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IMPUTATION
The imputation system allows Australian and New Zealand corporate tax entities who pay Australian tax to pass on to their Australian members a credit for Australian income tax paid on profits, when distributing those profits. This prevents double taxation, that is, the taxation of company profits when earned by a company, and again when a shareholder receives a dividend.
FRANKING ACCOUNT
A franking account is a record kept of tax paid which a franking entity can pass on to its members as a franking credit attached to a distribution. The franking account records franking credits and franking debits. In general terms, a credit occurs when tax is paid, and a debit occurs when a distribution is franked. It is necessary for each corporate entity to have a franking account. Typically a franking credit occurs if the entity pays income tax or receives a franking distribution. Therefore, a franking debit would arise when the entity pays a franked distribution or receives a refund of income tax it has paid.
FRANKED DISTRIBUTIONS
Franking means marking distributions as carrying franking credits that can be passed (imputed) to members. When an entity distributes profits to its members, it has the option of passing to those members credits for income tax paid by the entity. This is known as ‘franking the distribution’.
RECEIVING A DISTRIBUTION
A distribution may be received by the member, or indirectly through their partnership or trust. Where a distribution is received, the member includes both the distribution and any franking credit in their assessable income. The member is then entitled to a tax offset equal to the franking credit. A refund of excess franking credits is available to resident individuals, superannuation funds and other elibile entities where the amount of franking credit they receive has exceeded their standard tax liability.
TRANS-TASMAN IMPUTATION
The Trans-Tasman imputation reform allows a New Zealand entitiy to choose to enter the imputation system. This allowss the New Zealand company to maintain an Australian franking account and pay dividends franked with Australian franking credits. Reciprocal rules have been introduced by the New Zealand government to allow an Australian company to elect into the New Zealand rules.