• Franking distributions

    To frank a distribution, the distribution must be frankable and the entity making the distribution must be a franking entity – that is, a company or other eligible corporate entity that is an Australian resident, or a New Zealand company (NZ franking company) that chooses to enter the Australian imputation system (Trans-Tasman Imputation).

    Special rules apply to consolidated group and multiple entry consolidated (MEC) group members (see Special rules for consolidated group and MEC groups).

    A corporate entity that is a co-operative may choose how it distributes income to its shareholders (see Co-operative company franked and unfranked distributions).

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    Frankable distributions

    Generally, only distributions from profits can be franked. For imputation purposes, a distribution includes:

    • a dividend, or something taken to be a dividend, made by a company
    • a distribution made by a corporate limited partnership, other than a distribution from profits or gains arising during an income year in which the partnership was not a corporate limited partnership
    • something taken to be a dividend, made by a corporate limited partnership
    • a unit trust dividend made by a corporate unit trust or public trading trust.

    A distribution is frankable unless the law specifies that it is unfrankable.

    Unfrankable distributions

    Unfrankable distributions include:

    • distributions made in respect of shares treated as debt interest under the debt test (non-equity shares)
    • distributions made in relation to an instrument characterised as an equity interest under the equity test (non-share equity) where the distribution exceeds available frankable profits
    • distributions made by approved deposit institutions in respect of certain capital instruments issued overseas that are characterised as non-share equity under the equity test
    • distributions that are treated as demerger dividends for taxation purposes
    • distributions sourced from a company's share capital account
    • excessive payments by private companies to shareholders, directors and associates that are deemed to be dividends
    • payments or loans made by private companies to their members (or their associates) deemed as dividends under Division 7A (except in some circumstances – see Private company benefits – Division 7A dividends)
    • distributions to controlled foreign companies that are deemed to be dividends under section 47A of the Income Tax Assessment Act 1936
    • distributions relating to off-market buy-backs of shares where the amount paid for the buy-back exceeds the market value of the share (ignoring the buy-back)
    • payments to CGT concession stakeholders of exempt amounts (where the small business 15-year exemption is available)
    • payments to CGT concession stakeholders of exempt amounts (where the small business retirement exemption is available)
    • deemed dividends relating to the streaming of bonus shares to some members and minimally franked (franked to less than 10%) dividends to other members
    • deemed dividends relating to capital streaming and dividend substitution arrangements
    • certain payments made by NZ franking companies
    • distributions from profits sourced in Norfolk Island before 1 July 2016 from companies resident there.

    Franking entity residency

    A distribution can only be franked by:

    • a company or corporate limited partnership that is an Australian resident at the time of making the distribution
    • a corporate unit trust or public trading trust that is a resident unit trust for the income year in which the distribution is made
    • a New Zealand resident company that chooses to enter the Australian imputation system (Trans-Tasman imputation).

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    Last modified: 01 Dec 2016QC 47304