The Guideline explains how the ATO assesses and applies compliance resources under section 207-159 of the ITAA 1997 to determine when franking credits on a distribution may be denied.
The Australian Taxation Office (ATO) released Practical Compliance Guideline PCG 2025/3 on 24 September 2025, outlining its compliance approach to situations where “capital is raised to fund franked distributions.”
At the same time, it published compendium PCG 2025/EC3, which sets out the submissions received and the ATO’s responses in relation to the earlier draft guideline PCG 2024/D4 issued on 4 December 2024.
The amendments in Schedule 5 of the Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 introduce new rules on franked distributions funded by capital raisings, applying to distributions made on or after 28 November 2023, with the operative provisions set out in section 207-159 of the Income Tax Assessment Act 1997.
To frank a distribution, the distribution must be frankable, and the entity making the distribution must be a franking entity. A franking entity is a company or other eligible corporate entity that is an Australian resident, or a New Zealand company (NZ franking company) that chooses to enter the Australian imputation system. A corporate entity that is a co-operative may choose how it distributes income to its shareholders (see Co-operative company franked and unfranked distributions).
Frankable distributions
Generally, only distributions from profits can be franked. For imputation purposes, a distribution includes:
- a dividend, or something taken to be a dividend, made by a company
- a distribution made by a corporate limited partnership, other than a distribution from profits or gains arising during an income year in which the partnership was not a corporate limited partnership
- something taken to be a dividend, made by a corporate limited partnership
- a unit trust dividend made by a public trading trust.
A distribution is frankable unless the law specifies that it is unfrankable.
What this Guideline is about
- This Guideline outlines when we are likely to have cause to apply our compliance resources in relation to the integrity measure in section 207-159 of the Income Tax Assessment Act 1997 (ITAA 1997). It sets out the framework we use to assess the level of risk that this provision applies to deny franking credits attached to a distribution.
- The integrity measure is intended to discourage arrangements that feature the raising of capital to fund the payment of franked distributions and the release of franking credits in a way that generally does not significantly change the financial position of the entity. It addresses arrangements that are entered into for a purpose (other than an incidental purpose) and with the principal effect of accelerating the release of franking credits to members of entities in circumstances that cannot be explained by existing distribution practices, and which are typically artificial or contrived.
- The integrity measure addresses the concerns raised in Taxpayer Alert TA 2015/2 Franked distributions funded by raising capital to release franking credits to shareholders. This Guideline will assist taxpayers in understanding our compliance approach to those issues.
- The application of section 177EA of the Income Tax Assessment Act 1936 (ITAA 1936), or any provision other than section 207-159 of the ITAA 1997, is outside the scope of this Guideline.
- This Guideline applies to corporate tax entities that have made a distribution which purports to be a frankable distribution as defined in section 202-40 of the ITAA 1997.
- All further legislative references in this Guideline are to the Income Tax Assessment Act 1997, unless otherwise indicated.
Criteria to apply section 207-159
There are 4 criteria that must all be satisfied for section 207-159 to apply to make a distribution, or part of a distribution, unfrankable. For example, the fact that a company does not have an established practice of making distributions does not by itself mean that section 207-159 will apply to an arrangement.
If any one of the criteria is not satisfied, section 207-159 will not apply.
The relevant criteria are:
First criterion – The dividend payment is not consistent with established practice
Second criterion – There is an issue of equity interests.
Third criterion – There is a principal effect and purpose of funding a substantial part of the distribution
The third criterion is that it is reasonable to conclude, having regard to all relevant circumstances, that:
- The principal effect of the issue of any of the equity interests was the direct or indirect funding of a substantial part of the relevant distribution or the relevant part, and
- Any entity that issued or facilitated the issue of any of the equity interests did so for a purpose (other than an incidental purpose) of funding a substantial part of the relevant distribution or the relevant part.
Fourth criterion – There is no direct response to the Australian Prudential Regulation Authority or the Australian Securities and Investments Commission
The fourth criterion is that the issue of the equity interests was not a direct response in order to meet a requirement, direction, or recommendation from the Australian Prudential Regulation Authority (APRA) or the Australian Securities and Investments Commission (ASIC).
Date of effect
This Guideline applies to distributions made on or after 28 November 2023.
