franking credit, page-3

Further to SWC's post.

Companies are required under Accounting Standards to provide for tax using "Tax Effective Accounting" This results in an Income Tax Expense in the P&L based on accounting profit. Tax is actually paid based on Taxable Income and Taxable Income can be substantuially different to profit for two reasons:

1. Permanent Differences - these are items which are never assessable or deductible

2. Timing Differences - these are items which are assessable or deductible in a different year to which they are recorded in profit. These give rise to a Deferred Tax Asset (generally from an expense recorded in profit where the deduction will occur later), or a Deferred Tax Liability (generally from an amount of income recorded in profit which is not assessable until later)

An example of an expense giving rise to a DTA is providing in advance for untaken annual or long service leave of employees (there is no deduction until the leave is actually taken and payments made).

An example of income which is not assessable until later and the one that is particularly relevant to SHJ is WIP. WIP in professional firms is not assessable income. WIP is only converted into assessble income when it is billed. SHJ records WIP in income and calculates a tax liability that will be incurred on this in the future when it is billed - that tax liability is recorded as Deferred.

Only tax actually paid gives rise to a franking credit.