Explains the requirements to attach franking credits to a distribution.

About franking a distribution

To frank a distribution, the distribution must be frankable and the entity making the distribution must be a franking entity. A franking entity is a company or other eligible corporate entity that is an Australian resident, or a New Zealand company (NZ franking company) that chooses to enter the Australian imputation system (Trans-Tasman Imputation special rules).

Special rules apply to consolidated group and multiple entry consolidated (MEC) group members.

A corporate entity that is a co-operative may choose how it distributes income to its shareholders (see Co-operative company franked and unfranked distributions).

Frankable distributions

Generally, only distributions from profits can be franked. For imputation purposes, a distribution includes:

• a dividend, or something taken to be a dividend, made by a company
• a distribution made by a corporate limited partnership, other than a distribution from profits or gains arising during an income year in which the partnership was not a corporate limited partnership
• something taken to be a dividend, made by a corporate limited partnership
• a unit trust dividend made by a public trading trust.

A distribution is frankable unless the law specifies that it is unfrankable.

Unfrankable distributions

Unfrankable distributions include:

• distributions made in respect of shares treated as debt interest under the debt test (non-equity shares)
• distributions made in relation to an instrument characterised as an equity interest under the equity test (non-share equity) where the distribution exceeds available frankable profits – see Debt and equity tests
• distributions made by approved deposit institutions in respect of certain capital instruments issued overseas that are characterised as non-share equity under the equity test
• distributions that are treated as demerger dividends for taxation purposes
• distributions sourced from a company’s share capital account
• excessive payments by private companies to shareholders, directors and associates that are deemed to be dividends
• payments or loans made by private companies to their members (or their associates) deemed as dividends under Division 7A (except in some circumstances – see Private company benefits – Division 7A dividends)
• distributions to controlled foreign companies that are deemed to be dividends under section 47A of the Income Tax Assessment Act 1936
• distributions relating to off-market buy-backs of shares where the amount paid for the buy-back exceeds the market value of the share (ignoring the buy-back)
• payments to CGT concession stakeholders of exempt amounts (where the small business 15-year exemption is available)
• payments to CGT concession stakeholders of exempt amounts (where the small business retirement exemption is available)
• deemed dividends relating to the streaming of bonus shares to some members and minimally franked (franked to less than 10%) dividends to other members
• deemed dividends relating to capital streaming and dividend substitution arrangements
• certain distributions funded by capital raisings under arrangements that don’t significantly change the financial position of the entity, but are implemented to release franking credits that would otherwise remain unused
• certain payments made by NZ franking companies
• distributions from profits sourced in Norfolk Island before 1 July 2016 from companies’ resident there.

Franking entity residency

A distribution can only be franked by a:

• company or corporate limited partnership that is an Australian resident at the time of making the distribution
• public trading trust that is a resident unit trust for the income year in which the distribution is made
• New Zealand resident company that chooses to enter the Australian imputation system (Trans-Tasman imputation special rules).

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.