To frank a distribution, the distribution must be frankable and the entity making the distribution must be a franking entity. A franking entity 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).
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).
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 public trading trust.
A distribution is frankable unless the law specifies that it is unfrankable.
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 – see Debt and equity tests
- 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 distributions funded by capital raisings under arrangements that don’t significantly change the financial position of the entity, but are implemented to release franking credits that would otherwise remain unused
- certain payments made by NZ franking companies
- distributions from profits sourced in Norfolk Island before 1 July 2016 from companies resident there.
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
- public trading trust that is a resident unit trust for the income year in which the distribution is made
- New Zealand resident company that chooses to enter the Australian imputation system (Trans-Tasman imputation special rules).