On 5 September 2018, the ATO updated the guidance available on its website in relation to the allocation of franking credits, including the following areas:
- Corporate tax rate for imputation purposes
- Calculating the maximum franking credit
- Distributions issued using an incorrect tax rate
- The franking percentage
The ATO website provides broad guidance, including the following.
Corporate tax rate for imputation purposes
For the 2017-18 income year, the corporate tax rate for imputation purposes is 27.5% if either of the following applies:
- the company’s aggregated turnover in the 2016-17 income year was less than $25 million and 80% or less of its assessable income was base rate entity passive income or
- the entity didn’t exist in the previous income year
Calculating the maximum franking credit
The maximum franking credit that can be allocated to a frankable distribution paid by a corporate tax entity is based on its applicable corporate tax rate for imputation purposes. From the 2016-17 income year onwards, the maximum franking credit is calculated using the following formula:
Amount of the frankable distribution × (1 ÷ Applicable gross-up rate)
The ‘applicable gross-up rate’ is the entity’s corporate tax gross-up rate for the income year in which the distribution is being made.
Distributions issued using an incorrect tax rate
A taxpayer may have issued its 2016-17 or 2017-18 distribution statements using an incorrect corporate tax rate for imputation purposes where:
- based on Draft Taxation Ruling 2017/D7, the taxpayer considers itself as carrying on a business and is a small business entity eligible for the lower company tax rate (2016–17 distributions); or
- more than 80% of the taxpayer’s assessable income is base rate entity passive income, making the Taxpayer ineligible for the lower company tax rate (2017–18 distributions).
If a distribution issued using an incorrect tax rate has been made, taxpayers must notify shareholders of the correct dividend and franking credit amounts. The correct amounts must also be reflected in the franking account.
The franking percentage
The ATO notes that the extent to which an entity has allocated franking credits to a frankable distribution (the franking percentage) is calculated by dividing the franking credit allocated to the distribution by the maximum franking credit that may be allocated to the distribution. This is expressed as a percentage of the frankable distribution rather than the whole of the distribution.