Austronational Enterprises Pty Ltd had a balance in its franking account as at 1 July 2019 of $20,000 (credit). During the 2020 tax year the company paid $160,000 in PAYG instalments; received a refund of tax of $30,000 (for the 2019 tax return) and paid out a fully franked dividend of $600,000. The company's tax rate is 27.5%. What is the company's franking account balance as at 30 June 2020 and would there be any consequences for this balance?

Question

Quizplus · Accepted Answer

The franking account balance is affected by tax payments and refunds, and the payment of fully franked dividends. The initial credit of $20,000, plus the tax refund of $30,000, gives a new balance of $50,000. The PAYG instalments do not affect the franking account as they are prepayments of the company's income tax, not actual tax paid or refunds. When the company pays a fully franked dividend, it credits its franking account with the franking credit, which is the tax paid on the company's income. The franking credit on a $600,000 dividend at a tax rate of 27.5% is $600,000 * 27.5% / (100% - 27.5%) = $225,000. Subtracting this from the $50,000 credit leaves a debit balance of $175,000. However, the correct calculation for the franking debit due to the dividend should consider the grossed-up amount of the dividend, leading to a different calculation and resulting in a ($77,586) debit balance, which requires a payment of Franking Deficit Tax (FDT) of the same amount to reconcile the account.

Austronational Enterprises Pty Ltd Had a Balance in Its Franking