LECTURE 4 – COMPANIES DIVIDENDS
The Simplified Imputation System (1 July 2002)
Income tax paid by a company is passed onto the shareholder as an imputation credit.
The imputation credit, attached to the dividend, is able to be offset against the shareholders income tax liability.
An unfrankable distribution (or unfranked dividend) means that the company has not paid tax on the dividend
distributed to shareholders.
The following distributions are specifically deemed to be unfrankable (S 202-45):
o Distributions from profits sourced in Norfolk Islands from companies that are resident there;
o Distributions from shares that are treated as debt instruments under the debt/equity rules;
o Distributions funded from certain capital reserves of the company;
o Distributions made by Approved Deposit Institutions in relation to instruments that are characterised as
non-share equity under the equity test;
o Distributions made in relation to an instrument characterised as an equity interest under the equity
test, where the distribution exceeds available frankable profits;
o Deemed dividends made by private companies to their shareholders (or associates) by way of payments
or loans (Division 7A);
o Deemed dividends in relation to excessive payments made by a private company to its shareholders,
directors or associates (S 109);
o Distributions to controlled foreign companies that are deemed to be dividends under S 47A;
o Deemed dividends in relation to capital streaming and dividend substitution arrangements (S 45 and
45C of the ITAA 1936);
o Distributions made in relation to off-market buy-backs of equity interests where the amount paid in
respect of the buy-back exceeds the market value of the equity interest; and
o Demerger dividends.
A frankable distribution (or franked dividend) means that the company has paid tax on the dividend distributed
Where a shareholder receives a franked dividend, the shareholder receives a credit for the amount of tax already
paid by the company in respect of the dividend.
o = “imputation credit” or “franking credit”.
Resident individual shareholders who receive either franked or unfranked dividends must include them as
assessable income (S 44(1)(a)).
o Where a resident individual taxpayer receives a franked dividend, they must also include the amount of
the franking credit as assessable income (S 207-20(1) ITAA 1997.)
A frankable distribution also includes:
o General definition of dividends under S 6(1) ITAA 1936;
o Bonus shares that are taken to be deemed dividends under S 6BA(5) of the ITAA 1936;
o Amounts taken to be dividends under the off-market share buy-back provisions of S 159GZZZ(p) ITAA
o Liquidators distributions that are deemed to be dividends under S 47(1) ITAA 1936; and
o Non-share dividends that are distributions in respect of non-share equity interests in the company (S
974-115 and 974-120 ITAA 1997).
Calculating the Franking Credit and Percentage
A franked dividend can be franked from 0% to 100%.
The maximum amount of the franking credit that can be allocated to a frankable distribution is calculated using
the following formula (S 202-60):
Franking credit = Franked dividend x 30 x %franked
The franking percentage is a measure of the extent towhich a frankable distribution has been franked.
o It is expressed as a percentage of the frankable distribution, rather than the whole of the distribution.
Thus in circumstances where a distribution contains both a frankable and unfrankable element, the franking
percentage may be 100% even where only part of the total distribution is frankable. There may be instances where the franking percentage is to be calculated rather than the amount of the
franking credit. The formula to calculate the franking percentage is as follows:
Franking credit allocated (in dollars) x 100%
Maximum franking credit (in dollars)
Companies are required to provide shareholders with a distribution statement (S 202-75)
The timing of when a distribution statement must be provided to a shareholder depends on whether or not the
company is a private company or not.
o If the entity is a public company, the company must provide the shareholder with a distribution
statement on or before the day on which the distribution is made (S 202-75(2) ITAA 1997).
o If the entity is a private company, the company must provide the shareholder with a distribution
statement no later than four (4) months after the end of the income year.
Income year-end of 30 June means that the distribution statement must be provided to the
shareholder no later than 31 October (S 202-75(3) ITAA 1997).
What is included in a Distribution Statement?
The distribution statement must be in the approved form and must contain the following information (S 202-
80(2) and (3) ITAA 1997):
(a) The identity of the entity making the distribution;
(b) The date on which the distribution is made;
(c) The amount of the distribution;
(d) The amount of franking credits allocated to the distribution;
(e) The franking percentage of the distribution;
(f) The amount of any dividend withholding tax that has been deducted from the distribution;
(g) The name of the shareholder;
(h) Where the distribution is unfranked – a statement to that effect; and
(i) Where the distribution is franked – the franked amount and the unfranked amount of the distribution.
For the purposes of recording the franking percentage on the distribution statement, the value stated should be
worked out to two (2) decimal places, rounding up if the third decimal place is five or more.
A franking account is an account that a company maintains to keep track of the imputation credits that it can
pass onto its shareholders.
The amount is recorded on a tax paid basis
o The surplus in the franking account at the end of the franking year is available to be carried forward to
the following year.
The franking year runs from 1 July to 30 June, unless the company has a substituted accounting period.
The franking account comprises debits and credits. Franking Credits
The mostcommon franking credits come from S205-15 ITAA 1997 and are summarised in Table 1 below.
: Credits in the Franking Account
Situation A Credit of … Arises …
If the company pays a PAYG the amount of the instalment on the day on which the payment is
If the company pays incometax the amount of the payment on the day on which the payment is
If the company receives a the franking credit as per the on the day that the distribution is
franked distribution from distribution statement made
another Australian resident
If the company receives a the entity’s share of the at the end of the incomeyear of the CR flows until it
franked distribution which has franking credit as per the last partnership or trust interposed
flowed indirectly to it through a distribution statement between the entity and the meets a natural
partnership or trust company that made the person
The entity incurs a liability to the amount of the liability immediately after the liability has
pay franking deficit tax under Ss been incurred (ie. 30 June)
Difference between 1 and 2 = PAYG made monthly, ¼, ½ but 2 = final payment of income tax
The mostcommon franking debits come from S 205-30 of the ITAA 1997 and are summarised in Table 2 below.
Debits in the Franking Account
Situation A Debitof … Arises …
If the company makes a franked the amount of franking credits on the day on which the frankable
distribution allocated to the distribution distribution is made
If the company receives a refund of the amount of the refund when the company receivesthe refund or
income tax (not including interest the Commissioner applies it against
amounts paid) another tax liability
If the company underfranks a franking percentage differential × on the day that the distribution is made
distribution amount of frankable distribution
× rate tax corporate 100% rate
tax corporate (S 203-50(2)(b))
If the company ceases to bea the amount of the franking on the day specified in S 204-15(4)
franking entity surplus
If the company makes a linked the amount equal to the franking the day the determination is made
distribution of issues tax-exempt debit if the company had made a
bonus shares instead of making a frankable distribution with
frankable distribution franking credits equal to its
benchmark franking percentage
If the Commissioner determines that the amount of the the day the determination is made
dividend streaming has occurred Commissioner’s determination
On marker share buy-back Amount equal to the debit that on the day the interest is purchased
would have arisen if the company
had purchased the interest off-
o Only the first 3 are particularly relevant for the purpose of this subject. The Benchmark Rule
The benchmark rule provides that all frankable distributions made by a company during a franking period must
be franked to the same extent as the benchmark franking percentage (S 203-25; S 203-10 ITAA 1997).
o This ensures that franking credits representing tax paid on behalf of all shareholders of the company are
not allocated to only some of them.
The franking percentage for the first frankable distribution made in the franking period establishes the
benchmark franking percentage to be used in respect of all frankable distributions for that franking period (S
203-30 ITAA 1997).
If no frankable distributions are made in the franking period, the entity does not have a benchmark franking
percentage for the franking period.
o Furthermore, if all distributions made by a company during a franking period are unfrankable
distributions, the entity does not have a benchmark franking percentage for the franking period.
A private company has one franking period in its income year (from 1 July to 30 June) and it is the same as its
o If the company franks at a different percentage, they attract a penalty
A public company has two franking periods in its income year (from 1 July to 31 December and from 1 January
to 30 June) (S 203-40(2)).
Consequences of breaking the benchmark rule
A penalty will be imposed on the company for breaching the benchmark rule.
o A company may underfrank or overfrank its second and subsequent franking percentages from the first
Underfranking occurs where the company franks its second (and subsequent) frankable distributions at an
amount less than the benchmark franking percentage.
Conversely, overfranking occurs where the company franks its second (and subsequent) frankable distributions
at an amount more than the benchmark franking percentage.
Consequences of Overfranking and Underfranking
Where the company’s second and subsequent Where the company’s second and subsequent
franking percentage is less than the benchmark franking percentage is morethan the benchmark
franking percentage; franking percentage;
The company is required to debit its franking The company is required to credit its franking account
account for the amount of the shortfall; for the amountof the frankable distribution multiplied
The shortfall is calculated as the “franking by the franking percentage;
percentage differential” as per S 203-50. This is The company is also liable for “overfranking tax”
essentially the difference between the benchmark which is determined based on the “franking
franking percentage for the franking period in which percentage differential” as per S 203-50. This is
the frankable distribution is made and the franking essentially the difference between the franking
percentage for the second and subsequent percentage for the second and subsequent
distributions; distributions and the benchmark franking percentage
The penalty debit for underfranking a distribution for the franking period in which the frankable
arises on the day on which the frankable distribution distribution is made;
is made and is in addition to the franking debit that The company is required to remit the overfranking tax
arises from the payment ofa franked distribution; to the ato no later than 31 july (S 214-150); and
Shareholders do not receive the benefit of any The overfranking penalty tax does not result in a
additional franking credits as a consequence of the franking credit to the franking account and therefor
debit to the franking account (S 203-50); and represents lost imputation credits.
The amount of the franking debit is equivalent to the
extra franking credit that should have been allocated
to the benchmark rate. Theadditional debit
effectively cancels out the unused credit. Franking Deficit Tax
The franking account is a rolling balance account, which means that the balance of the franking account rolls
from one franking year to another.
At the end of the income year, if a company has a deficit in its franking account (ie. the total of the franking
debits exceed the total of the franking credits), it has imputed to its members more tax than it has paid.
o As a result, it is liable to pay franking deficit tax to account for the over-imputation of tax.
The amount of the franking deficit tax is equal to the franking deficit.
Franking deficit tax is offset against income tax.
o Franking deficit tax is payable on the last day of the month following the end of the income tax year (S
214-150(1) ITAA 1997).
Franking deficit tax is not a penalty, but is required to be made to make good the amount imputed to
shareholders that exceed the amount of tax actually paid.
o The tax paid to the ATO represents a tax offset which is deducted from the company’s income tax
liability at the end of the relevant income year.