Franking Credit Base Rate Entity Calculator
Calculate your franking credit entitlements as a base rate entity with precision
Calculation Results
Comprehensive Guide to Calculating Franking Credits for Base Rate Entities
The franking credit system in Australia allows companies to pass on tax paid on profits to shareholders through franked dividends. For base rate entities (BREs), which are generally small to medium businesses, the franking credit calculation follows specific rules that differ from standard corporate tax entities.
What is a Base Rate Entity?
A base rate entity is a company that:
- Has an aggregated turnover of less than $50 million, and
- Derives no more than 80% of its assessable income from passive sources (such as rent, interest, royalties, or dividends)
Base rate entities are eligible for the lower corporate tax rate of 25% (as of 2021-22 financial year), compared to the standard 30% rate for other companies.
Key Components of Franking Credit Calculation
- Taxable Income: The income subject to tax after allowable deductions
- Franked Dividends Received: Dividends from other companies that come with franking credits
- Franking Credits Attached: The tax credits attached to franked dividends received
- Corporate Tax Rate: 25% for BREs or 30% for standard entities
- Assessable Income: Total income before deductions
Step-by-Step Calculation Process
1. Determine Base Rate Entity Status
First, verify whether your company qualifies as a base rate entity by checking:
- Aggregated turnover is below $50 million
- Passive income doesn’t exceed 80% of assessable income
2. Calculate Tax Payable
The basic formula for tax payable is:
Tax Payable = Taxable Income × Corporate Tax Rate
3. Determine Maximum Franking Credit
The maximum franking credit is calculated as:
Maximum Franking Credit = (Frankable Distribution × Corporate Tax Rate) / (1 – Corporate Tax Rate)
4. Calculate Franking Account Balance
The franking account balance is affected by:
- Franking credits received from dividends
- Franking credits generated from tax payments
- Franking credits used to frank distributions
5. Check for Franking Deficit Tax
If the franking account goes into deficit at the end of the income year, the company must pay franking deficit tax at the same rate as its corporate tax rate.
Practical Example Calculation
Let’s consider a base rate entity with the following details:
- Taxable income: $200,000
- Franked dividends received: $50,000 (with $21,429 franking credits attached)
- Corporate tax rate: 25%
- Assessable income: $250,000
Step 1: Calculate tax payable = $200,000 × 25% = $50,000
Step 2: Franking credits generated = $50,000 (same as tax payable)
Step 3: Total franking credits available = $50,000 (generated) + $21,429 (received) = $71,429
Step 4: If the company pays $100,000 in dividends, the maximum franking credit would be:
$100,000 × (0.25 / (1 – 0.25)) = $33,333
| Income Year | Base Rate Entity Threshold | Corporate Tax Rate for BREs | Standard Corporate Tax Rate |
|---|---|---|---|
| 2017-18 | $25 million | 27.5% | 30% |
| 2018-19 | $50 million | 27.5% | 30% |
| 2019-20 | $50 million | 27.5% | 30% |
| 2020-21 | $50 million | 26% | 30% |
| 2021-22 onwards | $50 million | 25% | 30% |
Common Mistakes to Avoid
- Incorrect entity classification: Assuming you’re a base rate entity without verifying the passive income test
- Double-counting franking credits: Including the same franking credits from multiple sources
- Ignoring timing differences: Not accounting for when franking credits are generated vs. when they can be used
- Misapplying tax rates: Using the wrong corporate tax rate in calculations
- Forgetting franking deficit tax: Not monitoring the franking account balance throughout the year
Strategic Considerations for Base Rate Entities
Base rate entities should consider the following strategies to optimize their franking credit position:
1. Dividend Timing
Time dividend payments to align with when franking credits are available. Paying dividends when the franking account has a surplus can maximize the benefits to shareholders.
2. Passive Income Management
Monitor passive income levels to ensure they don’t exceed 80% of assessable income, which would disqualify the entity from base rate status.
3. Tax Payment Timing
Consider the timing of tax payments (PAYG installments) to generate franking credits when needed for dividend payments.
4. Shareholder Considerations
Understand your shareholders’ tax positions. Franked dividends are more valuable to shareholders with higher marginal tax rates.
5. Franking Account Monitoring
Regularly monitor the franking account balance to avoid deficits and potential franking deficit tax liabilities.
| Scenario | Base Rate Entity (25%) | Standard Entity (30%) |
|---|---|---|
| Maximum franking credit on $100,000 dividend | $33,333 | $42,857 |
| Franking credit generated from $100,000 tax paid | $100,000 | $100,000 |
| Effective tax rate on fully franked dividend to shareholder on 45% marginal rate | 15% | 15% |
| Effective tax rate on fully franked dividend to shareholder on 30% marginal rate | 0% | 0% |
| Franking deficit tax rate | 25% | 30% |
Recent Changes and Legislative Updates
The base rate entity regime has undergone several changes in recent years:
- 2017-18: Introduction of the 27.5% tax rate for companies with turnover below $25 million
- 2018-19: Threshold increased to $50 million and passive income test introduced
- 2020-21: Tax rate reduced to 26%
- 2021-22: Tax rate further reduced to 25%
These changes were part of the government’s plan to reduce the corporate tax rate for small and medium businesses to improve competitiveness and encourage investment.
Interaction with Other Tax Provisions
Franking credits interact with several other tax provisions that base rate entities should be aware of:
1. Division 7A
Payments, loans, or forgiven debts from a private company to shareholders or associates may be treated as unfranked dividends under Division 7A, which can impact franking account balances.
2. Thin Capitalization Rules
For entities with international dealings, thin capitalization rules may limit debt deductions, affecting taxable income and consequently franking credit generation.
3. Tax Consolidation
For groups of companies, tax consolidation rules affect how franking credits are shared and utilized across the group.
4. Research and Development Tax Incentive
R&D tax offsets can reduce tax payable, which in turn affects the generation of franking credits.
Record Keeping Requirements
Base rate entities must maintain comprehensive records to support their franking credit calculations, including:
- Documents verifying aggregated turnover is below $50 million
- Records of all assessable income and passive income components
- Franking account transactions and balances
- Dividend payment records and associated franking credits
- Tax return documentation supporting tax payable calculations
These records must be kept for at least 5 years from the date the relevant tax return is lodged.
Common Questions About Base Rate Entity Franking Credits
Q: Can a base rate entity pay dividends at the standard 30% franking rate?
A: No, base rate entities can only frank dividends at their applicable tax rate (25%). Paying dividends at 30% would be considered over-franking and could result in penalties.
Q: What happens if our passive income exceeds 80% of assessable income?
A: If passive income exceeds 80% in an income year, the company loses its base rate entity status for that year and must use the 30% corporate tax rate.
Q: Can we choose not to be a base rate entity?
A: No, the classification is determined by meeting the turnover and passive income tests. There’s no election to opt out of base rate entity status.
Q: How do we treat franking credits received from other companies?
A: Franking credits attached to dividends received are added to your franking account when the dividend is received, regardless of when you pay tax on that dividend income.
Q: What’s the difference between a franking credit and a franking debit?
A: Franking credits are additions to the franking account (from tax payments or received dividends), while franking debits are reductions (from franking dividends paid or franking deficit tax).