C15/2001 Pension Impact of changes to taxation imputation credit rules

Purpose

This Departmental Instruction provides assessment information relating to franked dividends.

Background

Prior to 1 July 2000, for taxation purposes Centrelink and Veterans' Affairs income support payment recipients could only take advantage of the imputation credits from franked dividends if they lodged tax returns and paid income tax.  The credits were used by the Australian Taxation Office (ATO) to reduce a persons tax liability.  Customers below the taxable income thresholds could not take advantage of the credits because they had no tax liability to be reduced.  Also those on lower marginal rates of tax could not fully utilise the credit.

The imputation credit rules were changed with the introduction of the new tax system to enable shareholders to access imputation credits regardless of whether they pay income tax or not.

Pensioners and others holding shares that attract imputation credits can access the value of the imputation credit from tax refunds for the 2000/01 financial year.  From 1 July 2001 companies will be able to provide early refund to a shareholder at the time the dividend is paid.

What is a franked dividend?

Franked dividends are defined in section 160AQF of the Income Tax Assessment Act 1936 (see attachment).  They are dividends, or shares of company profits, paid or credited by an Australian resident company from profits that have had Australian company tax paid on them.

Franked dividends can be wholly or partially franked, that is, either the whole or part of the amount of the dividend carries an imputation credit.

What is an imputation credit?

An imputation credit is a credit to a person owning shares for the tax that has already been paid by the issuing company on their dividends.  These are known as franking credits.

Pre 1 January 2002 income test assessment

Publicly Listed Shares

Shares in a publicly listed company are part of a person's financial assets.  The assessable income for income support pension purposes is the deemed income.  The changes to imputation credits will not change these rules.

Private Trust or Private Company Shares

Under current rules, dividends on shares including franking credits from a private company or private trust should be held as income for the individual for 12 months from the date of the distribution/refund.  The gross amount of the dividend payment is assessable.

It is important that income support pensioners advise of receipt of dividends and imputation credits from private trusts and private companies at the time they are received.

1 January 2002 rule change.

Private Trusts & Private Company Shares

From 1 January 2002, if a pensioner is attributed with the assets or income of a private trust or private company, there will be no need to advise of the receipt of imputation credits.  This is because the net assessable income of the private trust or private company will be attributed to the attributable stakeholder(s).

s160AQF

ITAA 1936

INCOME TAX ASSESSMENT ACT 1936

Part IIIA Franking of Dividends

Division 5 Franking of Dividends

Subdivision A Franking

160AQF What constitutes franking with a franked amount.

(1) Current class A franked dividend multiplied by specified percentage

Where:

(a) a frankable dividend (in this subsection called the "current dividend") is

     paid to a shareholder in a company; and

(b) the company is a resident at the time of payment; and

(c) if the current dividend is paid under a resolution:

1. before the reckoning day for the current dividend, the company  makes a declaration that each dividend to which the resolution relates is a class A franked dividend to the extent of a percentage (not exceeding 100%) specified in the declaration in relation to the dividend; and

2. the percentage so specified is the same for each of the dividends to which the resolution relates; and

(d) if the current dividend is not paid under a resolution - the company makes          a declaration before the reckoning day for the  current dividend that the current dividend is a class A franked dividend to the extent of a percentage (not exceeding 100%) specified in the declaration;

the current dividend shall be taken to have been class A franked to the extent

of the amount calculated in accordance with the formula: