R&D tax Incentive and Franking Credits

Q&A Tax

Question : 

ABC Pty Ltd is an Australian private company and eligible to claim R&D tax offsets.

The company’s performance has fluctuated between profit and loss over the past four years and has
made claims for R&D tax offsets for all these years. This has resulted in refunds of tax when the
company made a tax loss in an income year and reductions of tax payable in the other years.

Will these tax refunds impact the company’s franking account and give rise to franking debit tax when
the company receives the refund?


Answer : 

Generally, a franking debit arises in your entity’s franking account when it receives a refund of income
tax which includes a refunded amount from a tax offset.

However, s205-30(2)(b) ensures that the amount of R&D tax offset refunded is not immediately
reduced as a result of the entity becoming liable to franking deficit tax. The franking debit that
usually arises when a refund of income tax is received is effectively deferred in relation to refundable
tax offset amounts.

Where a debit has been deferred for this reason, a franking credit will not arise as a result of income
tax or PAYG instalments your entity pays until it recovers these deferred franking debits.

In other words, if the company pays income tax after the income year in which a refund of R&D tax
offset is received, no franking credits would arise from the payment of income tax until the deferred
franking deficit from the R&D tax refund is fully recovered.

It is recommended to keep separate records on the deferred franking deficit arising from the R&D
refund and payment of income tax for this purpose.

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