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taxes

What are Franking Credits?

As a shareholder, you’ve probably heard of dividends and capital gains tax but may be unfamiliar with the concept of franking credits. 


The franking credit system, introduced in 1987, is designed to prevent the double taxation of company profits, so shareholders are not required to pay taxes on their dividends.


But how do they work? And as a shareholder, are franking credits even relevant?



Franking credits explained

Franking credits (often known as imputation credits) are a form of tax credit that eligible shareholders of Australian companies receive from dividends funded through after-tax profits. 


Australian companies are required to pay taxes on profits. Dividends that are funded by after-tax profits and then paid to shareholders are known as franked dividends.


To prevent double taxation, franking credits allow a business to pass on a tax credit to its shareholders, helping them to receive a refund on any excess tax paid on their dividends. If a shareholder’s tax rate is lower than the corporation’s tax rate, the shareholder may be eligible for a tax refund of the excess franking credits, with the Australian Taxation Office (ATO) paying once the shareholder files their tax returns.

How do franking credits work? 

To better understand how franking credits work, let’s look at an example. 


A company pays a dividend of $500 to John, a shareholder. The company has also already paid taxes on its profits. John receives this $500 dividend, and a franking credit of $150 is attached to the received dividend. When John lodges his taxes, he will include the $500 dividend as part of his taxable income but will also claim the $150 franking credit as a tax payment made on his behalf. 


If the ATO determines that John’s tax is lower than the corporation’s, he may be eligible for a refund of the excess franking credits.


For instance, if John is meant to be taxed $100 on his shareholder income, he could be eligible for a refund of $50.

Who is entitled to franking credits? 

As an individual shareholder, you may be eligible for franking credits depending on your tax residency status and what type of entity you are. 


If you hold shares in Australian companies, you may be eligible for franking credits if you meet the following criteria:


  • You’re an Australian resident taxpayer: If you’re an Australian resident for tax purposes, you are likely eligible for franking credits on dividends paid by Australian companies.


  • You’re part of a taxable entity: If you’re part of an entity, such as a company or superannuation fund, you may be eligible for franking credits on dividends.


  • You meet the franking credit eligibility requirements: 
  • The franked dividend was received on or after 1 July 2020
  • Your basic tax liability is less than the franking credits
  • You meet the anti-avoidance rules set by the ATO 


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Franking credit eligibility requirements - anti-avoidance rules

For individual shareholders, the following anti-avoidance rules apply: 


  • Holding period rule: You must own shares ‘at risk’ for at least 45 days, excluding the day of acquisition and disposal, unless the total franking credit entitlement is below $5,000. This is known as a small shareholder exemption.


  • Related payments rule: This prevents you from claiming franking credits if a ‘related payment’ is made. For example, if you are obliged to pass on the franked dividend to someone else. 


  • Dividend washing integrity rule: You can’t claim more than one set of franking credits if you received dividends from ‘washing’ — when you sell an interest in shares held by you while still holding the right to the dividend. However, the small shareholder exemption applies here.


How to calculate franking credits 

If you’re unsure of how many franking credits you’ll receive as part of your tax rebate, fear not. There is an easy franking credit formula you can use to calculate how much you could receive:

(Dividend Payment ÷ (1- Company Tax Rate) - Dividend Amount) x Franking Percentage


Let’s look at the below example. If you’re paid a dividend of $200, and the company tax rate is 30%, the franking credit amount would be: 


(($200 / 1 - 30)) - $200 ) x 1 = $85.71

How QuickBooks can help

Quickbooks has various features designed to help you with your tax filings, including automated data pre-filling, broad system integration, and intelligent error-checking technology, helping you file your taxes. 


Using the QuickBooks mobile app, you can conveniently track your expenses in real time and access your finances on the go. It can facilitate your recordkeeping and help in making the end of the financial year easier for you. 


Ready to streamline your shareholder tax filings with powerful accounting software? 


Sign up for QuickBooks, try the 30-day free trial and start to simplify your tax process today.


To learn more about unfranked dividends, read our explainer article on Division 7A

While every care has been taken to ensure the accuracy of the information presented as at 01 May 2023, Intuit is not providing you with professional advice and we recommend you obtain your own professional advice. Intuit is not liable for your use of the information presented.

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