When corporate tax entities distribute, to their members, profits on which income tax has already been paid – such as when a company pays a dividend to its shareholders – they have the option of passing on, or 'imputing', credits for the tax.
This is called ‘franking’ the distribution. The franking credits are attached to the distribution and can be used by the recipients as tax offsets.
The imputation system also applies to a non-share dividend paid to a non-share equity interest holder in the same way as it applies to a membership interest.
Although the recipients are taxed on the full amount of the profit represented by the distribution and the attached franking credits, they are allowed a credit for the tax already paid by the corporate tax entity.
This prevents double taxation – that is, the taxation of profits when earned by a corporate tax entity, and again when a recipient receives a distribution.
- Debt and equity tests
- Guide to the debt and equity tests (for information on non-share equity interests)