Taxation Law - Section B

The franking account for Melchett Pty Ltd for the year ended 30 June 2019 is provided below:

Date

Particulars

Debit

Credit

01-07-18

Opening balance

 

$ 60,000.00

04-07-18

Payment of dividend franked to 55%

$ 1,00,137.93

 

28-09-18

Payment of income tax

 

$ 27,000.00

31-01-19

Refund of income tax

$ 4,60,000.00

 

22-02-19

Receipt of dividend from the company outside the group, franked to 90%

 

$ 1,08,000.00

02-03-19

Payment of dividend franked to 30%

$ 47,793.10

 

31-03-19

Payment of income tax

 

$ 44,000.00

30-06-19

Payment of dividend franked to 65%

$ 93,689.66

 

30-06-19

Closing balance

 

$ 4,62,620.69

       
 

Totals

$ 7,01,620.69

$ 7,01,620.69

Note: As all the shares of Melchett Pty Ltd are owned by George who is a resident of Australia, hence it is a resident company that is also a one-person company. Since of Melchett Pty is a one-person company, it is assumed that it is a small company and thus it is only entitled to pass on franking credits that are based on a tax rate of 27.5 percent and it is entitled to claim franking credits at the rate of 27.5 percent only on all franked distributions received by it.

Consequences for Mitchell Pty Ltd of The Final Balance of Franking Credit

The closing balance of the franking account of Mitchell Pty Ltd as of 30.06.2019 is a debit balance of $ 462,620.69. This means that its franking account is in deficit at the end of the year 2019. As per the Dividend Imputation rules that are applicable in Australia, an entity is not allowed to pass on franking credit to its shareholders which are greater than the amount of tax that has been actually paid by the entity (ATO, n.d. b). Hence, as per the FDT rules, an entity is required to pay franking deficit tax if its franking credit account has a debit balance at the end of the income year or its franking account has a debit balance when it is no longer a franking entity (ATO, n.d. b). Also, if a company is required to pay franking deficit tax, it must file its franking account return and must make payment of its FDT by the end of the immediately following month after the end of the income year of the entity. Therefore, Mitchell Pty Ltd will be required to pay FDT which is equivalent to the amount of the deficit in its franking account i.e. $462,620.69 and lodge a franking account return by 31.07.2019.

Consequences of Breaches of The Benchmark Rule

The franking percentage that was first used by the company in the franking period that started on 01.07.2018 and ended on 30.06.2019 was 55%. As per the benchmark rule, all distributions in the same franking period which are made later should be franked by using the same percentage that was first selected and used by the company (ATO, n.d.a). The consequence of breaching the benchmark rule will be that it will have to :

  • Pay over-franking tax in case of over franking, which is equal to the amount of extra franking credits.
  • Record a franking debit in its franking account in case of under franking for an amount that is equal to the unused franking credits. (ATO, n.d. a)

In the given case, Mitchell Pty Ltd has not followed the benchmark rule as it has made franking distributions that were franked at different percentages during the year. Hence, it will be required to pay over-franking tax in respect of dividend payment made by it on 30.06.2016 which was franked to 65% i.e., exceeded the benchmark percentage by 10 percent. It also is required to record a debit of unused franking credits in respect of dividend payment made on 02.03.2019

Over-Franking Tax to Be Paid by Mitchell Ltd

Actual franking credits passed on by Mitchell Pty Ltd @ 65% = $93689.66

Less: Franking credits that should have been passed = $79275.86

Based on the benchmark percentage of 55%

Excess Franking credits = $ 14413.79

The amount of Over-franking tax to be paid is $14413.79.

Debit to be recorded in the franking account

As per benchmark %

$ 87,620.69

Less: Actual franking credits passed

$ 47,793.10

Unused franking credits

$ 39,827.59

References for Taxation Law

ATO. (n.d. a). Benchmark Rule. Retrieved from https://www.ato.gov.au/Business/Imputation/Paying-dividends-and-other-distributions/Allocating-franking-credits/Benchmark-rule/#Breachesofthebenchmarkrule

ATO. (n.d. b). Franking deficit tax. Retrieved from https://www.ato.gov.au/business/imputation/paying-dividends-and-other-distributions/franking-account/franking-deficit-tax/

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