Are you a shareholder in a company? If so, there are high chances of you receiving dividends along with something called franking credits. But have you ever wondered why these credits are given, how they’re calculated and what kind of benefit they offer for you when you file your taxes? Well, to answer this, you first need to gain an understanding of the basics—what franked income means, the types of franked income and why it is good for you.
In this blog, let’s discuss everything mentioned above so you can calculate your own franking credits and maximise the benefit of your dividends. The blog will further explain how working with an expert can help reduce the stress of handling franking credit calculations and taxes.
Franked Income – An Overview
A dividend is a share of the profits a company offers to its shareholders. Franked income, on the other hand, is a dividend that the company has already paid its taxes on before distributing to its shareholders. In short,
Franked income = Dividend + Franking credits
With franking credits, the company allows the shareholders to offset the tax paid at the corporate level against their own tax liability. This system promotes transparency and fairness, ensuring the franked income is not taxed twice, along with reducing the personal tax obligations of shareholders, depending on their marginal tax rate.
Types of Franked Income
Understanding the type of dividend you receive is crucial for managing your tax obligations and after-tax income. In general, all franked income is a dividend, but not all dividends are franked. So, by knowing your dividend type you can
- Claim the right amount of franking credits.
- Calculate accurate taxable income.
- Make more informed financial decisions in advance.
Each dividend type has different tax implications.
- With fully franked income, the dividend comes with 100% franking credits, meaning the company has paid the entire tax for the distributed dividend, allowing shareholders to completely enjoy the tax benefit. This tax credit can reduce your tax obligations and even result in a tax refund if your tax liability is lower than the franking credit.
- With partially franked income, the company pays the franking credit for only half the portion of the distributed dividend. The unpaid portion of the dividend is unfranked, meaning you are taxed at your marginal rate.
- The last type, unfranked income, means the dividend has no franking credits attached.
Dividends in Australia: When & How It’s Calculated
In general, most Australian companies offer dividends twice a year—an interim dividend and a final dividend at the end of the financial year. However, a dividend distribution usually depends on the company’s financial health and performance. As dividends are paid from the company’s net profits, the dividend amount depends on the available balance after applying all taxes and funds earmarked for future growth.
For example, let’s say a company records $10 million in net profits. The board of directors decides to allocate $5 million for research, development, and expansion and$2 million in dividends which is allocated for 10 million shares. Now, the dividend per share (DPS) is calculated
DPS = $2 million / 10 million = $0.20 per share.
As a final step, the board members decided on the type of franking status. So if you own say700 shares, you are eligible for a dividend amount of $140.
Note: In general, only shareholders who own the shares before the dividend are eligible to receive dividends.
Calculating Franking Credits
Next, let’s move on to the most essential aspect of dividends—franking credits. While franking credits represent the corporate tax already paid by the Australian companies, understanding their calculation helps you determine the tax credit left for you to use against your own tax liabilities.
In Australia, franking credit is calculated by
Franking credit = (Dividend amount × Corporate tax rate) / (1 – Corporate tax rate)
= (140 X 0.30) / (1 – 0.30)
= 42/0.7 = $60
Where,
- The dividend is $200.
- Corporate tax rate in Australia is 30%.
- Franking credit = $60
Consider the company going for partial franked income:
Then 50% of $140 is taken into consideration. So franking credit is calculated only for $70.
Franking credit = (70 X 0.30) / (1-0.30)
= 21/0.7 = 30
In this case, if your tax for the financial year is $25, you can utilise the franking credit of $30 as a tax credit and gain a $5 tax refund. Thus, franking credit plays a crucial role in your taxation.
Conclusion
Tax season can often feel challenging, especially while navigating the intricacies of dividends and franking credits. But gaining a deep knowledge of these concepts will largely help you reduce your tax liabilities. That said, this isn’t an easy or straightforward task. Engaging a qualified tax advisor or accountant can make a significant difference. Experts, like those at Accountants Direct, can ensure your dividends and franking credits are accurately calculated and properly reported—helping you maximise your tax return while staying fully compliant. Simplify your taxations with experts by scheduling a call or booking a consultation now!
