Gross-up and credit mechanism for franked distributions PDF

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[¶20.6] Gross-up and credit mechanism for franked distributions Click to open document in a browser Subdivision 207-A contains a “gross-up” and “credit” rule that operates where franked distributions are received “directly” by individuals, corporate tax entities and complying superannuation entities. Subdivision 207-A does not apply to franked distributions paid to partnerships and trustees (except those partnerships and trustees that are corporate tax entities or complying superannuation entities). Instead, special rules in Subdiv 207-B operate where franked distributions flow “indirectly” to or through an entity (eg where entities derive franked distributions via interests they hold in partnerships and trusts). Under the general rule in Subdiv 207-A, the entity that receives a franked distribution:  

• is required to include in assessable income the amount of the franking credit allocated to the distribution (s207-20(1)), and • is entitled to a tax offset for the franking credit (s207-20(2)).

The amount included in assessable income under s207-20(1) is in addition to the amount assessable under s44(1) [¶20.3]. Example X Co pays a dividend of $7,000 to each of its three resident shareholders: A (an individual subject to tax at the rate of 16.5% including Medicare levy), B (an individual subject to tax at the rate of 46.5% including Medicare levy) and C (a company subject to tax at the rate of 30%). The dividend is fully franked, ie the franking credit allocated to the dividend is $3,000 ($7,000 × 30/70). The income tax positions of the respective shareholders are as follows:

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A (16.5% taxpayer) $7,000 $3,000 $10,000 $1,650 $3,000 ($1,350)

Dividend (s44(1)(a)) Gross-up for franking credit (s207-20(1)) Taxable income Gross income tax Less tax offset for franking credit (s207-20(2)) Income tax/(refund)

B (46.5% taxpayer) $7,000 $3,000 $10,000 $4,650 $3,000 $1,650

C (30% taxpayer) $7,000 $3,000 $10,000 $3,000 $3,000 Nil

Importantly, the general rule in Subdiv 207-A operates subject to the following Subdivisions: • Subdivision 207-C. This Subdivision provides that the gross-up and credit mechanism in s207-20 does not apply to an individual or company unless the entity satisfies the “residency requirement” at the time the distribution is made (s207-70). The residency requirement will be satisfied where the individual or company is a resident at the time the distribution is made. It will also be satisfied if the individual or company is a nonresident at the time the distribution is made provided the entity carries on business in Australia at or through a permanent establishment and the distribution is attributable to the permanent establishment (s207-75). • Subdivision 207-D. This Subdivision provides that the gross-up and credit mechanism in s207-20 does not apply to franked distributions that are exempt income or non-assessable non-exempt income of an entity (s207-90). Subdivision 207-D, however, operates subject to Subdiv 207-E which allows certain entitles (eg exempt institutions such as endorsed charities) to benefit from franking credits (s207-110). • Subdivision 207-F. This Subdivision provides that the gross-up and credit mechanism in s207-20 does not apply in certain cases that involve manipulating the imputation system (eg “dividend streaming” and “dividend stripping” arrangements [¶20.8]) (s207-145). CCH Texts: ATL ¶18-389 to ¶18-415. MTG ¶4-800 to ¶4-860.

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