Who must lodge a Franking account tax return?

Who needs to complete a Franking account tax return

Complete a Franking account tax return 2023 for all Australian corporate tax entities and New Zealand franking companies that have:

• a liability to pay franking deficit tax (FDT)
• a liability to pay over-franking tax (OFT), or
• an obligation to notify the Commissioner of Taxation in relation to any significant variation in their benchmark franking percentage between franking periods.

A trust that ceased to be a corporate unit trust or public trading trust as a result of 2016 amendments to repeal Division 6B and modify Division 6C does not need to complete the tax return. The transitional rules that allowed the trust to use any surplus in its franking account for events happening before 1 July 2019 no longer apply.

If there is such a liability or notification obligation, the entity is required to complete section A and the remaining items on the Franking account tax return that are relevant to that liability or obligation.

If there is no such liability or notification obligation, there is no need to lodge this tax return.

An entity is a corporate tax entity for the purposes of Part 3-6 of the Income Tax Assessment Act 1997 (ITAA 1997) at a particular time if:

• the entity is a company at that time
• a corporate limited partnership
• a public trading trust

for the income year in which that time occurs.

A company is a New Zealand franking company if the company:

• is a New Zealand resident company, and
• has made an election to join the Australian imputation system.

The Australian imputation rules generally apply to a New Zealand franking company in the same way as they apply to an Australian corporate tax entity. Special rules also apply, see Trans-Tasman imputation special rules.

Period boxes or specify if part year or approved substitute period

The Franking account tax return 2023 applies to the 2022–23 income year.

An early or late balancing corporate tax entity is one that has the Commissioner’s permission to use an income year that ends on a date other than 30 June. These entities are granted an approved substituted accounting period (SAP) which is in lieu of an income year ending on 30 June (the standard income year).

• An early balancing corporate tax entity has its income year end before 30 June.
• A late balancing corporate tax entity has its income year end after 30 June.

A late balancing corporate tax entity that has elected to have its FDT liability determined on a 30 June basis must complete the period boxes with the dates 1 July 2022 to 30 June 2023.

For more information on SAPs, see PS LA 2007/21 Substituted Accounting Periods (SAPs).

Complete the period boxes at the top of the tax return with the period covered by this tax return if the entity:

• is an early balancing corporate tax entity
• is a late balancing corporate tax entity
• ceases to be a franking entity part way through its income year
• is a New Zealand franking company, when its election to join the Australian imputation system is revoked or cancelled part way through its income year.

Late balancing corporate tax entities that elect to have their FDT liability determined on 30 June

A late balancing corporate tax entity may choose to have its FDT liability, if any, determined on a 30 June basis, rather than at the end of its income year.

If a late balancing corporate tax entity makes this choice and it has a debit balance in its franking account on 30 June 2023, it must lodge a Franking account tax return 2023 to account for this FDT liability, on or before 31 July 2023.

It must also lodge a subsequent Franking account tax return within one month after the end of its income year if it has to:

• account for any OFT liability, or
• notify any significant variation in its benchmark franking percentage between franking periods.

The OFT liability, if any, must be paid by the last day of the month immediately following the end of the income year.

R&D entities entitled to the R&D refundable tax offset

A corporate tax entity which satisfies certain requirements may be eligible for the research and development (R&D) refundable tax offset under Division 355 of the ITAA 1997.

Special rules ensure that the amount of R&D tax offset refunded is not immediately clawed back as a result of the entity becoming liable to franking deficit tax, due to a debit normally arising in an entity’s franking account at the time of receiving a refund of income tax. The franking debit that usually arises when a refund of income tax is received is effectively deferred (deferred franking debits) in relation to refundable R&D tax offset amounts.

A corporate tax entity receiving the R&D refundable tax offset will not record any franking credit in its franking account for either future PAYG instalments, or payments of income tax until such time as any prior deferred franking debits are effectively offset by these types of franking credits. Other types of franking credits are not affected by these rules.

Example – R&D refundable tax offset

The following example illustrates how a corporate tax entity accounts for any deferred franking debits in current and future years.

RI Pty Ltd is an R&D entity. Over 3 years, it has the following transactions that would affect its franking account:

Table 1: RI Pty Ltd transactions affecting franking account

Year	Refund of income tax	Income tax paid
1	$45,000	$0
2	$0	$30,000
3	$0	$36,000

Year 1

The refund of income tax in year 1 resulted from RI Pty Ltd receiving a refundable R&D tax offset. Therefore, although ordinarily a debit would arise in its franking account in year 1 for a refund of income tax, no debit will arise in year 1 and this amount will be a deferred franking debit. RI Pty Ltd must keep records that detail the calculation of a franking debit that would otherwise have arisen from the payment of the R&D refundable tax offset (deferred franking debit).

Year 2

In year 2, RI Pty Ltd pays income tax of $30,000, which would ordinarily give rise to a credit in its franking account of $30,000. However, the company must take into account any year 2 or prior year deferred franking debits. As RI Pty Ltd had a deferred franking debit in year 1, this needs to be taken into account prior to a credit amount arising in its franking account.

The following method statement shows the steps of how this is taken into account:

Step 1 Identify income years for which the entity received a refund of income tax before the entity paid tax.

• For RI Pty Ltd this was year 1.

Step 2 Add up the part of the refund that is attributable to a tax offset that is subject to the R&D refundable tax offset rules.

• For RI Pty Ltd, the amount of R&D tax offset received was $45,000 and this is the amount of the deferred franking debit.

Step 3 Subtract franking credits previously applied against the deferred franking debit.

• RI Pty Ltd has not previously applied any credit against their deferred franking debit. The result after applying the method statement for year 2 is $45,000. Therefore, the franking credit of $30,000 is reduced to zero.

The excess amount of the deferred franking debit will need to be taken into account when a future PAYG instalment amount or income tax is paid.

Year 3

In year 3, RI Pty Ltd pays income tax of $36,000, which would ordinarily give rise to a credit in its franking account of $36,000. However, the company must take into account any year 3 or prior year deferred franking debit. The following method statement is again applied:

Step 1 Identify income years for which the entity received a refund of income tax before the entity paid tax.

• For RI Pty Ltd this was year 1.

Step 2 Add up the part of the refund that is attributable to a tax offset that is subject to the R&D refundable tax offset rules.

• For RI Pty Ltd, the amount of R&D tax offset received was $45,000 and this is the amount of the deferred franking debit.

Step 3 Subtract franking credits previously applied against the deferred franking debit.

• $30,000 was applied against the year 1 deferred franking debit in year 2. The result after applying the method statement for year 3 is $15,000. Therefore, the franking credit of $36,000 is reduced by $15,000. As the deferred franking debits are now fully recovered, a franking credit of $21,000 ($36,000 – $15,000) arises in RI Pty Ltd’s franking account in year 3.

Continue to: Completing the Franking account tax return