Franking Credits: Everything You Need To Know

Saturday, 14 Sep 2019

You might have come across the term franking credits, but never paid heed to its implications and utilisation. However, if you are running a business or planning to get into bookkeeping, then you must be aware of its significance.

Franking credit is a type of tax credit, which is paid by Australian businesses to their shareholders in addition to the dividend payments. It was introduced to get rid of the challenge of double taxation, once at the corporate level and the second time on the distribution as a dividend to shareholders.

Your bookkeeping company in Melbourne can enlighten you about the dividend imputation system which is nothing but a corporate tax, wherein the tax paid by the business may be attributed to the shareholders through a tax credit to decrease the payable income tax on the distribution.

To understand the whole system in a better way, let us shed some light on various aspects and elements related to it.

So What Are Franking Credits?

Companies in Melbourne which are making profits are liable to pay tax as these are taxable profits. After the payment of the tax, they sometimes decide to share the remaining amount of profit with their shareholders as a dividend.

This is where the franking credits come into the picture by allowing businesses to give a tax credit to their shareholders since the companies have already paid tax on dividends. Consequently, the shareholders can either obtain a cutback in income tax or a tax refund based on their tax situation, which can be defined by their bookkeeper.

Thus franking is nothing but tax credits, and the process is called dividend imputation. It is applicable only to Australians and does not extend to international investors working in Melbourne.

It helps in avoiding double taxation of profits as earlier the tax-paid profits became taxable again when they reached the shareholder’s pocket. A professional bookkeeper can assist you in attaching these credits to dividends.

Different Types Of Franking Credits

Some shareholders receive 100% franked dividends which imply that the company has paid full tax on the dividend at the company tax rate. Others may get 50% franked dividends which mean that the company has paid half tax on the dividend at the company tax rate.

In some cases, the shareholders get 0% franked dividends which have no tax credits. It usually takes place when the company has not paid tax in Australia as most part of its profits is generated from foreign countries or when it has to compensate prior losses against revenue.

The franking credits help in encouraging continuing equity ownership and aid in improving the dividend payments to investors. It lies within the 0%-30% tax bracket and is paid according to the investor’s tax rate with the help of a bookkeeper.

If the top tax rate of the shareholder is less than the company tax rate, the ATO refunds the difference. The level of franking credits to be attached to dividends is solely decided by the company in Melbourne, and they are not required to attach them necessarily.

However, most companies follow the practice of attaching credits as it benefits their shareholders. According to the data from IRESS, in the S&P/ASX 200 index which comprises 200 companies operating in the country, 184 paid dividends.

Out of these, almost half paid fully franked dividends, one-fourth paid partially franked dividends and another one-fourth paid unfranked dividends.

Tax Rate For Imputation

The corporate tax rate for imputation purposes is 27.5% for the income year 2017-18. It is applicable only if the company’s collective turnover in the previous year was below $25 million and 80% or less of assessable income was base rate entity passive income.

It also applies if the company in Melbourne was not yet established in the 2016-17 income year. In all other cases, the corporate tax rate for imputation is 30%.

How To Calculate Franking Credits?

Take help from your bookkeeper to understand the franking formula, which came into effect from the income year 2016-17, and is as follows.

Amount of the frankable distribution × (1 ÷ Applicable gross-up rate)

Here the applicable gross-up rate refers to the business’s corporate tax gross-up rate for the same income year when the distribution is made. It can be calculated by using another formula given below.

(100% – Corporate tax rate for imputation purposes for the income year) ÷ Corporate tax rate for imputation purposes for the income year

Imputation System Eligibility

All shareholders are not eligible for franking credits. The eligibility criterion includes holding the share of the company for a continued time span of 45 days or more. The period increases to 90 days in case of some preference shares.

The shareholders with franking credits below $5000 for the tax year with no intention of passing on the benefits to others are also eligible to claim franking credits in Melbourne. Thus these credits are not meant for short-term investors and provide benefits to long-term investors.

Companies can collect franking credits in a franking account with the help of a bookkeeper as it creates a franking balance that can be distributed to shareholders. Some of the biggest national companies have huge franking balance, such as Woolworths, Westpac, BHP Billiton, etc.

Franking account tax return needs to be lodged by the company if it is liable to pay franking deficit tax or over franking tax. A company in Melbourne also needs to submit a tax return if it gets a written notice from the Commissioner of Taxation or if it is required to reveal any considerable variation in its franking percentage to the ATO.

Your bookkeeper can provide the required support in this regard.

Trans-Tasman Imputation

From 2003, New Zealand companies can enter the Australian dividend imputation system which allows them to attach Australian franking credits to their dividends for the Australian tax paid by them.

The shareholders who are Australian taxpayers can utilise these credits in a similar manner as obtained from an Australian company.

Reimbursement Of Surplus Imputation Credits

You are eligible for reimbursement in Melbourne when the total imputation credits attached to franked dividends paid is more than the basic income tax liability for the year.

You will be refunded with a cash amount that represents the surplus imputation credits. It brings down the basic income tax liability to zero. Your bookkeeper can further enlighten you on this matter.

Conclusion

Franking credits are a significant part of the tax system and can be utilised by businesses to avoid double taxation. Your bookkeeping company in Melbourne can help you in further understanding its terms in detail.

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