(upbeat music)
-: A corporate tax entity has the freedom
to allocate franking credits
to a frankable distribution to whatever extent it wants
subject to the benchmark rule.
The benchmark rule aims to ensure that franking credits
are spread more evenly across shareholders
in proportion to their ownership interests.
A breach of the benchmark rule does have tax consequences
unless the Commissioner of Taxation
has authorised such a departure.
The key components of the benchmark rule
relate to working out the franking period
and the benchmark franking percentage for that period.
Once the benchmark franking percentage is established,
all future distributions must apply this percentage.
Let's consider three distributions made by RTD Ltd
during the franking period.
What are the tax consequences, if any,
for RTD Ltd in breaching the benchmark franking rule
for the franking period?
Initially, we can see that as RTD is a private company,
so its franking period will be the same as its tax year.
So, the first distribution of $400,000 franked to 60%
is very important,
as it establishes RTD's benchmark franking percentage at 60%
for the entire franking period.
Therefore, the company should now frank
all subsequent distributions to shareholders to 60%
to avoid any penalties being applied.
However, we see that RTD did not do this,
and franked the second distribution to only 50%,
thereby under-franking the distribution by 10%
against the benchmark rule.
In order to determine the amount of the franking debit
in this case,
we apply the formula from section 203-50 subsection 2.
So RTD is $480,000 distribution franked to only 50%
will result in a franking debit being entered
into the company's franking account
as a direct result of under-franking that distribution.
The amount of the debit will be $20,571.
Likewise, RTD franked their third distribution to 80%,
and therefore over-franked the distribution by 20%.
This will result in over-franking tax
being incurred by the company during the franking period.
The amount of the over-franking tax in this case
will be $48,000.
While a breach of the benchmark rule
will not invalidate the allocation made on the distribution,
this conduct will give rise to penalties being applied
to the company according to section 203-50.
These penalties are calculated by reference
to the difference between
the franking credits actually allocated
and the benchmark percentage.
The penalties can generally be summarised
as over-franking tax,
if the franking percentage for the distribution exceeds
the benchmark franking percentage
or a franking debit i.e. penalty debit,
if the franking percentage for the distribution
is less than the benchmark franking percentage.
The penalty debit is in addition to the franking debit
that arises on a payment of the frank distribution.
Basically, it is the extra amount
that should have been allocated to the distribution
according to the benchmark rate.
The power to permit departure from the benchmark percentage
is only exercised in extraordinary circumstances,
which are unforeseeable
and beyond the control of the company.
An example of this might be where a company's business
is dependent upon seasonal fluctuations
which have changed dramatically.
It is up to the Commissioner of Taxation
to consider all relevant circumstances
in making his decision.
To recap, the benchmark rule is imposed
to set the level of franking
for a particular franking period
to which the corporate entity must comply.
To breach the rule will result in penalties,
unless the Commissioner of Taxation has provided permission
for the departure.