Appendix 5. General Information

Simplified imputation system

Broadly, the simplified imputation system has the following effects on the company tax return:

A company that is paid a franked or unfranked distribution must include:

• the amount of the distribution at Income, H Total dividends item 6
• any attached franking credits at J Franking credits item 7. Franking credits should not be included in assessable income at J or claimed as a franking tax offset at C or E in the Calculation statement if          
  • the shares are not held at risk as required under the holding period and related payments rules
  • dividend washing integrity rule applies
  • for particular instruments issued by a financial institution, general insurer or life insurance company (referred to as AT1 securities), the hybrid mismatch rules apply to deny the franking (as advised by the payer in the statement), or the imputation system has been manipulated in some other way.
   

The Commissioner may make a determination to deny imputation benefits where you have entered into a scheme for the purpose of obtaining franking credit benefits.

The amount of franking credits included in assessable income is allowed as a tax offset and claimed at C Non-refundable non-carry forward tax offsets in the Calculation statement.

Where the company has a franking deficit tax (FDT) liability, it can claim an FDT offset against its income tax liability. Some special rules apply to life insurance companies to ensure that an FDT liability can only be offset against that part of the company’s income tax liability that is attributable to shareholders. The amount of FDT liability that can be claimed as a tax offset is reduced in certain circumstances. There are also special rules that apply to late balancing entities that elect to determine their FDT on a 30 June basis.

For more information on how to calculate the Franking deficit tax offset and the special rules that apply to late balancing entities, see:

• Simplified imputation: Franking deficit tax offset
• Simplified imputation: FDT offset for late balancers
• Franking account tax return and instructions 2021 (NAT 1382).

Other features of the simplified imputation system include:

• the franking account operates on a tax-paid basis and is also a rolling-balance account
• the period for determining a corporate tax entity’s FDT liability is aligned with its income year. However, certain late balancing entities can elect to have their liability determined on 30 June
• the franking period relates to the operation of the benchmark rule
• corporate tax entities can choose the extent to which they frank frankable distributions made within a franking period. This choice is subject to the benchmark rule, except for certain listed public companies
• the benchmark rule, while limiting streaming opportunities, provides some flexibility in allocating franking credits to frankable distributions. To comply with this rule, a corporate tax entity must ensure that all frankable distributions made within a franking period are franked to the same extent, which is the benchmark franking percentage. The benchmark franking percentage is equal to the franking percentage established for the first frankable distribution made in that franking period
• a breach of the benchmark rule will not invalidate the allocation made to the distribution. However, a penalty will be imposed on the corporate tax entity. The penalty is either          
  • an over-franking tax (OFT) if the franking percentage for the distribution exceeds the benchmark franking percentage, or
  • a franking debit to the franking account if the franking percentage for the distribution is less than the benchmark franking percentage
   
• the penalty is calculated by reference to the difference between the franking credits actually allocated and the benchmark franking percentage
• payment of OFT does not give rise to a franking credit in the franking account. If an entity is liable to pay OFT it must complete a Franking account tax return 2021
• under the disclosure rule, corporate tax entities must notify the Commissioner in the approved form if they have significantly varied their benchmark franking percentage between franking periods. This information is disclosed on the Franking account tax return 2021
• the maximum franking credit than can be allocated to a frankable distribution is based on the entity's corporate tax rate for imputation purposes.

For 2020–21, the entity's corporate tax rate for imputation purposes can be 26% or 30%, depending on the entity's circumstances.

See also:

• Allocating franking credits.

Franking account tax return

Corporate tax entities may be entitled to claim a FDT offset. In certain circumstances, the FDT offset reduction rule reduces the amount of FDT that can be offset against future income tax liabilities. For more information, see Franking deficit tax offset.

As a result of these rules, the Franking account tax return 2021 requires you to complete C Offsetable portion of current year FDT.

Complete a franking account tax return for all Australian corporate tax entities (including head companies of consolidated or MEC groups, corporate limited partnerships, corporate unit trusts and public trading trusts) and New Zealand franking companies that have:

• a liability to pay FDT
• a liability to pay OFT, or
• an obligation to disclose information to the Commissioner for their benchmark franking percentage.

Lodge the Franking account tax return separately from your Company tax return. If you lodge your Franking account tax return at the time your Company tax return is due, your Franking account tax return may be late and an interest charge may apply to any outstanding tax amounts. Your Franking account tax return is generally due one month after the end of your income year.

For more information on completing this tax return, see Franking account tax return and instructions 2021.

Cooperatives – option to frank dividends

Cooperative companies may frank distributions made to members from assessable income.

Cooperative companies that do not choose to frank distributions made to members are entitled to claim a deduction to the extent that a distribution of assessable income is not franked.

Find out about:

• Simplified imputation
• Consolidation
• Co-operative company franked and unfranked distributions.

Debt and equity rules

The debt and equity measures broadly operate to characterise certain interests as either debt or equity. For some tax law purposes, interests are treated in the same way as shares even though they are not shares in legal form. These interests are called ‘non-share equity interests’. They include some income securities, some stapled securities and certain related party ‘at call’ loans. For more information, see Debt and equity tests: guide to the debt and equity tests. This provides an overview of the debt and equity rules, and explains non-share equity interests.

For an explanation of when and how the debt and equity measures apply to ‘at call’ loans made to a company, see Debt and equity tests: guide to ‘at call’ loans.

For the purposes of the imputation system, non-share equity interests are generally treated in the same way as shares that are not debt interests. Non-share dividends on these types of interests may be franked or unfranked. Write the amount of non-share dividend, whether franked or unfranked, and any amount of franking credit attached to the non-share dividend, at the appropriate place on the tax return as if it were for a share.

You cannot claim a deduction for a non-share dividend.

See also:

• Debt and equity tests

Taxation of financial arrangements (TOFA) Rules

For the purposes of these instructions, 'TOFA rules' is a reference to the TOFA rules contained in Division 230 of the ITAA 1997, and not to the 'foreign exchange gains or losses' rules contained in Division 775 of the ITAA 1997.

The TOFA rules found in Division 230 of the ITAA 1997 generally provide for:

• methods of taking into account gains and losses from financial arrangements, being accruals and realisation, fair value, foreign exchange retranslation, hedging, and reliance on financial reports and balancing adjustment
• the time when the gains and losses from financial arrangements will be brought to account.

The TOFA rules will apply to the following entities:

• authorised deposit-taking institutions, securitisation vehicles and financial sector entities with an aggregated turnover of $20 million or more
• superannuation entities, managed investment schemes or entities with a similar status to a managed investment scheme under foreign law relating to corporate regulation with assets of $100 million or more
• any other entity (excluding individuals) which satisfies one or more of the following          
  • an aggregated turnover of $100 million or more
  • assets of $300 million or more
  • financial assets of $100 million or more.
   

Once the TOFA rules apply to a company, they will continue to apply to that company, even if its aggregated turnover, value of assets or value of financial assets subsequently falls below the requisite threshold.

A company that does not meet these requirements can elect to have the TOFA rules apply to it.

The aggregated turnover tests may mean that the TOFA rules will apply to companies that do not meet the turnover thresholds in their own right. Aggregated turnover includes the annual turnover of any entity a company is connected with, or any affiliate of the company, including overseas entities.

There are a number of elections available to companies under the TOFA rules. Elections under the TOFA rules are irrevocable and should be carefully considered before being made.

See also:

• TOFA elections
• Guide to the taxation of financial arrangements (TOFA).

Foreign exchange gains and losses

Under the foreign exchange (forex) measures contained in Division 775 of the ITAA 1997, forex gains and losses are generally brought to account as assessable income or allowable deductions, when realised. The forex measures cover both foreign currency denominated arrangements and, broadly, arrangements to be cash-settled in Australian currency with reference to a currency exchange rate. Forex gains and losses of a private or domestic nature, or for exempt income or non-assessable non-exempt income, are generally not brought to account under the forex measures.

If a forex gain or loss is brought to account under the forex measures and under another provision of the tax law, it is generally assessable or deductible only under the forex measures. However, if a financial arrangement of a company is subject to the TOFA rules, forex gains and losses from the financial arrangement will generally be brought to account under those TOFA rules instead of the forex measures.

Additionally, forex gains and losses will generally not be assessable or deductible under the forex measures if they arise from certain acquisitions or disposals of capital assets, or acquisitions of depreciating assets, and the time between the acquisition or disposal and payment is no more than 12 months. Instead, any foreign exchange gain or loss is usually matched with or integrated into the tax treatment of the underlying asset.

The general translation rule (Subdivision 960-C of the ITAA 1997) requires all tax-relevant amounts to be expressed in Australian currency, regardless of whether there is an actual conversion of that foreign currency into Australian dollars.

The tax consequences of gains or losses on existing foreign currency assets, rights and obligations that were acquired or assumed before 1 July 2003, being the commencement date of the forex measures, are to be determined under the law as it was before these measures came into effect, unless:

• the company has made a transitional election that brings these under the forex measures, or
• there is an extension of an existing loan that brings the arrangement within these measures, for example, an extension by a new contract, or a variation to an existing contract.

For more information about these measures and how to calculate your foreign exchange gains and losses, see Foreign exchange gains and losses.

General value shifting regime

Broadly, value shifting describes transactions and other arrangements that reduce the value of an asset and (usually) increase the value of another asset.

The general value shifting regime (GVSR) consists of direct value shifting (DVS) and indirect value shifting (IVS) rules that primarily affect equity and loan interests in companies and trusts. There is also a DVS rule dealing with non-depreciating assets over which a right has been created. There are different consequences for particular interests according to whether the interest is held on capital account, or as a revenue asset or trading stock.

Where the rules apply to a value shift there may be a deemed gain (but not a loss), adjustments to adjustable values (for example, cost bases), or adjustments to losses or gains on realisation of assets.

There are de minimis exceptions and exclusions that will minimise the cost of complying with the GVSR, particularly for small business. Entities dealing at arm’s length or on market value terms are generally excluded from the GVSR.

See also:

• Guide to the general value shifting regime

International taxation – hybrid mismatch rules

The hybrid mismatch rules are designed to prevent entities from gaining an unfair competitive advantage through hybrid mismatch arrangements. Generally, these arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions.

These rules have now been legislated in the following Australian income tax law:

• Division 832 of the ITAA 1997
• related amendments to the ITAA 1997 (including amendments affecting the Subdivision 768-A dividend exemption and Division 207 franking entitlements), and
• related amendments to the ITAA 1936 (including amendments affecting Part IIIB for the Australian branch of a foreign bank and the operation of section 23AH where a branch hybrid mismatch would otherwise arise).

Division 832 also contains a targeted integrity rule that applies to certain deductible interest payments, or payments under a derivative, made to an interposed foreign entity where the rate of foreign income tax on the payment is 10% or less. The targeted integrity rule seeks to prevent multinational groups from circumventing the hybrid mismatch rules by routing investment or financing into Australia though an entity in a low or no tax foreign jurisdiction.

These rules operate in Australia to neutralise hybrid mismatches by disallowing deductions or including amounts in assessable income.

Effective dates:

• Division 832 of the ITAA 1997 has an effective start date for income years beginning on or after 1 January 2019, with the exception of certain aspects of the imported mismatch rules.
• The related measures referred to above have effect for distributions received and flows occurring on or after 1 January 2019, apart from particular transitional measures applying to certain distributions received in relation to Additional Tier 1 capital instruments that have been issued by certain financial or insurance institutions.

See also:

• Hybrid mismatch rules

Small business entity concessions

Depending on its aggregated turnover for an income year, a small business entity may be eligible for the following concessions:

• CGT 15-year asset exemption
• CGT 50% active asset reduction
• CGT retirement exemption
• CGT rollover provisions, including the small business restructure rollover with effect from 1 July 2016
• simplified depreciation rules and calculations
• accelerated depreciation for primary producers
• deduction for professional expenses for start-ups
• deduction of certain prepaid business expenses immediately
• simplified trading stock rules
• accounting for GST on a cash basis
• annual apportionment of GST input tax credits
• payment of GST by quarterly instalments
• FBT car parking exemption
• FBT work-related devices exemption
• PAYG instalments based on GDP-adjusted notional tax.

Businesses that would be small business entities if the aggregated turnover threshold was $50 million may also be eligible for the following concessions

• deduction for professional expenses for start-ups
• deduction of certain prepaid business expenses immediately

Some of these concessions have specific eligibility conditions that must also be satisfied.

For more information about small business entity concessions:

• see Small business entity concessions
• phone 13 28 66.

In this section:

• Eligibility
• Calculating turnover
• Aggregation rules
• Business operated for only part of the year
• Satisfying the aggregated turnover threshold
• Former simplified tax system taxpayers

Eligibility

A company is eligible for the small business entity concessions if it is a small business entity. The company will be a small business entity if it is carrying on a business and has an aggregated turnover of less than $10 million. This is known as the small business entity test.

Broadly, aggregated turnover is the company’s annual turnover plus the annual turnovers of any entities that are connected to or affiliated with it.

Companies that would be small business entities if the aggregated turnover threshold was $50 million are also eligible for immediate deduction for certain prepaid expenses and certain start-up expenses.

For information about:

• What it means for a company to be carrying on a business, see Taxation Ruling 2019/1 Income tax: when does a company carry on a business?
• How to determine a company's aggregated turnover, see Calculating turnover and Aggregation.
• See LCR 2019/5 Base rate entities and base rate entity passive income.

Eligibility for the small business entity concessions must be reviewed each year.

See also:

• Eligibility

Calculating turnover

Turnover includes all ordinary income that the company earned in the ordinary course of business for the income year. Some examples of amounts included and not included in ordinary income are in table 1.

Table 1: Ordinary income

Include these amounts	Do not include these amounts
Revenue from sales of trading stock Fees for services provided Interest from business bank accounts Amounts received to replace something that would have had the character of business income, for example, a payment for loss of earnings.

There are special rules for calculating the annual turnover if the company has retail fuel sales or business dealings with associates that are not at market value.

For more information about calculating turnover, see Aggregation or phone 13 28 66.

Aggregation rules

Special rules, called the aggregation rules, will determine who the company is connected to or affiliated with.

These rules prevent larger businesses from structuring or restructuring their affairs to take advantage of the small business entity concessions or the lower company tax rate.

An entity that is connected with the company or that is its affiliate is referred to as a relevant entity.

When calculating the company’s aggregated turnover, do not include:

• income from dealings between the company and a relevant entity
• income from dealings between any of the company’s relevant entities
• income from a relevant entity when it was not the company’s relevant entity.

For more information on the aggregation rules, see Aggregation.

If the company is not connected or affiliated with any other entities and its annual turnover for the relevant period is less than $10 million, then the company is a small business entity.

Business operated for only part of the year

If the company, or a relevant entity, carries on a business for only part of the income year, annual turnover must be worked out using a reasonable estimate of what the turnover would have been if the company, or relevant entity, had carried on a business for the whole of the income year.

Satisfying the aggregated turnover threshold

There are three ways to satisfy the $10 million aggregated turnover threshold or the $50 million aggregated turnover threshold. These are:

• Previous year turnover
• Estimate of current year turnover
• Actual current year turnover
• Most businesses will only need to consider the first method.

Previous year turnover

If the company’s aggregated turnover for the previous income year was less than $10 million, it will be a small business entity for the current year. This is regardless of its estimated or actual aggregated turnover for the current year.

If the company's aggregated turnover for the previous income year was less than $50 million, it can access those small business entity concessions with an aggregated turnover threshold of less than $50 million.

Estimate of current year turnover

If the company’s estimated aggregated turnover for the current income year is less than $10 million, it will be a small business entity for the current year.

If the company's estimated aggregated turnover for the current income year is less than $50 million, it can access those small business entity concessions with an aggregated turnover threshold of less than $50 million.

If you are estimating the company’s turnover you need to:

• estimate the company’s turnover based on the conditions you are aware of at the relevant date
• assess whether the aggregated turnover is more likely than not to be less than $10 million or $50 million as at the relevant date.
• The relevant date is either:
• the first day of the income year or,
• the time the business started, if the company started a business part way through the year.
• Companies that began carrying on a business in the current year need to make a reasonable estimate of what their turnover would have been had the business been carried on for the entire year.

This method cannot be used if the company’s aggregated turnover in each of the previous two income years was equal to or more than the aggregated turnover threshold.

Actual current year turnover

If the company’s actual aggregated turnover is less than $10 million at the end of the income year, it will be a small business entity for that year.

If a company's actual aggregated turnover is less than $50 million at the end of the income year, it can access those small business entity concessions with an aggregated turnover threshold of less than $50 million.

This method is only needed if the first two tests cannot be met.

If the company is a small business entity by means of this third method only, it cannot use the GST and PAYG concessions for that income year because those particular concessions must have been chosen earlier in the income year.

Former simplified tax system taxpayers

There are transitional rules for former simplified tax system (STS) taxpayers that deal with the continued use of the STS accounting method.

A special rule applies if the company is winding up a business this year that it previously carried on and it was an STS taxpayer in the income year it ceased business.

See also:

• Small business entity concessions.

Treatment of cryptocurrencies

If you are involved in the acquiring or disposing of cryptocurrency, you need to be aware of the tax consequences. These vary depending on the nature of your circumstances.

See also:

• Tax treatment of cryptocurrencies in Australia – specifically bitcoin.

Return to:

• Appendixes