Where a NFP charity receives investment income that includes dividends can it claim a refund of franking credits that are included on the dividend statements and if so how? If the charity wholly or partially owns a company that undertakes commercial activities and pays a dividend to the charity do the same rules apply?
As each 30 June rolls around one of the annual processes that may be required of a not-for-profit (NFP) that holds an investment portfolio is to claim refunds of franking credits (also called imputation credits) that are included in any dividends or distributions the organisation may receive on its investment income.
To answer the question though it is necessary to consider which NFPs may be eligible for a refund and, where an NFP is eligible, how to go about claiming the refund.
By way of background, companies operating in Australia are generally required to pay tax at the rate of 30% on their profits or 27.5% (reducing to 26% from 1 July 2020) for what are known as ‘base rate entities’ generally being smaller businesses.
When a company pays dividends to its shareholders it can pass on the benefit of any income tax that it has paid by ‘franking’ the dividend. A franked dividend will generally entitle the shareholder to a franking credit as shown in the dividend statement which the company issues to the shareholder, although this is subject to certain holding period rules. These franking credits can ordinarily be offset against the shareholder’s own tax liability. Dividends with franking credits attached may include dividends paid by a company wholly or partially owned by the NFP such as one through which commercial activities are undertaken.
Franked dividends can also pass through other entities. For example, it is possible for a company to a pay a franked dividend to a trust and for the trust to pass the whole or part of the franked dividend to a beneficiary. In this instance, the beneficiary is generally placed in a position corresponding to that of a shareholder in the company for purposes of utilising the franking credit.
However, if the shareholder is an organisation which is a tax exempt (as most NFPs are) it will not have paid tax. In these circumstances, i.e. where there is no tax liability against which the franking credit can be offset, the franking credit would potentially be wasted, regardless of whether the franked dividend is received directly or indirectly (e.g. through a trust or managed investment)
The income tax legislation contains special provisions that enable certain (but not all) NFP shareholders, to request the Australian Taxation Office (‘ATO’) refund the franking credits as a cash payment.
Eligibility to claim a refund
Eligibility to claim the refund is limited to certain types of NFPs including:
- an ACNC registered charity endorsed by the ATO as exempt from income tax
- an income tax exempt DGRs endorsed by ATO in its own right (i.e. not a DGR fund operated by a non-DGR)
- an income tax exempt DGR listed by name in the tax law
- an income tax exempt relief fund declared by the Treasurer to be a developing country relief fund
- a prescribed income tax exempt institution that is eligible for a refund under the regulations
- an income tax exempt institution eligible for a refund under an Australian Government law (other than the tax law).
Further details regarding eligibility can be viewed at the ATO’s website at ‘Eligibility for a Refund‘.
Process to claim a refund
The process to claim the refund is pretty straightforward however first time claimants and regular claimants need to make sure the refund claim does not get overlooked – surprisingly we have seen this happen in plenty of cases!
In terms of recurring claims, towards the end of each income year, the ATO writes to entities that applied for and received a refund of franking credits in the prior income year and provides them with a ‘refund of franking credits application package’. The package needs to be completed and returned to the ATO in order for the refund to be paid. For entities that receive franking credits from multiple sources, a single refund application is submitted for all franked distributions received during the income year.
Organisations that have not previously applied for a refund or who did not receive their personalised application for refund of franking credits package and which are in receipt of franked dividends can contact the ATO (telephone 1300 130 248) and order a refund application package.
Applications for a refund of franking credits cannot be made electronically.
Further details regarding the application process can be view at the ATO website.
Finally, there is a no time limit on the initial application for a refund of franking credits for a particular year (e.g. an organisation that failed to apply for a refund from 2017 can still apply for it now). However, if the franking credit attached to dividend income is paid on or after 1 July 2013, the organisation will be subject to time periods (generally two or four years) within which to amend to their refund claim if the original claim was incorrect.