Allocating franking credits

A corporate tax entity allocates franking credits to shareholders by attaching the credits to the distributions they make.

The maximum franking credit that can be allocated to a frankable distribution paid by a corporate tax entity is based on its applicable corporate tax rate for imputation purposes.

Find out about:

• Corporate tax rate for imputation purposes
• Calculating the maximum franking credit
• Distributions issued using an incorrect tax rate
• The franking percentage

Corporate tax rate for imputation purposes

From the 2017–18 income year, to work out your corporate tax rate for imputation purposes you need to assume your aggregated turnover, assessable income and base rate entity passive income will be the same as the previous income year.

If you are a base rate entity, your corporate tax rate for imputation purposes is 27.5% for the 2017–18 to the 2019–20 income years. It will be 26% for the 2020–21 income year and 25% for the 2021–22 income year.

You are a base rate entity for an income year if either of the following apply:

• 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 80% or less of your assessable income was base rate entity passive income
• the entity didn't exist in the previous income year.

Otherwise, your corporate tax rate for imputation purposes is 30%.

See also:

• Law Companion Ruling LCR 2019/5 Base rate entities and base rate entity passive income

Calculating the maximum franking credit

From the 2016–17 income year onwards, the maximum franking credit is calculated using the following formula:

• Amount of the frankable distribution × (1 ÷ Applicable gross-up rate).

The 'applicable gross-up rate' is the entity's corporate tax gross-up rate for the income year in which the distribution is being made.

The 'applicable gross-up rate' is calculated using the following formula:

• (100% - your corporate tax rate for imputation purposes for the income year) ÷ your corporate tax rate for imputation purposes for the income year.

 

Previous years

For the 2016–17 income year, your corporate tax rate for imputation purposes is 27.5% if either of the following apply:

• your 2015–16 aggregated turnover was less than $10 million, and you are carrying on a business
• this is the first year you are in business.

Otherwise, your corporate tax rate for imputation purposes is 30%.

For the 2015–16 and previous income years, the maximum franking credit that can be allocated to a frankable distribution for all companies was 30%.

See also:

• Changes to company tax rates
• Law Companion Ruling LCR 2019/5 Base rate entities and base rate entity passive income
• Imputation
• Simplified imputation: Franking deficit tax offset

Distributions issued using an incorrect tax rate

You may have issued 2016–17 or 2017–18 distribution statements using an incorrect corporate tax rate for imputation purposes if:

• based on Taxation Ruling 2019/1 Income tax: when does a company carry on a business?, you now consider you are carrying on a business and are a small business entity eligible for the lower company tax rate (2016–17 distributions)
• more than 80% of your assessable income is base rate entity passive income, making you ineligible for the lower company tax rate (2017–18 distributions).

If you have issued your 2016–17 or 2017–18 distribution statements using an incorrect corporate tax rate for imputation purposes, you should notify your shareholders of the correct dividend and franking credit amounts. You can do this by sending a letter or email to your shareholders, or a revised distribution statement. You also need to ensure the correct amounts are reflected in your franking account.

Find out about:

• Calculating the maximum franking credit for prior years
• The franking percentage

See also:

• Practical Compliance Guideline PCG 2018/8 Enterprise Tax Plan: small business company tax rate change: compliance and administrative approaches for the 2015–16, 2016–17 and 2017–18 income years
• Changes to company tax rates
• Company tax rates

The franking percentage

The extent to which an entity has allocated franking credits to a frankable distribution is referred to as the franking percentage. This is calculated by dividing the franking credit allocated to the distribution by the maximum franking credit that may be allocated to the distribution. It is expressed as a percentage of the frankable distribution, rather than the whole of the distribution. This means that in circumstances where only part of the total distribution is frankable, the franking percentage could still be 100%.

You may choose the extent to which you want to allocate franking credits to a distribution. You will need to consider the existing and expected surplus in your franking account and the rate at which earlier distributions have been franked. However, you cannot frank a distribution at a percentage greater than 100%.

Generally, the only restriction on your ability to frank a distribution is the requirement to frank all frankable distributions within the franking period to the same extent – known as the benchmark rule.

If you issue a distribution statement showing an amount of franking credit that exceeds the maximum amount allowable, then:

• your franking account is debited by the amount of the maximum franking credit allocation rather than the amount shown on the distribution statement
• the recipient of the franked distribution will only include the franked distribution and the amount of franking credit up to the maximum that could have been allocated on the distribution in their assessable income
• the recipient is only entitled to a franking credit equal to the maximum amount.

See also:

• Benchmark rule
• Franking period

About the corporate tax rate for imputation purposes, correct distributions and applying franking percentages when allocating franking credits.