Tax Tips

Imputation Credits

 

The imputation system provides the means by which Australian corporate tax entities are able to pass on, to their members, credit for income tax they have paid. The way in which they do this is by franking a distribution. Without the imputation system, income tax would be levied when income is earned by the entity and then again in the hands of the members when it is distributed to them (ie it would be taxed twice). Imputation alleviates this problem.

 

Typically a franking credit would arise in the franking account when the corporate tax entity pays its income tax or when it receives a franked dividend. A franking debit would arise when the corporate tax entity pays a franked dividend or receives a refund of income tax that it has paid.

 

If an entity, that is:

 

  • an Individual
  • a Corporate Tax Entity
  • an eligible superannuation fund, approved deposit fund or pooled superannuation trust, or
  • an eligible income tax exempt charity or a deductible gift recipient

 

 

receives a franked distribution directly, then:

 

  • the entity must include in assessable income, both the franked amount of distribution and the franking credits attached to the distribution. That is, the entity’s assessable income must be ‘grossed-up’ to include the franking credits attached to the distribution, and
  • the entity will be entitled to a tax offset equal to the amount of franking credit included in its assessable income.

 

This process is commonly called the ‘gross-up and credit’ approach.