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Imputation rules for exempting and former exempting entities

Check imputation rules that apply for exempting and former exempting entities.

Last updated 30 November 2016

Imputation rules apply for exempting and former exempting entities.

An exempting entity is a corporate tax entity that is effectively owned by prescribed persons.

Broadly, a prescribed person is either:

  • a company or natural person who is exempt from tax or is a non-resident
  • a partnership or trust where all the partners or beneficiaries are exempt from tax or are non-resident
  • the Commonwealth, states and territories.

A corporate tax entity is effectively owned by prescribed persons if either:

  • 95% or more of the accountable membership interests in the entity are held directly and indirectly by prescribed persons
  • 95% or more of the accountable partial interests in the entity are held directly or indirectly by prescribed persons
  • having regard to any arrangement of which the corporate tax entity is aware with respect to the accountable membership interest, it would be reasonable to conclude that the risks and opportunities resulting from holding the membership interests substantially accrue to prescribed persons.

A former exempting entity is a corporate tax entity that has ceased to be an exempting entity and has not again become an exempting entity.

The exempting entity and former exempting entity rules have been modified to support the integrity rules relating to franking credit trading. These will apply if:

Imputation on exempting entities

Exempting entities frank a distribution by applying franking credits to frankable distributions in the same way ordinary companies do.

Franked distributions made by exempting entities are generally treated as unfranked distributions in the hands of the recipient. They only provide benefits to recipients in the form of:

  • an exemption from dividend withholding tax for non-resident members
  • a tax offset entitlement for franked distributions arising to members holding eligible employee shares and corporate tax entities in certain cases. This is generally when the receiving entity is itself subject to the exempting entity rules
  • a franking credit arising in the franking account of a recipient exempting entity in certain cases.

Consistent with the rules that apply to ordinary companies, the franking account balances of exempting entities will be maintained on a tax-paid basis.

Imputation for former exempting entities

The effects of imputation on former exempting entities are outlined as follows.

Quarantining exempting accounts

Where an exempting entity ceases to be effectively owned by prescribed persons, it is taken to be a former exempting entity. In these cases, the franking account (of the entity when it was an exempting entity) is converted to an exempting account.

The exempting account is quarantined so that franking benefits funded from the existing balance of franking credits are only able to confer on eligible continuing substantial shareholders or members holding eligible employee shares.

A new franking account is established for the entity to record franking credits or debits after it ceases to be an exempting entity.

Franking a distribution

A former exempting entity can pay either franked distributions franked with franking credits or exempting credits. However, it must first frank the distribution by allocating franking credits to the distribution. It must have regard to the entity's benchmark franking percentage for the franking period, in the same way that the rules apply to ordinary companies. The entity can attach exempting credits to that part of a distribution that is unfranked with franking credits.

A former exempting entity may frank a distribution with exempting credits by allocating exempting credits to the distribution. The amount of the exempting credit on a distribution is stated in the distribution statement unless the amount stated exceeds the maximum franking credit for the distribution. In that situation the amount of the exempting credit on the distribution is taken to be nil.

Distributions to be franked with exempting credits to the same extent

All frankable distributions made within a franking period should be franked to the same extent with an exempting credit. If this rule is breached, distributions made within the period with an exempting credit attached are taken not to have been franked with an exempting credit.

Converting exempting accounts into tax paid basis

The franking and exempting account balancers of exempting and former exempting entities will be maintained on a tax-paid basis. This is consistent with the rules that apply to ordinary companies.

QC50657