May 12, 2014 by slater86
Franking Credit Explained
Franking credits are the component of dividends that the company already paid taxes on.Australia tax systems allows companies to pass on the taxable income to their shareholders where there will be no double taxation of income at the company and shareholder level. Dividends attached with franking credits are called franked dividends.
Franking credit is separate to the idea of dividend withholding tax .
Essentially investors only pay income once either at the tax level if the earnings of the company is retained to fund future growth or on the individual level if the earnings are passed on to shareholders. Usually the dividends passed on from trusts or Australia Exchange Traded Fund does not contain franking credit if no taxes were paid by the fund. Dividends without any franking credit are called unfranked dividends.
Only Australian taxpayers benefit from using franking credit in franked dividends when individuals file their tax returns.
Franking Credit Calculation
Franking Credit = Dividend Income x (30/70)
Franked Dividend Example
- Investor owns 100 shares in an Australian Company. The company pays $1 dividend per share.
from the company amounts to $100 with franking credit of $100 x (30/70) = $42.85
- The above makes the total income at $100 with imputation benefit of $42.85.
Implication for investors with the above franked dividend income stream:
- Individuals with expected zero liability will receive $42.85 back from ATO following filing taxes as any taxes already paid is refunded.
- Individuals with 15% tax rate will receive half of the imputation benefit $21.42 as the whole income is taxed at 15%.
- Individuals at 30% tax bracket will keep the $100 in income with no additional tax obligations
- Individuals at the highest bracket 45% with pay additional 15% on top of the imputation credit embedded in the dividend received
Franking Credit Holding Rule
To qualify the benefit of franked dividends. Individuals must meet the holding rule outlined by the ATO. The rule states that Individuals must maintain ownership of the shares over 45 days (not inclusive of the purchase and sale dates). Additionally if any sale occurs over the period after the dividend has been paid. Investors must maintain more than 30% overall ownership of the original holding.