What is franking credits in Australia and how do they work?
Franking credits are a tax credit attached to dividends paid by Australian companies. They represent the tax the company has already paid on its profits, allowing shareholders to offset this tax against their own income tax liability and avoid double taxation.
Was this helpful?
8 readers found this helpful
8 readers found this helpful
How it works in practice
Understanding Franking Credits
Franking credits, also known as imputation credits, are a unique feature of the Australian tax system designed to prevent the double taxation of company profits. Without franking, company profits would be taxed at the company level, and then dividends paid to shareholders would be taxed again as part of their personal income. Franking credits essentially pass on the tax already paid by the company to the shareholder.
How They Work
When an Australian company pays tax on its profits, it can attach a franking credit to any dividends distributed to its shareholders. This credit represents the amount of tax the company has already paid on those profits. When a shareholder receives a franked dividend, they receive both the cash payment and the attached franking credit. The shareholder then includes both the cash dividend and the franking credit in their assessable income. However, they also get a tax credit for the franking amount, which reduces their overall tax payable. If the franking credit is larger than the tax otherwise payable on the dividend, a refund may be issued.
Important exceptions
Franking credits are generally only available to Australian resident shareholders. Non-residents typically cannot utilise these credits.
To be eligible, the shares must be held 'at risk' for a certain period around the dividend payment date to prevent tax exploitation. For individuals, this usually means holding shares for at least 45 days. Certain entities, like self-managed super funds (SMSFs), have specific rules regarding franking credit refunds, especially for SMSFs in the retirement phase.
The value of the franking credit is based on the company's tax rate, typically 30%. If your individual tax rate is lower than this, you may receive a tax refund. If your tax rate is higher, the credit will reduce your tax payable on the dividend income.
What you should do now
-
Understand that franking credits are received with eligible dividends from Australian companies and are noted on your dividend statement.
-
Keep accurate records of all dividend statements, which show the amount of the cash dividend and the attached franking credit.
-
Include both the dividend income and the franking credit in your annual tax return, as required by the Australian Taxation Office (ATO).
-
Calculate your personal income tax liability, noting that the franking credit will offset the tax on the dividend, potentially leading to a refund.
-
Seek advice from a qualified financial advisor or tax professional if you have complex shareholdings or are unsure about your eligibility or tax obligations.
Expert Notes
No expert notes have been added to this question yet.
People also asked
Explore highly relevant questions and get instant verified short answers.