A corporate entity that is a co-operative may choose how it distributes income to its shareholders. Franked distributions are generally subject to the simplified imputation rules. If a co-operative company chooses not to frank a distribution, it can claim a tax deduction for the distribution it makes to its members. A co-operative company can also make distributions with both a franked and unfranked part (partly-franked).
Franked distributions
A co-operative company can choose to frank distributions to shareholders, subject to available franking credits. If it does so, then:
- it will generally be subject to the simplified imputation rules – these will apply in the same way as they do for other corporate tax entities that are franking entities
- it will not be entitled to a deduction for that part of the distribution that it has franked.
A co-operative company may generally choose to frank:
- so much of its assessable income for the current income year that it distributes among its members as rebates or bonuses based on business done by members with the company, or interest or dividends on shares
- realised profits from sources other than assessable income for the current income year that it distributes to its members
- distributions from retained profits that has arisen from previous income years.
Franked distributions made by a co-operative company are treated in the same way as franked distributions made by other corporate tax entities. These include companies, public trading trusts and limited partnerships.
Where a co-operative company makes a distribution to its members and allocates some franking credits to this distribution, it must provide a distribution statement, in the approved form, to members. The distribution statement will show how a distribution has been franked.
See also
Unfranked distributions
If a co-operative company chooses not to frank a distribution made to its members, it can claim a tax deduction for the distribution made. The deduction is available for the unfranked part of the distribution that is funded from the cooperative company's assessable income for the current year.
If a co-operative company chooses not to frank the distributions made to its members, it is not obliged to provide a distribution statement to its members.
When claiming a deduction for unfranked distributions, a co-operative company can treat distributions paid within three months after the end of an income year, or such further time allowed by the Commissioner of Taxation, as if they were paid on the last day of the income year.
Example 1
JLO, a co-operative company, has assessable income of $7,000 that it wants to distribute to its members. It has sufficient franking credits in its franking account to fully frank this distribution.
On 1 June 2015 it decides to distribute its entire assessable income of $7,000 to its members and allocate the maximum amount of franking credits of $3,000 to the distribution. This means that the distribution is fully franked.
No deduction will be allowed for the $7,000 that JLO distributes to its members, as no part of this distribution represents an unfranked distribution.
End of example
Example 2
LIX, a co-operative company, makes a distribution of $150,000 to its members for the 2014–15 income year. As it does not allocate any franking credits to the distribution, the entire distribution is unfranked. This distribution is funded from assessable income of $150,000 that it derived in the 2014–15 income year.
As the distribution is wholly funded from LIX's assessable income, it will be entitled to a deduction of $150,000.
End of example
Example 3
XIL, a co-operative company, makes a distribution of $200,000 to its members for the 2014–15 income year. As it does not allocate any franking credits to this distribution, the entire distribution is unfranked. This distribution is funded from assessable income of $150,000 for the 2014–15 income year and from retained earnings of $50,000.
XIL will be allowed a deduction of only $150,000, as this is the amount of distribution that is unfranked and funded from the company's assessable income. The balance of the distribution ($50,000) is not allowed as a tax deduction.
End of examplePartly-franked distributions
A co-operative company can make a distribution to its members that have both a franked and unfranked part. This means the distribution will be partly franked. The franking percentage for the distribution is less than 100%. A deduction is allowable only for the unfranked part of the distribution that is funded from the co-operative company's assessable income.
Example: Partly-franked distribution
GDC, a co-operative company, distributes $70,000 to its members for the 2014–15 income year. GDC chooses to frank only 90% of this distribution. The distribution is wholly funded from GDC's assessable income for the 2014–15 income year.
GDC can claim a tax deduction for $7,000 (that is, $70,000 x 10%). This is the unfranked part of the distribution funded from its assessable income for the 2014–15 income year.
End of exampleSee also
Distributions partly-franked and not funded from assessable income
Where a partly-franked distribution is paid and it is:
- partly from assessable income of the income year
- partly from another source, for example, retained earnings or a pre-capital gains tax (CGT) gain
you need to identify the part of the distribution that is franked and not sourced from assessable income for the purpose of calculating the allowable deduction. This is because sub-section 120(5) of the ITAA 1936 assumes that the franked part of the distribution is sourced to the maximum extent possible from sources other than assessable income.
This approach maximises the amount of the deduction available to a co-operative company where the co-operative does not allocate the maximum franking credit allowable to a distribution made to shareholders in an income year.
Example: Partly-franked and not funded distribution
MJL, a co-operative company, distributes $10 million to its members for the 2014–15 income year. This distribution is franked to 60%. It is funded partly from a capital gain of $9 million made on the disposal of pre-CGT assets (this amount is not part of MJL's assessable income) and $1 million of assessable income for the 2014–15 income year. MJL's assessable income for 2014–15 was $15 million.
To maximise MJL's deduction, it is assumed that the franked part of the distribution (that is, $6 million) is funded from sources other than MJL's assessable income for the 2014–15 income year. That is, the entire $6 million is funded from the capital gain made on the disposal of pre-CGT assets. Of the $4 million distribution that is the unfranked part, $3 million is funded from the balance of the capital gain made on the disposal of pre-CGT assets (the non-assessable income) and $1 million is from MJL's assessable income for 2014–15.
MJL is therefore entitled to a deduction of $1 million. This is the unfranked part of the distribution that is funded from its 2014–15 assessable income.
End of example