What are the relevant franking account entries for ABC Co and XYX Co

Home, - What are the relevant franking account entries

Question - ABC Co (a resident private company) owns 20% of the shares in XYX Co (a resident public company). Both companies have a corporate tax rate of 30% and a corporate tax rate for imputation purposes of 30%. XYX Co pays ABC Co a \$70,000 dividend which has \$12,000 of franking credits allocated to it (i.e. the franking percentage of the dividend is 40%). What are the relevant franking account entries for ABC Co and XYX Co? Assuming this is the only receipt of ABC Co, how much tax will it be required to pay? How would your answer be different if ABC Co was a non-resident company?

The franking credit is a taxation process that helps a company to pay tax to its shareholders at a corporate level and it helps to avoid double taxation issues in case of corporate taxation transfer. Shareholders receive franking credit as their tax refunds after paying taxation in accumulated debit rate and it is connected with their net capital gain without any capital loss.

Franking credit developed in 1987 is generally used in the Australian taxation method which was introduced just to avoid the double taxation process, moreover, it is important to note that the stakeholder must be eligible for the franking credit system and the company can earn credit through the tax refunded methods. According to the rules and formula the total franking credit is calculated through the formula following

[amount of dividend /( 1- taxation percentage) ] - amount of dividend

Where the amount of dividend is considered as the money submitted to the shareholders by the company and the taxation percentage is the percentage that profit by the company after-tax payment.

In this question, the XYZ company allows ABC co to have a 20% shareholders ability with a \$70000 dividend value. The total drinking credit value is \$12000 with 40% franking dividend percentages, the franking account entries for ABC company is

[amount of dividend /( 1- taxation percentage) ] - the amount of dividend

[\$70000 / ( 1- 40%)] - 70000

\$46666.666

The total franking credit amount of the ABC company is \$46666.66 according to the franking credit formula.

The accounts credit of XYZ is

[amount of dividend /( 1- taxation percentage) ] - the amount of dividend = franking credit [x / (1- 40%)] - x = \$12000 [ : x= amount of dividend value]

\$18000

According to section 205-10 for the corporate tax company it is compulsory to having a franking credit account. The section 205-15 provides the credit items list. Also the section 205-30 provides the debit items list. In the debit items includes the income tax refund receipts, the amount of the franking distribution made. While in the credit items it includes franking distribution receipt etc. The franking credit can be adjusted against the taxability of Receiver Company. At the end of the income year there is deficit in the franking account the franking deficit tax must be paid by the corporate company.

In the given case the amount of the franking distribution is \$12000 made by the XYZ Co. so this required the debit entry in the franking account. While ABC Co having received \$12000 as a franking credit. So this required credit entry in the franking account.

From the following formula the amount of the tax payable by ABC Co can be calculated;

Tax payable amount = Assessable Income x Corporate tax rate- franking credit offset

= \$70,000 x 30% - \$12,000

=\$9000

Here the amount of the tax paid by the ABC Co is \$9000.

In the case of the ABC Co is a non-resident the company cannot avail the option of the tax set off and gross up mechanism according to the section 207-20. This is non assessable income.