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 FDT offset and the special rules that apply to late balancing entities, see:
- Franking deficit tax offset
- FDT offset for late balancers
- Franking account tax return and instructions 2022
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 2022
- 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 2022
- 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 2021–22, the entity's corporate tax rate for imputation purposes can be 25% or 30%, depending on the entity's circumstances.
For more information, see Allocating franking credits.
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.
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.
For more information, see Debt and equity tests.
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.
For more information, see 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.
The hybrid mismatch rules are primarily contained in Division 832 of the ITAA 1997, with additional rules contained in:
- Division 207 of the ITAA 1997 (franking entitlements)
- Subdivision 768-A of the ITAA 1997 (dividend exemptions)
- Section 23AH of the ITAA 1936 (exempt branch income)
- Part IIIB of the ITAA 1936 (Australian branches of a foreign bank).
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.
For more information, see Hybrid mismatch rules.
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.
For more information, see Tax treatment of cryptocurrencies.
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