How are Franked Dividends Treated when Held by a Company

A question for people like @Paul@PFI It seems some one told me that Franked Credits in a company expire and cannot be used on dividends but can be carried forward as loss. Is this correct?

Lets say you have a company and it is holding ETF/LICs

How are Franked Dividends treated?

Lets use this example.
Year 1 - Income Loss of 5k
Year 2 - Income 5k dividend income and 5k capital gains, franked credits 3k
Year 3 - Income 5k from divident income, franked credits 3k

Would this be treated similar to an individual for franking credits? I get that there is no CGT 50% discount in a company.

 

Companies with losses are treated differently than individuals when it comes to franking credits

 

Are you able to elaborate on this? Perhaps what happens in each instance?

 

Franking credits do not expire.

 

Yes I understand that. But if the company owns shares..when can the franked credits be used?

On income or dividends it receives from the shares?

 

Franking credits will reduce the company tax payable on its income.

excess franking credits are converted to a tax loss.

the tax loss is carried forward. However the conversion of the excess franking credits to a tax loss does not reduce the franking account balance in a company.

 

Excellent thanks.

 

Franking credits are added to a franking account. They dont expire but certain acts can invalidate the franking balance or the company ability to pass on the franking without considering other tax laws. eg Changes of shareholders etc may require that the company meet a same business test.

Franking credits are not refundable to a company. They may be to an individual.

Franking accounts and losses dont impact each other in any way other than a loss will mean no tax is payable. A loss may or may not impact the ability for a company to pay dividends (s254T Corporations Act)

 

a company with losses and receiving franked dividends will impact each other from a tax perspective. it will increase the carried forward losses

 

Ah yes. Took me time to find the basic ATO explanation v's the heavier Master Tax Guide position of the non-refundable offset-loss issue.

If a corporate tax entity (such as a company) has taxable income, the franking tax offsets it receives can reduce its income tax liability to nil, but is not refunded if it exceeds its liability. This is likely to occur when the entity's other taxable income is in a net loss position disregarding the dividend income derived.

In this situation, a corporate tax entity doesn't lose these excess franking tax offsets, but can convert the excess franking offsets to an equivalent tax loss. The converted tax loss is then aggregated with any current year tax losses. These current year losses are carried forward to future years along with any other prior year losses.

Where a corporate tax entity has no current year losses (and despite having franking tax offsets it has no excess franking credits) it may be able to choose to deduct an amount of prior year losses. This choice is subject to certain limitations. Alternatively, it may choose not to deduct prior year losses so it can pay enough tax to frank its distributions​