Understanding the franking credits calculation

Trying to understand the franking credits calculation?

Franking credits are based on the dividends given out to shareholders by a company. According to the imputation rules, the maximum franking credit calculation that may be applied to an entity’s frankable dividend is determined by the corporation tax rate.

The following are important:

  • The imputation rate for corporate taxes
  • Distributions issued with an erroneous tax rate for determining the maximum franking credit calculation
  • Percentage of franking
  • The imputation rate for corporate taxes

When doing a franking credits calculation, you’ll need to assume that your aggregated turnover, assessable incomes, and base rate entity passive incomes will all be the same in order to calculate your imputation rate.

In an income year, if any of the following is true, you are a base rate entity:

It was less than $25 million or less than $50 million for the income year or less than $50 million for the income year, and 80 percent or less of your assessable income was the base rate entity passive income the entity did not exist in the prior income year.

Otherwise, your corporation’s imputed tax rate is 30 percent.

In addition, see below on franking credit calculation:

The maximum franking credit calculation will be determined using the method shown below:

Gross-up rate multiplied by the total frankable distribution

Applicable gross-up rate” is a reference to the corporation’s corporate tax gross-up rate for the current revenue year.

Assuming that you pay 100% of your corporation’s imputation rate for the year, divide that percentage by 100.

In order to get the maximum franking credit, the appropriate gross up rate must be (100 percent – 27.5 percent) – 27.5 percent = 2.6364.

Corporate tax rates for 2019–20 are 30 percent since the preceding year’s total revenue was above $50 million, making it the imputation rate to use.

A franking credit of 30 percent might be given to any company’s frankable payout for the 2015–16 and preceding income years.

Also consider this when it comes to franking credits calculation.

On the basis of the Taxation Ruling of 2019/1 When is a corporation considered to be operating for tax purposes? To qualify for the lower company tax rate (2016–17 distributions), more than 80% of your assessable income is base rate entity passive income, leaving you ineligible for the lower company tax rate for 2017–18 distributions.

Your shareholders should be informed of the right dividend and credit amounts if you published your 2016–17 or 2017–18 distribution statements using an inaccurate corporation tax rate for imputation purposes. For example, you may send out a new distribution statement and/or contact your shareholders with the new information. Your franking account must also display the right amounts.

Investigate the following:

Previous years’ maximum franking credit calculation.

In addition, see:

Guide to Complying with Regulations in the Real World Corporation tax rate changes for small businesses for the 2015-16, 2016-17, and 2017-18 income years are included in PCG 2018/8 Enterprise Tax Plan: small business company tax rate adjustment compliance and administrative procedures

Percentage in franking credits calculation

The franking percentage measures the amount of franking credits awarded to a frankable payout by a company. The franking credit granted to the distribution is divided by the maximum franking credit that may be assigned to the distribution. It is given as a percentage of the frankable distribution, rather than the total distribution. Franking percentages may still be 100% in situations when just a portion of the overall payout is eligible.

Identifying the distribution’s franking percentage, as an example.

A franking credits calculation is applied to your franking account in an amount equal to the maximum amount that could have been allocated on your distribution statement, not what is shown on your tax statement. The recipient of the fully franked distribution must only include the fully franked distribution and the maximum amount of franking credits calculation in their taxable income. The recipient is only entitled to the maximum amount of franking credit.

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