Franking Credits

[David Cousens]

Graeme, Peter et al,

The following is a bit long winded but I think  it does give a consistent
accounting procedure for dividends under the Australian taxation system.

One acceptable way of treating Tax is using a Liability :Tax header account
with sub accounts for the Tax Payable, and contra accounts for the PAYG (pay
as you go  instalments paid to Tax office out of income usually via employer
in Australia) and Franking Credits together with an Income:Taxable:Dividends
account and an Expense:Non-Taxable:Tax account.  ( You may of course also
havein addition  non-taxable income and tax-deductible expenses which are
not shown below for clarity.)

I.e.
Asset:Bank,
Income:Taxable:Dividend - not all income is necessarily taxable,
Income:Taxable:Salary -  income from salary
Expense:Non-Taxable:Tax -  income tax paid to the government is not
generally a deductible expense (in Australia),

Liabiliy:Tax   - header account,
Liabiliy:Tax:TaxPayable -  records the amount of tax due to the taxation
office on your taxable income,
Liability:Tax:PAYG -  records instalments paid in advance to the tax office
out of income,
Liability:Tax:FrankingCredits -  records the amount of tax already paid by
company issuing the dividend,

The company issuing the dividend pays tax at the company tax rate CR while
you as an individual (or other entity) pay tax at an appropriate marginal
rate MR (which is in the case of SMSF is 0).  Note the franking credit
C=CR*(F+C)  i.e. CR=C/(F+C).

If we consider a dividend  with a franked amount F, an unfranked amount U,
and a franking credit C, the total of your income for tax purposes is F+U+C.
The transactions recorded are:
Credit to your Income:Taxable:Dividend  = F+U+C;
debit to your Asset:Bank = F+U;  and  
debit to your Liability:Tax:FrankingCredits = C , when the company pays its
dividend to you. 

If during the year, you make payments T to the tax office in advance from
your salary income I, your transactions will be:
a debit to your Asset :Bank = I-T;
a credit to your Income:Taxable:Salary = I
a debit to Liability:Tax:PAYG = T.

When you calculate your tax and submit your return your total tax owing to
the tax office on your taxable income is MR*(I + F +U +C) but you receive a
rebate of C on your franked dividend so your tax payable is (assuming
taxable income is only from salary and dividends) which could be recorded
with these transactions:
credit to Liability:Tax:TaxPayable =  MR*(I+F+U+C)  (records the tax payable
on your total taxable income)
debit to Expense:Non-Taxable:Tax = MR*(I+F+U+C) ( records the tax paid).

At this point, the Liability:Tax  header account balance should equal
MR*(I+F+U+C)-C-T and should record your residual liability (if T<
MR*(I+F+U+C)-C) or refund  ( if T > MR*(I+F+U+C) - C, refund.

When you get your refund (assuming it is a refund) the transactions to
record your refund RA =(T+C -MR*(I+F+U+C)) with the following transactions:
debit to Asset:Bank = RA;
credit to Liability:Tax:TaxPayable =RA.

If you have to pay the tax office  an amount TO:
credit to Asset:Bank = TO;
debit to Liability:Tax:TaxPayable=TO.


At this point your Liability:Tax balance should be 0.   

At the end of the financial year, you would apply closing transactions as
follows:
credit to Liability:tax:FrankingCredits = C;
credit to Liability:Tax:PAYG = T;
debit to Liability:Tax:Payable = MR*(I+F+U+C);

and whichever of these applies:
debit Liability:Tax:TaxPayable=RA;      (refund)
credit Liability:Tax:TaxPayable=TO;   (if further tax owing)

and with the balancing transaction whichever of the following is applicable:

credit to Equity:SuitableAccount= MR*(I+F+U+C)- C-T + RA (if refund);
credit to Equity:SuitableAccount= MR*(I+F+U+C)- C-T -TO (if further tax was
owing);

Note: If the tax transactions are correctly recorded, the balance
transferred to the equity account should be 0 and these closing transactions
merely serve to zero the TaxPayable, FrankingCredits and PAYG accounts for
the beginning of next tax accounting period in the same way an
Equity:IncomeSummary  (or Retained Earnings) account could be used to zero
the Income and Expenses accounts for the beginning of the next period and
record Profit for the period in Equity.

Hope this helps
Cheers

David Cousens

-----Original Message-----
From: PeterO [mailto:petero at fotodomain.com] 
Sent: Thursday, 26 December 2013 8:41 PM
To: gnucash-user at gnucash.org
Subject: Re: Franking Credits

Peter,

This is perfectly true in case of an individual. However SMSF fund in
pension mode does not pay tax on the fund income, so all franking credits
are paid back by ATO. I am recording them as income of course, but was
looking for a place in the chart of accounts to "park" them until the refund
cheque arrives. (Unlike dividends, I can't enter them in the bank account
because I don't have the money yet). 
So I have created an account for it under
Assets:Investments:Broker:Shares:Franking Credits Accumulated. 
That would be "paired" with bank deposit in due time.
I tried to enter them under Expenses:Tax Paid as suggested earlier in this
thread, but that screws up Advanced Portfolio report. Looks like a bug, so I
needed to find an alternative.



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