A question I get asked regularly is can a new company pay a fully franked dividend in its first year, even if it has never paid a tax bill yet as it has not yet lodged its first tax return and so has not paid any PAYGI?
The answer is a big YES without any penalty. But let me explain why.
- The payment of the franked dividend will create a franking deficit tax liability may arise.
- But the Franking Deficit Tax can be offset against the company’s income tax bill that will be paid when they pay the first tax bill when the first return is lodged.
- However, this is where people get worried as they know that where the deficit at the end of the year is more than 10% of all the franking credits that arose during the year, which in this year was $0, the company’s franking deficit tax offset is reduced by 30%. But the 30% offset reduction does not apply in the first income year in which a private company has an income tax liability if all the conditions of subsection 205-70(5) are met. The main concern in this subsection is that the amount of the income tax liability for the relevant year is at least 90% of the amount of the deficit in the company’s franking account at the end of the relevant year. So be careful.