Are you entitled to a refund of franking credits?
Its tax time, which means you’ll soon need to establish the value of the franking credits you received from last year’s dividends.
One of the benefits of being a shareholder of Australian shares is that many Australian companies reward their shareholders by paying out a dividend. Dividends are essentially a portion of the profit that the company has made during the year, paid to their investors.
Often attached to these dividends are franking credits. Put very simply, franking credits form part of the income an investor receives, which isn’t received in cash, but as a kind of IOU from the tax office.
Franking credits are tax credits, and prevent the double taxation of dividends. They represent the amount of tax that the company has already paid on the profit. These tax credits, can be used by a shareholder to reduce taxable income, or receive as a refund from the Australian Taxation Office (ATO).
To make things a little complicated, franking credits are also called imputation credits.
Under this system, the Australian Tax Office recognises that corporate tax has already been paid on profits distributed as dividends. This already-paid tax can be transferred to investors using franking credits, reducing their tax liability.
The tin tacks of the process is explained in the following example –
• A company makes a profit. Let’s use an example of $100 profit.
• The company has to pay tax on their profit at the company tax rate of 30%. So on $100 profit, tax would be $30. The $30 is paid to the Australian Taxation Office (ATO) and the company makes a record of this payment in their franking account.
• The company then pays the net (after-tax) dividend to investors of $70 either in the same year or later. When the company pays the dividend it may attach a franking credit from its franking account, in proportion to the tax rate. So each $70 of dividend may have $30 of franking credit attached. This type of dividend is referred to as a Franked Dividend.
• The shareholder receiving a Franked Dividend declares the income amount of $70 plus the franking credit of $30, and depending on their marginal tax rate can either use the franking credit to reduce their final tax bill or receive the franking credits back in cash, at the end of the financial year.
Share registries and Fund Managers provide the majority of this information to the Australian Taxation Office, and the accounting team have already started processing returns for our clients.
If you think you may be entitled to a refund of franking credits, our accounting team would be pleased to assist you. Please feel free to contact our office and speak to Kelly or Georgia if you have any queries in relation to this.