Company Tax Losses : Excess Franking Offsets

Q&A Tax

Question :

In the 2016/17 income year, ABC Co incurred tax losses of $150,000. In the 2017/18 income year, the company had a taxable income of $200,000. In preparing ABC Co’s 2017/18 income tax return, the company wishes to deduct part of the $150,000 of carrying forward losses against all of the taxable income.

In the 2017/18 income year, ABC Co also received franked dividends with $60,000 franking credits attached. The company income tax rate is 30%.  

How would the franking offsets be treated?  


Answer :

Corporate tax entities are generally able to choose the amount of prior-year tax loss they wish to deduct in a later tax year (ITAA97, s. 36-17). Rules restricting the extent to which prior year losses can be deducted apply in certain circumstances: 

• An entity cannot choose to deduct any prior year losses where there is an amount of excess franking offsets (i.e. unused franking credits) (s. 36-17(5)(a)). 

• An entity cannot deduct a loss that will result in an excess franking offset (s. 36-17(5)(b)).  

These restrictions are designed to prevent companies from refreshing prior-year tax losses into current year tax losses, thereby making tests such as the COT easier to satisfy. 

In this case, the gross company income tax payable = $200,000 * 30% = $60,000. If ABC Co applies the 2017 loss to reduce its 2018 taxable income, it would result in excess franking offsets. The company could not deduct any prior year losses.  

Posted in Case Studies and tagged , .