Tax Hotline Question: Maximum franking percentage if company has NO assessable income

November 2022

Question:

I have a company that had been trading for many years.  However, it stopped trading in the 2022 income year and did not derive any assessable income either in the 2022 nor 2023 income years. 

The directors are seeking to wind up the company and will be paying a dividend to the shareholders in the 2023 income year.  What is the maximum franking percentage for this 2023 dividend, given there is no assessable income in 2022?

Answer:

 The ATO has confirmed that in such a situation, the maximum franking percentage would be the base rate entity corporate tax rate for the year in which the company pays the dividend, i.e., for a 2023 dividend, the dividend can be franked at a maximum rate of 25%.

 By way of background, the maximum franking percentage for a dividend is the company’s ‘corporate tax rate for imputation purposes’ for the income year the dividend is paid.  Broadly, this term is defined to mean the company’s tax rate for the income year (the dividend is paid), assuming the following:

• The company’s aggregated turnover for the income year is equal to its aggregated turnover for the previous income year;
• The company’s base rate entity passive income (‘BREPI’) for the income year is equal to its BREPI for the previous income year; and
• The company’s assessable income for the income year is the same as its assessable income for the previous income year.

 In the current scenario, given the company had no assessable income in 2022 (the previous income year), this means that we assume the company has nil assessable income in 2023, including an assumption that there is no BREPI in 2023.  The 2023 company tax rate applicable to such an assumed scenario, will be the company’s maximum franking percentage.

Accordingly, for the 2023 income year, the lower 25% base rate entity rate applies if:

• no more than 80% of its assessable income for the year of income is BREPI; and
• aggregated turnover is less than $50 million.

Given that nil BREPI as a percentage of nil assessable income creates a mathematical error such that it is not technically possible to give a percentage, there was uncertainty about the interpretation of the first requirement in such a situation. However, the ATO has confirmed in LCR 2019/5 that in such a case, it would interpret the first requirement as being satisfied, which means that the maximum franking percentage is the base rate entity rate applicable in the year of paying the dividend.  Refer to example 2.2 of LCR 2019/5.

 Note that if a company did not exist in the previous income year and seeks to pay a dividend in the current year, the maximum franking percentage would also be the base rate entity rate for the year of paying the dividend.

 Finally, other franking requirements and rules must be considered, including the requirement for private companies to issue a distribution statement before the end of 31 October 2023 (for a company with a 30 June 2023 year end paying a dividend in the 2023 income year).