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Franking distributions

Explains the requirements to attach franking credits to a distribution.

Last updated 3 December 2023

About franking a distribution

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).

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

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).

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 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 – 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.

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
  • 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).