Hooper Pty Ltd is a resident private company, which has recorded the following transactions below:
| $ | ||
| 01/07/22 | Received unfranked dividend from L Ltd | 4,000 |
| 01/09/22 | Paid PAYG Instalment | 5,000 |
| 01/09/22 | Received 30% franked dividend from E Ltd | 10,000 |
| 11/03/23 | Paid interim dividend fully franked | 20,000 |
| 15/03/23 | Paid balance of company tax | 3,000 |
| 01/04/23 | Paid fringe benefits tax of | 10,000 |
| 11/06/23 | Received fully franked dividend from C Ltd | 7,000 |
| 15/06/23 | Paid final dividend franked to 80% | 10,000 |
• The entity had an opening franking account balance of $500 credit
• The entity was not granted any variations to its benchmark franking percentage
Required:
a) Prepare the franking account for the year ended 30 June 2023
b) Calculate any additional taxes and penalties (if any) that may need to be paid.
The franking account is a crucial element in the Australian tax system that helps to determine the tax consequences of dividends paid by a company to its shareholders. It keeps track of franking credits and debits associated with dividends, which are essential for shareholders to understand their tax liabilities. In the case of Hooper Pty Ltd, let’s prepare its franking account for the year ending 30 June 2023 based on the provided transactions.
Opening Franking Account Balance: $500 (credit)
Received Unfranked Dividend from L Ltd (01/07/22): $4,000
Franking credits: $0 (as unfranked)
Paid PAYG Instalment (01/09/22): $5,000
Franking debits: $5,000
Received 30% Franked Dividend from E Ltd (01/09/22): $10,000
Franking credits: $3,000 (30% of $10,000)
Paid Interim Dividend Fully Franked (11/03/23): $20,000
Franking debits: $20,000
Paid Balance of Company Tax (15/03/23): $3,000
Franking debits: $3,000
Paid Fringe Benefits Tax (01/04/23): $10,000
Franking debits: $10,000
Received Fully Franked Dividend from C Ltd (11/06/23): $7,000
Franking credits: $7,000
Paid Final Dividend Franked to 80% (15/06/23): $10,000
Franking debits: $8,000 (80% of $10,000)
Now, let’s calculate the closing balance of the franking account for the year ending 30 June 2023:
Total franking credits: $10,000 (3,000 + 7,000)
Total franking debits: $46,000 (5,000 + 20,000 + 3,000 + 10,000 + 8,000)
Opening franking account balance: $500 (credit)
Closing Franking Account Balance: $-35,500 (500 – 46,000 + 10,000)
The closing balance of -$35,500 indicates that Hooper Pty Ltd has a franking account deficit at the end of the financial year. This means that the company has distributed more franking credits than it has accumulated throughout the year.
b) Additional Taxes and Penalties
When a company has a franking account deficit at the end of the financial year, it may be subject to additional taxes and penalties under Australian tax law. This deficit indicates that the company has distributed franking credits to shareholders that it has not fully earned through its tax payments.
To calculate any additional taxes and penalties, we need to determine the extent of the deficit. In this case, the deficit is $35,500.
The additional tax payable on the franking deficit is calculated at the company tax rate, which is currently 30% (as of my last knowledge update in September 2021). Therefore, the additional tax payable would be:
Additional Tax = Franking Deficit x Company Tax Rate Additional Tax = $35,500 x 30% = $10,650
Additionally, the company may be subject to the shortfall penalty interest. The penalty interest rate is generally set by the Australian Taxation Office (ATO) and can change. It is essential to check the ATO’s website or consult with a tax advisor for the most current rates.
In summary, Hooper Pty Ltd would likely need to pay an additional tax of $10,650 due to the franking deficit, and they may also be subject to penalty interest as determined by the ATO’s current rates. It’s crucial for the company to rectify the franking account deficit and comply with tax regulations to avoid further penalties and interest charges. Always consult with a tax professional or the ATO for the most up-to-date information and guidance on tax matters.
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