Franking Credit Calculations

A franking credit is a unit of tax paid by companies in countries with a dividend imputation system. The Australian simplified imputation system started on 01 July 2002 which allows that only frankable distributions may be franked.

Who can frank credits?

Australian resident companies, corporate limited partnerships, corporate unit trusts and public trading trusts are franking entities. Mutual life insurance companies are excluded from issuing franking credits.

What distributions can be franked?

In general, a distribution is frankable when it is funded from corporate tax entity profits. Some unfrankable distributions include distributions made by Approved Deposit Institutions in relation to instruments that are characterised as non-share equity and deemed dividends in relation to capital streaming and dividend substitution arrangements.

How is maximum franking credit calculated?

Maximum franking credit allocated to a distribution is the maximum amount of income tax that the corporate tax entity pays on issued profits. A company must not give its members credit for more tax than it has paid. The formula for calculating maximum franking credits is amount of frankable distribution multiplied by corporate tax rate divided by 100 percent minus corporate tax rate. Corporate tax is 30 percent.

Let's take corporate entity Miners R Us who wants to issue $20,000 to shareholders. $14,000 of the $20,000 is profit earned by Miners R Us. The maximum franking credit that Miners R Us can allocate to this frankable distribution is: $14,000 x 30 percent/100 percent – 30 percent = $14,000 x (0.4286) = $6,000.

What is the franking percentage?

Franking percentage is expressed as a percentage of the frankable distribution rather than the whole of the distribution. When a distribution has frankable and unfrankable elements, franking percentage can be 100 percent (even if only part of the distribution is frankable). Franking percentage is the lesser of 100 percent OR the value calculated from this formula: Franking credit allocated to the frankable distribution divided by the maximum franking credit for the frankable distribution multiplied by 100 percent.

For example, Miners R Us issued $20,000 to its shareholders with $6,000 allocated for franking credits. The franking percentage for this distribution is $6,000/$6,000 x 100 percent = 100 percent. This means that the $14,000 frankable distribution is franked 100 percent, also called a fully franked dividend.

What is a distribution statement?

A distribution statement is evidence of the extent to which a frankable distribution has been franked. This distribution is given on or the day before the distribution was made. A private company, however, must give a distribution statement before the end of the four months after the end of the income year when the distribution was made.