• Franking deficit tax

    The imputation system has sufficient flexibility to allow entities to anticipate franking credits. However, the basic principle remains that an entity must not give its members credit for more tax than has actually been paid. This is given effect through the franking deficit tax (FDT) rules which require an entity to reconcile its franking account at certain times. An entity will have to pay FDT when the account is in deficit.

    A FDT liability will arise if either:

    • an entity's franking account is in deficit at the end of its income year (or at 30 June for certain late balancing corporate tax entities)
    • an entity's franking account is in deficit when it ceases to be a franking entity.

    If an entity is liable for FDT it must lodge a franking account tax return and pay the FDT by the last day of the month immediately following the end of the entity’s income year.

    Payment of FDT can generally be offset against future income tax liabilities.

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    Refunds received within three months of the end of the income year

    If a refund of income tax for an income year is received within three months of the end of that income year, the refund is treated as though it had been received just before the end of the income year for the purpose of calculating FDT. This rule ensures an entity does not avoid FDT by deferring the time a franking debit would arise in its account by overpaying tax in anticipation of the refund.

    In these circumstances, a franking account tax return or an amended franking account tax return must be lodged, and any FDT liability paid, within 14 days of the refund being received for that income year.

    Example: Deferred franking deficit tax

    Always Alert Pty Ltd has a deficit of $5,000 in its franking account on 25 June 2014.

    The company makes a tax payment of $5,500 on 29 June 2014 to bring the balance in the franking account on 30 June 2014 to $500. On 25 August 2014, Always Alert receives a tax refund of $3,000, due to the payment on 29 June 2014.

    Because the refund is received within three months of the end of the income year, the balance of the franking account is recalculated as though the refund was received at the end of the income year.

    Date

    Description

    Dr

    Cr

    Balance

    25 June

    Balance brought forward

     

     

    ($5,000)

    29 June

    Payment of tax

     

    $5,500

    $500

    30 June

    Refund of tax received 25 August

    $3,000

     

    ($2,500)

    30 June

    Franking deficit tax

     

    $2,500

    $0

    Always Alert is liable for FDT of $2,500 on 30 June 2014 to set the balance at year-end to nil. Always Alert must lodge a franking account tax return and pay the FDT within 14 days of 25 August 2014.

    End of example

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    Franking deficit tax offset

    Payment of FDT may be offset against future income tax liabilities in certain circumstances.

    A franking entity is entitled to a tax offset for an income year for which it satisfies the residency requirements and at least one of the following applies:

    • the entity has incurred a liability to pay FDT in that year
    • the entity has carried forward an amount of excess FDT offset that was unable to be applied against an income tax liability in a previous income year
    • the entity incurred a liability to pay FDT in a previous income year when it did not meet the residency requirement and was therefore not entitled to an FDT offset for that income year.

    An entity satisfies the residency requirement if it is an Australian resident for more than half an income year. If the entity has existed for less than six months, it will pass the residency requirement if it was a resident at all times during the year in which it existed.

    The full amount of FDT liability can be claimed as a tax offset except where the FDT offset reduction rule applies. This provides that the FDT offset is generally reduced by 30% where the FDT liability attributable to certain debits arising in the franking account is greater than 10% of the total franking credits in that year. There are also exclusions to the FDT offset reduction rule.

    The FDT offset is not refundable, but any excess is taken into account in calculating the amount of the tax offset in future income years.

    There are special rules to calculate the amount of tax offset for late balancers who choose to have their FDT liability determined at 30 June.

    There are also special rules relating to the treatment of excess franking deficit tax offsets when an entity becomes a member of a consolidated group (or MEC group).

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    Last modified: 01 Dec 2016QC 47303