The franking account: credits, debits and franking deficit tax for private companies

What a franking account is

The franking account is a running record of the tax a company has paid that it can pass on to shareholders as franking credits. It isn’t a bank account or a ledger account in Xero: it’s a tax record that sits outside the general ledger, kept for each company for every year it exists.

Section 205-10 gives every entity that is or has been a corporate tax entity a franking account. For most of your clients that means each private company in a family group, including a trading company with no plans to pay a dividend this year.

What creates franking credits and franking debits

The entry follows the payment, not the year the tax relates to. Tax paid in December for the previous year is a credit in the year it’s paid, and a refund is a debit in the year it’s received.

How the franking credit on a dividend is worked out

Division 202 decides how much franking a distribution carries, and section 202-65 caps it at the maximum franking credit. For a fully franked dividend, the franking credit, and so the debit in the paying company’s account, is:

1. 01

   A company taxed at 25%.

   A $96,000 fully franked dividend carries $96,000 × 0.25 ÷ 0.75 = $32,000 of franking credits.

2. 02

   A dividend received from a company at 30%.

   A $3,500 fully franked dividend carries $3,500 × 0.30 ÷ 0.70 = $1,500 of franking credits, a credit in the receiving company’s account.

Division 203’s benchmark rule governs franking distributions consistently within a franking period. Read it before a client franks two dividends in the same year at different percentages.

A worked example: one year of a company’s franking account

Bull Antics Pty Ltd is the trading company in the sample group we use across the site, taxed at 25% here, and every figure is invented. It opens 2025/26 with a franking surplus of $53,335.00, pays its instalments and last year’s tax, receives a dividend on listed shares, and pays a fully franked dividend in June.

The June dividend is the only debit, so the question each year is simple: will the credits since 1 July cover it? Here they do, with room to spare. Had the dividend been large enough to take the balance below zero at 30 June, the company would have a franking deficit.

Franking deficit tax and the tax offset

Section 205-40 compares credits and debits: more credits is a franking surplus, more debits is a franking deficit. Under section 205-45, a company whose franking account is in deficit at the end of the income year is liable to franking deficit tax equal to the deficit.

Section 205-70 gives the company a tax offset for that liability, which it can use against its later income tax. The offset can be reduced in some cases, so check the section before you tell a client the cost of a deficit is only timing.

Franking returns

Division 214 covers franking returns and franking assessments, and section 214-150 sets the due date for paying franking tax. A company that ends the year in deficit, or that the Commissioner asks for one, has a franking return to lodge; check the ATO’s franking account tax return instructions for the year for who must lodge and when.

A year-end check for every company’s franking account

1. 01

   Roll the balance forward.

   Start from last year’s closing balance, not a fresh calculation from the tax return.

2. 02

   Record every payment and refund by the date it happened.

   Income tax, PAYG instalments and refunds go in the year they’re paid or received.

3. 03

   Add franked distributions received.

   Use the franking credit on each distribution statement.

4. 04

   Work out the franking on each dividend paid.

   Use the company’s rate for the year and check it against the balance before the dividend is declared.

5. 05

   Confirm the 30 June balance.

   A surplus carries forward. A deficit means franking deficit tax and a franking return.

6. 06

   Keep the register with the file.

   The closing balance goes into the company’s return, and the register is the working paper behind it.

How AccountKit keeps franking accounts

AccountKit’s franking account register keeps one register for each client company, listed with its ACN, last entry and balance. You import the history from Excel once, add the current year’s entries with a running balance, and lock each finished year. The closing balance goes into the tax return and the register exports to PDF. It’s included in the base subscription; pricing lists the plans. If the company also lends to its shareholders, our guide to the Division 7A benchmark interest rate and minimum yearly repayments covers the other year-end job.