Franking deficit tax offset calculations, reduction rule and exclusions

Overview

The following information explains how to calculate the amount of your FDT offset for an income year.

If the FDT offset reduction rule applies, the offset amount you can claim is reduced by 30%. This rule applies when certain franking debits exceed 10% of the amount of franking credits that arise in the income year.

An exclusion to the FDT offset reduction rule may apply either:

• in your first taxable income year if you are a private company
• where the Commissioner of Taxation exercises his discretion in your favour because of events outside your control.

Our franking account tax return and instructions provides information on how to complete your tax return.

How to calculate the amount of FDT offset

You can calculate your FDT offset amount for an income year using the following method.

Special rules

The calculations are also subject to:

• special rules excluding the application of the FDT offset reduction rule if you are a private company without any previous tax liabilities
• special rules to calculate your FDT liability if you are a late balancing corporate tax entity.

Calculating the FDT offset amount

A 7 step method to calculate the amount of your franking deficit tax (FDT) offset for an income year.

Step 1

Work out the amount of FDT liability that the entity has incurred in the income year.

Step 2

Did any franking debits arise in your franking account under items 1, 3, 5 or 6 of section 205-30 of the Income Tax Assessment Act 1997?

If yes, go to step 3.

If no, the FDT offset reduction rule does not apply. Claim the amount of FDT liability from step 1 as a tax offset. Show this amount at the Offsetable portion of current year FDT label on the franking account return. Go to step 5.

Step 3

Work out the amount of FDT liability attributable to items 1, 3, 5 and 6, plus any item 2 franking debits.

To do this, add together the opening balance (if any) of the franking account and any franking credits that arose in the account for the year (*see note below). Subtract from this amount the total of the items 1, 2, 3, 5 and 6 debits.

If the result is zero or positive, the FDT offset reduction rule does not apply. Claim the amount of FDT liability from step 1 as a tax offset. Show this amount at the Offsetable portion of current year FDT label on the franking account return. Go to step 5.

If the result is negative, this is the amount of franking deficit tax attributable to items 1, 2, 3, 5 and 6. Go to step 4.

*Note: When you calculate the total amount of franking credits that arise in the franking account in the income year:

• don't include the opening balance of the franking account for the income year
• include credits that arise at the beginning of the income year as a result of a franking deficit tax liability that was incurred at the end of the previous income year.

Step 4

If the step 3 amount for the year is negative and is less than or equal to 10% of the total franking credits that arose in the franking account in the same year, the FDT offset reduction rule does not apply. Claim the amount of FDT liability from step 1 as a tax offset. Show this amount at Offsetable portion of current year FDT label on the franking account return. Go to step 5.

If the step 3 amount for the year is negative and is greater than 10% of the total franking credits that arose in the franking account in the same year, the FDT offset reduction rule applies as follows:

1. Work out 30% of the step 3 amount – this is the reduction amount.
2. Reduce the amount of FDT liability from step 1 by the reduction amount – the result is the amount you can claim as a tax offset.
3. Show this amount at the Offsetable portion of current year FDT label on the franking account return – go to step 5.

Step 5

Repeat steps 1 to 4 for each previous income year in which the entity did not meet the residency requirement. Use this to work out the amount of a previous year's FDT liability that is eligible to be claimed as an offset and that has not previously been claimed as an offset.

Add up the amounts covered by step 5 for all previous income years the entity did not meet the residency requirements.

Step 6

Work out the amount of any excess FDT offset from a previous year (that has not been utilised in a previous year after applying all other tax offsets).

Step 7

Add up any amounts in the Offsetable portion of current year FDT label on the franking account return from steps 2, 3 or 4 plus any offsetable portions of previous year FDT amounts from step 5 and 6. This is the total amount of current year and previous year FDT offset the entity is entitled to claim for the income year. Show this amount at the Franking deficit tax offset label in the calculation statement on the company tax return.

If the FDT offset amount is greater than the income tax liability for the income year, the excess amount will be taken into account in calculating the amount of FDT offset in the following income year.

FDT offset reduction rule

The amount of FDT offset you can claim is reduced by 30% when the FDT offset reduction rule applies.

The 30% FDT offset reduction rule is triggered when certain franking debits give rise to a deficit (debit greater than credits) that is greater than 10% of the total franking credits in the franking account in an income year.

These franking debts arise where an entity has either directly or indirectly franked a distribution or received a refund of income tax.

The applicable franking debits are specified at subsection 205-70(8) of the Income Tax Assessment Act 1997 (and section 205-71 of the Income Tax (Transitional provisions) Act 1997).

The applicable franking debits that would trigger the reduction rule are:

• item 1, when an entity franks a distribution
• item 3, when an entity franks a distribution in contravention of the benchmark rule
• item 5, when a distribution by one entity is substituted by a distribution by another entity
• item 6, when a tax-exempt bonus share is issued in substitution for a franked distribution.

If franking debits first arose under any of the above items, then the applicable franking debits also includes item 2 when an entity receives a refund of income tax.

There are 2 situations where this reduction rule may not apply:

• in a private company's first taxable income year, or
• when the Commissioner has exercised his discretion in an entity's favour because of events outside the entity's control.

For more information see:

• section 205-15 of the Income Tax Assessment Act 1997
• section 205-30 of the Income Tax Assessment Act 1997

Exclusions to the FDT offset reduction rule

Explains the 2 exclusions to the 30% franking deficit tax (FDT) offset reduction rule.

On this page

• When the exclusions apply
• Private company’s first taxable income year
• Commissioner's discretion

When the exclusions apply

There are 2 exclusions to the 30% franking deficit tax (FDT) offset reduction rule. The rule will generally not apply either:

• in the first income year in which a private company has an income tax liability where it meets certain conditions
• where the Commissioner has exercised his discretion because he is satisfied that the franking deficit arose from events outside the entity's control.

Private company’s first taxable income year

The 30% FDT offset reduction rule does not apply to determine the amount of the offset from the 2004–05 and later income years when the following conditions are satisfied:

• the entity is a private company (defined in section 995-1) for the relevant year (the income year in which it satisfies the residency requirements for a FDT offset)
• if the company did not have the tax offset (but had all its other tax offsets) it would have had an income tax liability for the relevant year
• the amount of the income tax liability for the relevant year is at least 90% of the amount of the deficit in the company's franking account at the end of the relevant year
• the company has not had an income tax liability for any income year before the relevant year.

Commissioner's discretion

The Commissioner of Taxation can make a determination in writing to disregard the FDT offset reduction rule where the franking deficit was due to circumstances that could not be anticipated or events outside of the entity's control.

The Commissioner will generally consider the events that gave rise to the deficit as outside the entity's control if they were not readily foreseeable and could not be influenced by the company or did not involve the broader exploitation of the imputation system.

The Commissioner does not consider that a franking deficit arising due to improper tax planning, bad management, inadvertent errors, or expansion of business are circumstances that are unanticipated or beyond the entity’s control.

You can make an application for the Commissioner to exercise discretion in the approved form for events that occurred on or after 1 July 2002.

Next step

Information on how to apply for an exception or Commissioner's discretion is in the Franking account tax return instructions.