Where a partly franked distribution is paid and it is:
- partly from assessable income of the income year, and
- partly from another source, for example, retained earnings or a pre-capital gains tax (CGT) gain,
it will be necessary to identify that part of the distribution that is unfranked and sourced from assessable income for the purpose of calculating the allowable deduction.
In determining the extent to which the unfranked part of a distribution is paid from assessable income of the income year, the franking credit is attached first to that part of the distribution that is attributable to a source other than assessable income of the income year. This approach maximises the amount of the deduction available to a co-operative company where the co-operative does not allocate the maximum franking credit allowable to a distribution made to shareholders in an income year.
MJL, a co-operative company, distributes $10 million to its members for the 2002-03 income year. This distribution is franked to 60% and is funded partly from a capital gain of $9 million made on the disposal of pre-CGT assets (this amount is not part of MJL's assessable income) and $1 million of assessable income for the 2002-03 income year. MJL's assessable income for 2002-03 was $15 million.
To maximise MJL's deduction, it is assumed that the franked part of the distribution (that is, $6 million) is funded from sources other than MJL's assessable income for the 2002-03 income year. That is, the entire $6 million is funded from the capital gain made on the disposal of pre-CGT assets. Of the $4 million distribution that is the unfranked part, $3 million is funded from the balance of the capital gain made on the disposal of pre-CGT assets (the non-assessable income) and $1 million is from MJL's assessable income for 2002-03.
MJL is therefore entitled to a deduction of $1 million, being the unfranked part of the distribution that is funded from its 2002-03 assessable income.