The Australian imputation system rules
There are special rules for a NZ company to ensure the Australian imputation rules operate appropriately and to preserve the integrity of the Australian imputation system.
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The Australian franking account operates on a tax-paid basis, which means if a company pays $30 of Australian tax it generates a credit of $30 in its franking account.
A NZ franking company will be required to keep its franking account in Australian currency.
Typically, a franking credit would arise when the NZ franking company:
- pays Australian income tax, or
- receives a franked dividend, or
- pays Australian dividend, interest or royalty withholding tax.
Franking debits typically arise when a NZ franking company:
- pays a dividend with Australian franking credits attached, or
- receives a refund of tax.
Franking deficits tax
If a NZ franking company's franking account is in deficit at the end of the income year, it will be liable to franking deficits tax.
Franking a distribution
A NZ franking company franks a distribution by allocating franking credits to it.
Only distributions that are frankable can have franking credits allocated to them. This may require a consideration of the Australian debt and equity rules.
Frankable distributions can only be franked to the maximum franking credit amount. There are formulas for calculating the maximum franking credit for a distribution.
Conduit tax relief additional dividends and supplementary dividends paid by NZ franking companies will be unfrankable.
A NZ franking company will be able to attach both Australian franking credits and NZ imputation credits to the same dividend.
When a NZ franking company makes a distribution to its members it must include a distribution statement with the payment.
The benchmark rule
All frankable distributions must be franked to the same extent within a given franking period.
This achieves a similar effect to the NZ dividend benchmark rule.
It is designed to ensure that one member of a corporate tax entity is not preferred over another.
If a distribution is franked over the benchmark franking percentage the franking entity will be liable to pay overfranking tax.
If a distribution is franked below the benchmark franking percentage the franking entity will be required to debit its franking account with an underfranking penalty debit.
If the benchmark franking percentage varies excessively between franking periods, the franking entity is required to make a disclosure to us.
The imputation rules generally apply in relation to a NZ franking company's income year.
The benchmark rule applies to distributions made within the same franking period.
If the NZ franking company is a private company, its franking period will be the same as its income year.
If the NZ franking company is a public company, it will generally have the following franking periods:
- the six-month period commencing at the start of its income year and
- the remainder of its income year.
An annual franking return is not automatically required.
A franking return will generally only be required when there is a liability to franking deficits tax, or overfranking tax, or where the company has triggered the disclosure rule.
Anti-streaming and franking credit trading rules
There are anti-streaming and franking credit trading rules that apply to maintain the integrity of the imputation system.
Companies that are less than 5% effectively owned by non-exempt Australian residents are prevented from conveying franking benefits to Australian resident shareholders. These companies are called exempting entities.
Changes are made to exempting entity rules to allow a NZ franking company to be 'looked through' to find effective Australian ownership. Therefore, NZ franking companies will not automatically be treated as exempting entities.
A NZ listed company that is a NZ franking company, along with its Australian or NZ fully-owned subsidiaries will also not be treated as exempting entities.
In cases of wholly-owned groups that include a company that is not resident in Australia or NZ, if the NZ parent company is a NZ franking company and is not treated as an exempting entity, none of the companies in that wholly owned group will be an exempting entity.
A group includes a non-Tasman company
When a wholly-owned group includes a company that is not resident in Australia or NZ, special rules apply to the franking account.
Generally, franking debits or credits that would otherwise arise in the franking account of the subsidiary will be transferred to the franking account of the NZ parent.
This only applies when all NZ companies in the wholly-owned group have made a NZ franking choice.
Joint and several liability
All members of the same wholly-owned group that are Australian or NZ residents may be held jointly and severally liable for any outstanding franking related liabilities of the NZ franking company, unless they are prevented by an Australian or NZ law from entering into an arrangement to make them jointly or severally liable.