Certain organisations—such as deductible gift recipients (DGRs) and income tax exempt entities that are endorsed by the ATO—may be eligible for a refund of franking credits. This article provides a general overview of the eligibility criteria for organisations, potential limits on claiming refunds and the refund application process.
In June 2019, the ATO released information sheet QC 59435 – Refund of franking credits information 2018-19.
Certain organisations—such as deductible gift recipients (DGRs) and income tax exempt entities that are endorsed by the ATO—may be eligible for a refund of franking credits. This is subject to meeting specific eligibility criteria and other conditions.
Eligibility for franking credit refunds is worked out at the end of each income year and must be revisited annually.
Section 207-115 of the ITAA 1997 outlines the types of income tax exempt organisations that are eligible for a refund of franking credits, which are (broadly):
- income tax exempt charities;
- income tax exempt relief funds;
- income tax exempt deductible gift recipients (DGRs);
- income tax exempt specified DGRs (meaning those organisations specifically listed by name in tax law); and
- prescribed income tax exempt entities (meaning an entity ‘prescribed as an exempt institution that is eligible for a refund by the regulations’).
Income tax exempt charities and DGRs must also satisfy the ‘residency requirement’. Section 207-117 states that:
‘An entity satisfies the residency requirement for the purposes of determining whether, at the time a *franked distribution is made, the entity is an *exempt institution that is eligible for a refund if:
(a) the entity has a physical presence in Australia; and
(b) to that extent, incurs its expenditure and pursues its objectives principally in Australia;
at all times during the income year in which the distribution is made.’
The ATO suggests using the ABN Lookup to confirm the eligibility status of an organisation. An entry on the ABN Lookup website includes the following relevant information about an organisation:
- Registration with the Australian Charities and Not-for-Profits Commission (ACNC)
- Charity tax concession status
- DGR status
Limits on refunds and anti-avoidance rules
Even if an organisation is an eligible organisation, specific rules can prevent the organisation from being able to claim a refund of franking credits.
Generally, an eligible organisation will not be entitled to a franking credit refund if the payment of the franked dividend results in any of the following:
- ‘the organisation obtains a reduced benefit from the franked dividend (or notional trust amount)
- the organisation, or another entity, provides a benefit or incurs a detriment
- the entity that pays the dividend or trust distribution (or their associate) obtains an advantage
- failure to pass full, unconditional ownership of property comprising the dividend (or trust distribution) to the organisation at the time of payment.’
Receiving a distribution from another eligible entity
Rules apply to prevent multiple refunds from being claimed in respect of the same franked dividend.
Where an organisation (Eligible Entity A) receives a franked distribution and, as a result of receiving the distribution, makes a distribution to another eligible organisation (Eligible Entity B), Eligible Entity B will not be entitled to a franking credit for the distribution and, therefore, will not be able to claim a refund. This is because Eligible Entity A is eligible for claiming a refund of franking credits for the original franked distribution.
Franking credit trading rules
An eligible organisation’s entitlement to a franking credit refund may be affected by the following franking credit trading rules:
- Holding period rule
- Related payments rule
- Dividend washing rule
For further information on these rules, refer to QC 59435 – Anti-avoidance rules.
Applying for a franking credit refund
Eligible organisations automatically receive a personalised refund application form in June of each year. If you haven’t received your refund application form or have misplaced it, you will need to contact the ATO to be sent one. There is no other way to apply for a franking credit refund other than using the personalised application form.
You can apply for a franking credit refund at any time on, or after, 1 July after the end of the income year you are applying for. There is no due date or time limit on claiming franking credit refund—you just need to use the relevant application form for the year the franking credit is being claimed.
You can only lodge one application per income year that a franking credit is being claimed. Although you can amend an original assessment, there is a time limit for doing so, so you may be limited in the assessments you can amend.
For further information on applying for a franking credit refund, refer to QC 16343 – Applying for a refund.