The Franking Rate for A Company That Only Derives Interest

Q&A Tax

Question :

Mr C has a company that no longer trades but has retained earnings that they are paying out in
dividends over successive years.

The company was originally used for property development. The only income now is interest under $1k
How this a company should pay out its dividends? What would be the franking rate for dividends in this
case?

 

Answer :

If the company only derives interest income in a particular income year then it would generally, be
subject to a 30% maximum franking rate for dividends paid in the following year.

When determining a company’s maximum franking rate for dividends paid in the 2018 income year
onwards you need to look at the company tax rate that would apply in the year the dividends are paid if
the following assumptions are made:

  • The company’s aggregated turnover in the current year was the same as in the previous year;
  • The company’s assessable income in the current year was the same as in the previous year; and
  • The company’s base rate passive income in the current year was the same as in the previous year.

For example, if the company pays a franked dividend in the 2019 income year its maximum franking
percentage should be based on a 30% rate if more than 80% of the company’s assessable income in the
2018 year was base rate entity passive income.

The fact that the profits might have been taxed at a different rate is not really relevant under these
rules.

The rules in this area ensure that interest is normally treated as base rate entity passive income.
Having said that, there are some exceptions to this which are summarised below, and which should be
checked:

  • Where the entity is a financial institution (within the meaning of section 202A of the Assessment
    Act); or
  • Where the entity is a registered entity (within the meaning of the Financial Sector (Collection of
    Data) Act 2001) that carries on a general business of providing finance (within the meaning of that
    Act) on a commercial basis; or
  • Where the entity holds an Australian credit licence (within the meaning of the National Consumer
    Credit Protection Act 2009), or is a credit representative (within the meaning of that Act) of
    another entity that holds such an Australian credit licence; or
  • Where the entity is a financial services licensee (within the meaning of the Corporations Act 2001)
    whose licence covers dealings in financial products mentioned in paragraph 764A(1)(a) of that Act
    (securities), or is an authorised representative (within the meaning of section 761A of that Act) of
    such a financial services licensee; or
  • Where the entity is an entity of a kind specified in a legislative instrument.
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