36‑55 Converting excess franking offsets36‑55 Converting excess franking offsets into tax loss

#### 36‑55 Converting excess franking offsets into tax loss Excess franking offsets (1) An entity that is a \*corporate tax entity at any time during an income year has an amount of excess franking offsets for that year if: (a) the total amount of \*tax offsets to which the entity is entitled for that year under Division 207 and Subdivision 210‑H (except those that are subject to the refundable tax offset rules because of section 67‑25); exceeds: (b) the amount of income tax that the entity would have to pay on its taxable income for that year if: (i) it did not have those tax offsets; and (ii) it did not have any tax offsets that are subject to the tax offset carry forward rules or the refundable tax offset rules; and (iii) it did not have any tax offset under section 205‑70; but had all its other tax offsets. The excess is the amount of excess franking offsets. > Note: Division 65 sets out the tax offset carry forward rules. Division 67 sets out which tax offsets are subject to the refundable tax offset rules. > Note: Example: For the 2017‑18 income year, Company E (which is not a base rate entity) has: > Note: assessable income of $200 (franked distribution of $140 and franking credit of $60); and > Note: $100 of deductions that are allowable. > Note: The tax offset of $60 from the franking credit is not stated in Division 67 to be subject to the refundable tax offset rules. > Note: Disregarding the tax offset of $60 from the franking credit, the amount of income tax that Company E would have to pay is $30: > Note:  > Note: This amount is $30 less than the tax offset of $60. Company E therefore has an amount of excess franking offsets of $30 for that year. How to work out the amount of the tax loss (2) For the purposes of this Act, if: (a) an entity has an amount of \*excess franking offsets for an income year; and (b) the result of applying the following method statement is a positive amount; then: (c) the entity is taken to have a \*tax loss for that year equal to that positive amount (instead of an amount of tax loss worked out under section 36‑10, 165‑70, 175‑35 or 701‑30); and (d) that year is taken to be a \*loss year for the entity if the entity would not otherwise have a tax loss for that year. Method statement Step 1. Work out the amount (if any) that would have been the entity’s \*tax loss for that year under section 36‑10, 165‑70, 175‑35 or 701‑30 if the entity’s \*net exempt income for that year (if any) were disregarded. > Note: See section 36‑20 for the calculation of net exempt income. Step 2. Divide the amount of \*excess franking offsets by the entity’s \*corporate tax rate for imputation purposes for that year. Step 3. Add the results of steps 1 and 2. Step 4. Reduce the result of step 3 by the entity’s \*net exempt income for that year (if any). The result of this step is taken to be the entity’s \*tax loss for that year. However, if the result of this step is nil or a negative amount, the company does not have any tax loss for that year. > Note: Example: Assume that company E did not derive any exempt income for the 2017‑2018 income year and that it would not otherwise have any tax loss for that year under section 36‑10, 165‑70, 175‑35 or 701‑30. > Note: Applying the method statement, the amount of excess franking offsets of $30 generates a tax loss of $100 for that year, which can be deducted in a later income year under section 36‑15 or 36‑17.