income, the recipient is generally not entitled to a tax offset – in which case the distribution is not grossed-up. However a tax offset is allowed for:

    • complying superannuation funds, approved deposit funds and pooled superannuation trusts (eligible superannuation entities), and life insurance companies, which are entitled to a tax offset for certain exempt income, such as income derived by a complying superannuation fund from segregated pension assets
    • income tax exempt charities and deductible gift recipients.

    See also:

    Utilising franking credit tax offsets

    A tax offset can be used to reduce the tax liability from all forms of income (not just dividends) and from any taxable capital gain. Excess franking credit tax offsets may be refundable for some members where their marginal tax rate is less than the corporate tax rate.

    Excess franking credits are not refundable for a corporate tax entity, such as a company. The tax offset can reduce the corporate tax entity’s tax liability to nil, but is not refunded if it exceeds the tax liability. However, it can convert any excess franking tax offsets to a tax loss which can be carried forward to future years. A corporate tax entity must also be mindful of the limitations placed on the utilisation of its prior year losses where it has franking tax offsets (see Utilising franking credit tax offsets and effect on losses – corporate tax entities')

    An individual’s marginal rate of tax varies according to their taxable income so the tax payable on a grossed-up distribution may exceed the franking credit attached to a distribution. In this case they will have an additional tax liability on the distribution which is sometimes referred to as 'top up' tax.

    Example: How imputation works when the shareholder is on the top personal tax rate

    Company

    Fully franked distribution

    Income earned
    Company tax (30%)
    Net profit after tax

    $100.00
    $30.00
    $70.00

    Dividend paid
    Franking credit

    Taxable income
    Tax on taxable income (47%*)
    Credit for company tax
    Tax payable

    $70.00
    $30.00

    $100.00
    $47.00
    $30.00
    $17.00

    Net distribution to shareholder

    Total tax paid by company and shareholder

    $53.00

    $47.00

     

    End of example

    However, a corporate tax entity receiving a distribution doesn't pay additional tax because the corporate tax rate (30%) results in the same taxable amount as the credit attached to a fully franked distribution. The income has already been fully taxed at the level of the corporate tax entity making the distribution.

    A corporate tax entity that receives a distribution also receives a credit to its franking account. This credit can be passed on (imputed) to its members through a distribution.

    Example: Shareholder that is a company

    On 15 August 2015, Edwards Pty Ltd receives a franked distribution of $700 with $300 franking credits attached.

    Edwards Pty Ltd includes $1,000 ($700 franked distribution plus $300 franking credits) in its assessable income and is entitled to a $300 tax offset to reduce its income tax liability.

    In addition, on 15 August 2015 Edwards Pty Ltd generates a franking credit of $300 in its franking account.

    End of example

    See also:

    Special rules

    Special rules may apply where a recipient is a member of a consolidated group or a multiple entry consolidated (MEC) group.

    A resident company that is wholly owned by a non-resident company that receives an unfranked non-portfolio dividend from other resident companies may be entitled to a deduction. This is subject to certain conditions. The deduction is equal to the amount of any unfranked non-portfolio dividend that it pays on to its non-resident parent.

    See also:

    Conduit foreign income

    If you're an Australian corporate tax entity who receives (directly or indirectly) foreign sourced income, you may declare some or all of a frankable (whether actually franked or not) distribution to be conduit foreign income. This is to the extent it is conduit foreign income in accordance with Subdivision 802-A of the Income Tax Assessment Act 1997.

    If you make the distribution to:

    • a non-resident member – the portion declared to be conduit foreign income is exempt from withholding tax
    • another Australian corporate tax entity – that corporate tax entity may pass on that conduit foreign income to its members. The distribution statement must specify the portion of the unfranked part of the distribution that is declared to be conduit foreign income.

    If an individual resident member receives a distribution declared to be conduit foreign income, that distribution is treated like any other unfranked distribution.

    Note: if an amount is eligible to be both an unfranked non-portfolio dividend for which a deduction is allowed, and also to be treated as conduit foreign income, you must make a choice for one to apply. (See Deductions for non-portfolio dividends to a resident company.)

    See also:

    Last modified: 01 Dec 2016QC 47310