WHAT EXACTLY ARE FRANKING CREDITS?
Franking credits are a kind of tax credit you get when you receive dividends from a company to prevent you getting taxed twice by the Australian Taxation Office (ATO).
Franking credits are also known as imputation credits. The imputation system was created to prevent the ATO from double taxing profits on shares.
It’s useful to know whether you might be eligible for franking credits around tax time.
When you fill out your income tax return, you may be eligible to claim back or reduce the amount of tax you have to pay on the income you receive from dividends.
We explain more about how franking credits work below.
How do franking credits work?
For the company
When companies with shareholders earn a profit, the organisations are taxed up to 30% on these profits by the ATO. The taxed companies accrue franking credit and, when they pay out dividends, pass on this tax credit to their shareholders.
For the shareholder
When the shareholders declare their income on a tax return, they can claim a tax rebate from their franked dividends.
For the ATO
The franking system enables the ATO to recognise when tax has already been paid on an income. It prevents the ATO from taxing that profit amount twice from the franked dividends.
for example
For example, lets say a company with one shareholder earns $100 in profit, the organisation would be taxed 30% by the ATO, leaving them with $70 net profit after tax.
$100 profit - 30% tax = $70 net profit after tax
If this company profit is paid as a dividend of $70 to its shareholder, the shareholder would need to declare that income in their tax return to the ATO.
Without the franking system, the ATO would tax the shareholder on the entire $70. The franking credit, or imputation, system prevents this income getting taxed twice.
With the franking system, the ATO recognises the $30 of tax already paid by the company on the behalf of the shareholder.
shareholder’s dividend = $100 including $30 tax credit
So in reality, the shareholder’s dividend is actually $100 with a $30 tax credit stored at the ATO. This tax credit amount is used to offset the shareholder’s income tax, come tax time.
What can shareholders claim?
If the shareholder had a 10% marginal tax rate, they might be entitled to a $20 tax refund because the $30 tax that has already been paid is stored at the ATO.
At a 30% marginal tax rate, the shareholder might pay no tax at all because the tax paid by the company evenly offsets their personal income tax.
At a 50% marginal tax rate, the shareholder pays an extra 20% on the dividend.
franking credit eligiBility
When asking about franking credits, it’s good to bear in mind the following:
Not every company pays franking credits
Not everyone is eligible for franking credits
There are rules that apply to buying, holding and selling shares with franking credits attached
Always speak to your financial advisor to get the most accurate information for your personal financial situation.
Don’t pay double
We can help you find out whether you are eligible for franking credits in your tax return.