Companies are not entitled to a refund of franking tax offsets, however they may be able to convert them to carried forward losses in subsequent years.
Companies are able to choose the amount of prior year losses they wish to deduct, after first having offset losses against net exempt income. There are however the following restrictions on the amount of prior year tax losses that a company can choose to deduct:
- a company must choose not to use any of its prior year tax losses if it has excess franking tax offsets in the current year, and
- a company cannot choose to use an amount of prior year tax losses that would create excess franking tax offsets in the current year.
These are anti-avoidance rules to prevent a company from utilising prior year losses and then creating current year losses by converting excess franking tax offsets into an equivalent tax loss, effectively “refreshing” the losses.
Calculating excess franking offsets
Step 1: First, calculate the amount of franking tax offsets to which the entity is entitled.
Step 2: Secondly, calculate the amount of income tax payable. In this calculation:
- ignore the amount of franking tax offsets calculated in the step 1 as well as tax offsets subject to the refundable tax offset rules (Division 67), the carry forward tax offset rules (Division 65) and any tax offset arising from franking deficit tax liabilities (s205-70), and
- take into account all other tax offsets, if any.
If the amount from step 1 exceeds the amount from step 2, the excess is the amount of excess franking offsets.
Converting the excess franking offset into a tax loss
The amount of excess franking offset is converted into an equivalent amount of tax loss (by dividing the amount by the standard corporate tax rate). This tax loss needs to be added to any tax loss otherwise calculated for the income year and the aggregate amount treated as the tax loss for the income year (known as a loss year).
XYZ Ltd (not an SBE) has:
- assessable income of $200 (being a fully franked dividend of $140 and franking credit of $60)
- allowable deductions of $400, and
- net exempt income of $80.
XYZ Ltd calculates its section 36-10 tax loss as $120 (ie $400 – $200 – $80) and its excess franking offset amount under subsection 36-55(1) as $60.
Applying the method statement
Step 1: Work out the amount that would have been the entity’s tax loss for the tax year, ignoring net exempt income. Ignoring net exempt income, the tax loss of XYZ Ltd would be $200 (ie $400 – $200).
Step 2: Divide the amount of excess franking offsets by the corporate tax rate ie $60 ÷ 30% = $200
Step 3: Add the result of Step 1 and 2 together ie $200 + $200 = $400
Step 4: Reduce the result of Step 3 by any net exempt income ie $400 – $80 = $320.
This is the amount of the company’s tax loss for that year.
Further details and updates
For more information, see Division 36 of ITAA97. In particular, see:
- SECTION 36-10 How to calculate a tax loss for an income year
- SECTION 36-15 How to deduct tax losses of entities other than corporate tax entities
- SECTION 36-17 How to deduct tax losses of corporate tax entities
- SECTION 36-20 Net exempt income
- SECTION 36-25 Special rules about tax losses
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