You may know about different types of taxes. Among other taxes, one is the franking deficit tax (FDT). In today’s blog, we’ll discuss franking credit, franked distributions & FDT. A franking account records the tax amount paid that a franking entity can pass on to its shareholders/members as a franking credit. Each entity that has ever been or is a corporate tax entity has a franking account. Continue reading this blog to know more about FDT.
An Overview of Franking Credits
A franking credit is usually recorded in the account if the entity gets a franked distribution, pays PAYG instalments or income tax, or is liable for franking deficit tax (FDT). The credit is equivalent to the tax amount or PAYG instalments paid, the franking credit attached to the received distribution, or the incurred FDT liability. In simple words, credit is equivalent to the paid amount.
Franking credits will not arise for the remaining amount where an income tax liability is paid partially. Partial payments will be assigned while following the ATO policies. Franking credits will arise to the extent that a partial payment is assigned for a PAYG instalment liability.
The organisations written below may qualify for franking credits:
registered charities that are accepted as exempt from income tax
income tax-exempt for deductible gift recipients (DGRs)
entities that are suggested as exempt institutions and qualify for a refund under rules and regulations
income tax-exempt to be developing country relief funds
income tax-exempt institutions that qualify for a refund under a commonwealth law except for the income tax law
When certain Australian-resident corporations pay income tax on their taxable income and distribute their after-tax earnings through franked dividends, franking credits become available to shareholders. There are franking credits associated with these franked dividends. As a shareholder or a beneficiary of a trust, you can directly receive franked dividends.
Organisations that get a dividend from a New Zealand company with Australian franking credits attached to it can claim a refund of those credits if an organisation would have been eligible to claim the credits had the dividend been paid by an Australian company.
It is not possible to claim New Zealand franking credits. If the New Zealand company that made the payment has not mentioned that the franking credit is Australian, you need to get in touch with the company to check whether the franking credit is New Zealand or Australian franking credit. In most cases, if it is not mentioned as Australian, it will be considered a New Zealand franking credit.
Franked Distributions & Franking Deficit Tax (FDT)
Double taxation of dividends can be eliminated with a franked distribution, which is an arrangement in Australia. The tax can be reduced by the shareholder that is paid on the dividends by an amount equivalent to the tax imputation credits.
Franking deficit tax is considered a basic principle that an entity should not provide its members credit for more tax as compared to what has already been paid. The FDT needs an entity to reconcile its franking account. An entity will need to pay FDT when the account is in deficit.
An FDT is liable if an entity’s franking account is either:
in deficit when it no longer qualifies as a franking entity
in deficit at the end of the corporation’s income year
If an entity qualifies for FDT, it must file a franking account tax return and pay the FDT by the month’s last day immediately following the end of the entity’s income year.
How to Calculate Franking Credits?
You can seek help from professionals to understand the franking credit formula that is used to calculate the maximum franking credit. Take a look at the following formula for calculating franking credits:
amount of the frankable distribution * (1/applicable gross-up rate)
Here applicable gross-up rate is the business’s corporate tax gross-up rate for the income year when it made the distribution. The applicable gross-up rate can be calculated using the following formula:
(100% – your corporate tax rate for imputation purposes for the income year)/ corporate tax rate for imputation purposes for the income year.
The blog shares information on franking deficit tax, franking credits, and a method for calculating franking credits. To get detailed information about FDT, you can also contact Reliable Melbourne Accountants.
More Useful Links:
Tax Deductions for Dividend, Interest and Investment Income