Franking credit allocation

The franking credits that are owed to shareholders are distributed by a corporate tax entity, which does this by attaching the credits to distributions made by the shareholders.

For the purposes of imputation, a corporate tax entity's applicable corporate tax rate determines the maximum amount of franking credit that can be applied to a frankable distribution that the entity has paid out.

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Rate of taxation applicable to corporations for purposes of imputation

To determine your corporate tax rate for imputation purposes beginning with the 2017–18 income year, you will need to make the assumption that your aggregated turnover, assessable income, and base rate entity passive income will be the same as they were in the previous income year. This is necessary in order to calculate your corporate tax rate.

If you are considered a base rate entity, the corporate tax rate that applies to you for the purpose of imputation is 27. 5% for the income years 2017–18 through 2019–20 combined It is going to be 26% for the income year 2020–21, and it is going to be 25% for the income year 2021–22.

For the purposes of an income year, you are considered a base rate entity if either of the following conditions is met:

• if your aggregated turnover for the previous year was less than $25 million for the 2017–18 income year or less than $50 million from the 2018–19 income year, and if 80% or less of your assessable income was base rate entity passive income, then you may be eligible for a reduced tax rate.
• The entity was nonexistent during the previous accounting period.

If this is not the case, your company will be subject to a tax rate of thirty percent for imputation purposes.

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Figuring out the highest possible franking credit

Beginning with the 2016–17 taxation year and continuing forward, the maximum franking credit is determined by applying the following formula:

• Quantity of the frankable distribution multiplied by one times the applicable gross-up rate

This rate is the entity's corporate tax gross-up rate for the income year in which the distribution is being made, and it is referred to as the "applicable gross-up rate."

The 'applicable gross-up rate' is determined by applying the following formula to the calculation:

• (100%) minus your corporate tax rate for imputation purposes for the income year

The years before this one

Imputation purposes will result in a 27 percent tax rate for your company during the 2016–2017 fiscal year. 5% discount if either of the following conditions are met:

• despite having a total revenue of less than $10 million for the fiscal year 2015–2016, you are still operating a business.
• This is the first year that you have been in business. Congratulations!

If this is not the case, your company will be subject to a tax rate of thirty percent for imputation purposes.

The maximum franking credit that can be allocated to a frankable distribution for all companies was thirty percent in the income year 2015–16, as well as in the income years prior to that.

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Distributions made using an inaccurate tax rate that were applied

If any of the following apply to your situation, it's possible that you issued distribution statements in 2016–17 or 2017–18 using an incorrect corporate tax rate for imputation purposes:

• based on Taxation Ruling 2019/1, the question of when a company is considered to be conducting business is addressed. , you now believe that you are operating a business and that you qualify as a small business entity, which makes you eligible for a lower company tax rate (distributions in 2016–17).
• Because more than 80 percent of your total assessable income comes from passive base rate entity income, you cannot qualify for the reduced company tax rate that applies to distributions in 2017–18.

In the event that you have issued your distribution statements for the financial years 2016–17 or 2017–18 using an incorrect corporate tax rate for the purposes of imputation, you are obligated to inform your shareholders of the appropriate dividend and franking credit amounts. You can accomplish this goal by writing and sending an email or letter to your shareholders, or by distributing an updated distribution statement. In addition to this, you are responsible for ensuring that the appropriate amounts are reflected in your franking account.

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A calculation of the franking percentage

The term "franking percentage" refers to the degree to which an organization has allotted franking credits to a frankable distribution. This is determined by dividing the total amount of franking credit that has been allocated to the distribution by the total amount of franking credit that has the potential to be allocated to the distribution. Instead of being expressed as a percentage of the entire distribution, it is expressed as a percentage of the frankable distribution. This indicates that even in situations in which only a portion of the total distribution is eligible for franking, it is possible for the franking percentage to remain at 100%.

You are free to decide how much of an allocation of franking credits you want to make to a distribution. You will need to take into consideration both the current surplus in your franking account as well as the anticipated surplus in the future, in addition to the rate at which earlier distributions were taxed. You are not permitted to frank a distribution at a percentage higher than one hundred percent.

The requirement to frank all frankable distributions within the franking period to the same extent, also known as the benchmark rule, is generally the only limitation on your ability to frank a distribution.

In the event that you issue a distribution statement that reveals an amount of franking credit that is greater than the maximum amount that is permissible, you will be subject to the following:

• The amount that is shown on the distribution statement is not the amount that is deducted from your franking account; rather, the amount that is deducted is the maximum franking credit allocation.
• The recipient of a franked distribution is only required to include the franked distribution and the amount of franking credit that was allocated on the distribution, up to the maximum amount that could have been allocated on the distribution, in their income for tax purposes.
• The only franking credit that the recipient is eligible for is one that is equal to the maximum amount.

See also:

• Benchmark rule
• Franking period