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Credits in, debits out
| Franking credits (balance up) | Franking debits (balance down) |
|---|---|
| Company tax and PAYG instalments paid | Franked dividends paid to shareholders |
| Franking credits on dividends the company receives | Tax refunds received, the one everyone forgets, because a refund hands back tax and the ledger follows |
| Certain adjustments, including over-franking and some anti-avoidance events |
The rhythm for a healthy trading company: instalments credit the account through the year, the year-end dividend debits it, and the balance stays modestly positive. The rhythm for a company in trouble: refunds and unpaid tax drain it while owners keep declaring franked dividends, until the deficit lands.
The three rules that generate the bills
1. Maximum franking
A dividend can carry at most the credit implied by the company's corporate tax rate for franking. At 25%, a $75 dividend carries at most $25 of credit, the 25/75 fraction; at 30% it is 30/70. Attaching more is over-franking, which triggers over-franking tax without giving shareholders the extra credit: pure deadweight. Rate transitions between 25% and 30% across earning and paying years are where this trap actually fires.
2. The benchmark rule
All frankable distributions in a franking period must be franked to the same percentage. You cannot send the family's dividends out fully franked and the outside investor's unfranked. Departures need ATO permission or attract penalties.
3. Franking deficit tax
A negative balance at 30 June, or on deregistration, triggers franking deficit tax equal to the deficit, effectively prepaying the company tax the credits promised. It is creditable against future company tax, but a deficit exceeding 10% of the year's credits can cost part of that offset. The system fines habitual over-distributors. The timing fix: where the account is thin, pay the tax instalment before declaring the dividend, not after.
Why this ledger decides real strategies
Every extraction plan runs through the balance. Dividend and salary mixes need credits to frank with, Division 7A minimum repayments serviced by dividend set-off need them too, and bucket company money comes back out someday franked, or expensively.
The ledger only exists if it is kept. Companies with years of unlodged returns have no reliable franking balance at all, which quietly invalidates every plan that assumes a dividend can simply be franked. Reconstructing the account is a standard part of a company catch-up, and it often reveals credits the owners did not know they had.
Frequently asked questions
What is a franking account?
What happens if the franking account goes negative?
How much can a dividend be franked?
Do tax refunds affect the franking account?
Can I frank one shareholder's dividend and not another's?
General information only - not personal tax, financial or legal advice. Consider your own circumstances or speak to a registered tax agent. Remission of penalties or interest and payment plans are decisions of the ATO and outcomes can't be guaranteed.