Franking Account Workpaper

[Phuong Fulsom]

Acorporate tax entity includes a company, corporate limited partnership or public trading trust, but does not include a mutual life insurance company or a company acting in its capacity as trustee of a trust.

A franking credit is most commonly recorded in the account if the entity receives a franked distribution, pays income tax or a PAYG instalment, or incurs a liability for franking deficit tax (FDT). The credit is equal to the amount of tax or PAYG instalment paid, the franking credit attached to the distribution received, or the FDT liability incurred.

Where an income tax liability is only partially paid, franking credits will not arise for the amount that remains outstanding. Partial payments made towards outstanding activity statement liabilities will be allocated in accordance with our policy. Franking credits will only arise to the extent that a partial payment is allocated towards a PAYG Instalment liability.

A franking debit is most commonly recorded in the account if the entity pays a franked distribution to its members or receives a refund of income tax. The debit is equal to the franking credit attached to the distribution or the amount of tax refunded.

The franking account is a rolling balance account, which means that the balance of the account rolls over from one income year to another. At any time the franking account can be either in surplus or deficit.

The account is in surplus at a particular time if the sum of franking credits in the account exceeds the sum of franking debits. The account is in deficit at a particular time if the sum of franking debits exceeds the sum of franking credits.

If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

The purpose of this worksheet is to identify the tax component of Retained Earnings and then reconcile this amount to the closing balance of the Imputation Credit Account. This is particularly important, as profit for accounting purposes and taxable income for tax purposes can differ. This provides a further check and ensures the following are correct:

The first step involves calculating the Retained Earnings (based on taxable income). The amounts of taxable income are brought through from Workpaper Q3a for each common period of income tax rates (i.e. 28% vs 30% vs 33%).

Following this, there is a section which caters for losses carried forward from a period which had a certain tax rate applying to a period in which they are utilised, which had a different tax rate applying. This is required, as the tax effect of the losses brought through from the Q3a workpaper differs when utilised in a different income tax rate period, as they are applied against profits subject to income tax at a different tax rate.

This then produces the amount of Retained Earnings based on taxable income amounts. It is from this amount that the income tax component of the Retained Earnings is calculated, based on the income tax rates applying for each period.

A further reconciliation is then performed to reconcile this amount [Retained Earnings based on taxable income] to the Retained Earnings in the financial statements. Adjustments for items that have been made in determining taxable income for all periods are entered here to determine the balance of Retained Earnings. By performing this reconciliation, the amount of the tax component of the Retained Earnings is effectively verified and ensures all amounts of tax paid have been picked up in this balance.

If there is an initial amount of retained earnings that is not reflected in Q3a, enter year to date retained earnings as per the financial statements. You can populate data from prior year workpapers using the Rollover Data function.

An amount may need to be entered if the Retained Earnings balance consists of amounts prior to 1989. Clicking Show pre 1990 will bring up columns allowing you to input an opening balance of Retained Earnings.

These amounts are pulled through from Workpaper Q3a, and represent the taxable income (net profit adjusted for tax differences) for each year. They are grouped in the relevant income tax periods to ensure the tax component is calculated correctly.

This is used where losses are carried forward from a period, which had a certain tax rate applying to a period in which they are utilised, which had a different tax rate applying. It is only the balance of losses that is carried forward crossing an income tax rate period change that is required to be entered here.

For example, losses of $100,000 that are available to carry forward as at the end of the 2011 income year would be entered in column H. The amount of these losses that were used in the income years 2012 onwards are then entered in column I. If all of these losses are not used, say for example there were $20,000 of these losses left to carry forward at the end of the prior year income year, then $80,000 would be entered in column I and $20,000 would be entered in column J. Note the amount of losses to carry forward will also need to be entered to reconcile the amount of retained earnings.

These lines are used to enter tax adjustments that have been made from accounting income to get to taxable income. As the tax component of the Retained Earnings has been calculated using the taxable income, the tax component will not be impacted by these adjustments. The majority of these fields will populate from prior year workpapers (using the rollover data function) or from A1 or Q3a workpapers. However, check items have pulled through correctly:

After this has been done, the accounting Retained Earnings balance should be reconciled. As mentioned above, this is a further check that all income tax has been picked up in the accounts and also the imputation credit account.

This section provides for adjustments to the tax component of the retained earnings balance (calculated above) to reconcile to the balance of the imputation credit account. Most of the items are brought through from Q3a.

A company is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to include body corporates and any other unincorporated associations or bodies of persons. Partnerships are excluded from the definition.

Companies can be private (privately owned) or public (publicly owned). If a company is a private company (e.g. a Pty Ltd company), it is subject to the rules concerning loans and certain payments to shareholders and their associates in Division 7A and section 109 ITAA 1936.

A company will be a public company if it satisfies one of many tests, the most common being ordinary shares in the company listed on a stock exchange in Australia or overseas on the last day of income.

Resident and non-resident companies pay tax at a flat rate. The full company tax rate of 30% applies to all companies that are not eligible for the lower base rate entity tax rate of 25% (see Base Rate Entity section below).

PAYG instalments are due on the 28th of October, February, April and July. Companies are also required to self-assess their final tax liability for a year of income and lodge a return specifying their taxable income and the amount of tax payable on that income.

Clubs, societies and associations required to pay income tax are generally treated as companies for income tax purposes. Their taxable income is calculated in the same way as for companies apart from a special rule concerning mutual income.

Non-profit clubs, societies and associations that are treated as companies (referred to as non-profit companies) have the benefit of special rates of tax. If the non-profit body is a charity, it is income tax exempt. Note however that even if a non-profit body is exempt from income tax, it may still have PAYG withholding, FBT, the superannuation guarantee and GST obligations.

To qualify as a base rate entity a company must meet two criteria. First, its aggregated turnover for the income year must be below the specified threshold of $50 million. Second, the company must derive no more than 80% of its assessable income from base rate entity passive sources in that income year.

Rent refers to payments made by a tenant to a landlord for the use of land or property. It constitutes passive income for the recipient, reflecting a regular stream of revenue without direct involvement in active business operations.

The Australian royalty definition, as expanded by the LCR (Law Companion Ruling), includes payments for the use of industrial, commercial, or scientific equipment. This extension broadens the scope of royalty income, including specific payments related to the utilisation of such assets.

Income derived from trusts or partnerships is considered passive to the extent that it remains passive in the hands of the trustee or partner. However, certain exceptions apply. For instance, if a franked dividend is paid to a company holding at least 10% of voting power in the paying entity, it is classified as a non portfolio dividend. Additionally, dividends from wholly owned subsidiary companies within a group do not constitute base rate entity passive income.

The net capital gains value, as per the LCR, is utilised in calculating the passive income threshold. This calculation, conducted under section 102-5 of the ITAA 1997, takes into account any capital losses and small business concessions, thereby determining the net capital gain.

Non share dividends, defined in section 974-120 of the ITAA 1997, represent returns on non share equity. These dividends are distinct from traditional share dividends and contribute to the passive income assessment for tax purposes.

Although companies can qualify for the small business CGT concessions (where they satisfy all the necessary criteria), it should be noted that it can be difficult to get the amount out of the company in a tax-free form.

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