I am seeking advice regarding the correct determination of the company tax rate for franking credit purposes. After consulting with the ATO, I understand that the rate for franking credits is based on the prior year’s tax rate. This is because we assume that the company’s aggregated turnover, assessable income, and base rate entity passive income will be the same as the previous year.
For example, in 2023, if the company’s activities consisted entirely of passive income (e.g., interest from a division 7A loan), the applicable corporate tax rate would be 30%. As such, if the company issues dividends in 2024, the franking credits would also be calculated at 30%, even if the company begins trading in 2024 and qualifies as a base rate entity with a lower tax rate (25%) on taxable income.
Below are the relevant references from the ATO website. Could someone clarify whether my understanding and application of tax rates for franking credit purposes are correct?
The two sources provide slightly different interpretations: Extract from ATO website:
- One explains that the tax rate for franking credit purposes is determined by the prior year’s tax rate. (This is what ATO staff advised me, and I am happy to apply this)
- The other suggests that the tax rate used for franking credits is based on the income year in which the distribution is made. (This is confusing as it seems to apply 2024 tax rate instead of 2023 tax rate)
1. Maximum franking credits
To work out the company tax rate for franking your distributions, otherwise referred to as 'corporate tax rate for imputation purposes', you need to assume your aggregated turnover, assessable income, and base rate entity passive income will be the same as the previous income year.
If you are a base rate entity, your corporate tax rate for imputation purposes was 27.5% for the 2017–18 to the 2019–20 income years, 26% for the 2020–21 income year and is 25% from the 2021–22 income year onwards. You are a base rate entity if either of the following apply:
your aggregated turnover in the previous income year was less than $50 million, and 80% or less of your assessable income was base rate entity passive income
the entity didn't exist in the previous income year.
Otherwise, your corporate tax rate for imputation purposes is 30%.
https://www.ato.gov.au/tax-rates-and-codes/company-tax-rate-changes#ato-Baserateentitycompanytaxrate
2. 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.
I would appreciate any guidance on reconciling these differences and confirming the correct approach.
Thank you for your time in advance.
YMC
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