Franking credit rates also reduce, in line with the reductions in the relevant company’s reducing corporate tax rate, which is complex (see related Tax Month article).
What follows is the ATO’s summary of how to calculate the company’s franking credit amount, as its corporate tax rate reduces.
Calculating the maximum franking credit
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. This is calculated using the following formula:
- (100% − your corporate tax rate for imputation purposes for the income year) ÷ your corporate tax rate for imputation purposes for the income year.
To work out your corporate tax rate for imputation purposes you need to assume your aggregated turnover will be the same as the previous income year.
Example
For the 2017–18 income year (when the relevant turnover threshold, for a 27.5% tax rate, is $25m), your corporate tax rate for imputation purposes will be 27.5% if either of the following apply:
- your aggregated turnover, in the prior 2016–17 year, was less than $25 million, and you are carrying on a business. In other words, profits that might have been taxed at 30%, from the previous year (because the company was over the previous year’s turnover threshold), could then only be franked at the new/lower 27.5% rate (assuming that is the new tax rate, because the company now satisfies the increased $25m turnover threshold).
- this is the first year the company is in business.
Calculating the maximum franking credit for prior years
For the 2016–17 income year (when the relevant turnover threshold, for a 27.5% tax rate, was $10m), to have a 27.5% corporate tax rate for imputation purposes, a company needed to be carrying on a business and have an aggregated turnover of less than $10 million.
For the 2015–16 income year, the corporate tax rate for companies that are small business entities was 28.5%, although they could continue to frank distributions up to 30%.
[ATO website: Allocating Franking Credits article; FJM; LTN 243, 19/12/17; Tax Month Dec 2017]