ATO ID 2004/837: Income Tax: Allocation of a franking credit to a distribution
Date of decision: 14 October 2004
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
Will the decision to allocate a franking credit to a distribution by a corporate tax entity, pursuant to section 202-5 of the Income Tax Assessment Act 1997 (ITAA 1997), give rise to a franking debit in the franking account at that time?

Decision
No. The decision to allocate a franking credit to a distribution by a corporate tax entity, pursuant to section 202-5 of the ITAA 1997, will not give rise to a franking debit in the franking account. Pursuant to Item 1 of the table in subsection 205-30(1) of the ITAA 1997, a debit to the franking account arises when the actual payment of the distribution is made.

Facts
A corporate tax entity decides on 1 September 2002 to pay a fully franked dividend of $7,000, allocating a $3,000 franking credit, to its shareholders. On 2 July 2003, the corporate tax entity pays the distribution to its shareholders.

Reasons for decision
Summary: Section 202-5 of the ITAA 1997 states that an entity franks a distribution if the following conditions are satisfied: The mechanism by which an entity allocates a franking credit is determined by the entity. However, the decision to allocate a franking credit, without actual payment of the distribution, does not in itself give rise to a franking debit in the franking account. Item 1 of the table in subsection 205-30(1) of the ITAA 1997 states that if the entity franks a distribution, a debit equal to the amount of the franking credit allocated to the distribution arises on the day on which the distribution is made. On the facts of this case, the entity's decision to allocate a franking credit of $3,000 on the distribution on 1 September 2002 does not give rise to a franking debit in the franking account at that time. When the payment of the distribution is made on 2 July 2003, the decision to allocate a franking credit of $3,000 to the distribution is given effect and only then does a franking debit entry arise in the franking account.

Legislative references: Income Tax Assessment Act 1997 section 202-5 subsection 205-30(1)
Subject references: Company tax Franking accounts Franking debits Imputation system