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What is Franked Income: Understand and Calculate Franking Credits

5 min read

If you own shares or are thinking about investing in the stock market, then you need to know a little bit about franked income. It might be a phrase you’ve heard at some point, and it might sound confusing but it’s actually quite simple.
 
Here is a brief summary of the main things you need to know:
 
What is franked income?
 
Basically, as the shareholder of a company you receive a piece of the company’s profit and this is called a dividend. When income tax has already been paid on this dividend, the company can pass on what are called ‘franking credits’ for this tax payment. This system is called ‘imputation’. You are then able to use these franking credits as tax offsets.
 
What is the purpose of franked income?
 
In a nutshell, this system has been set up to help you avoid double taxation on your dividend. Double taxation is what happens when you get taxed twice on the same income (ie once by the company and then again by you, in your tax return). It also allows companies to receive tax-free distribution for certain income, again to avoid double taxation.
 
How are dividends taxed?
 
If you’re an Australian resident, then you will receive dividends via the imputation system described above. If you’re a non-resident, then you’ll be taxed differently, depending on your situation, and you should consult an experienced tax agent, such as one of the consultants at H&R Block, to find out more.
 
It’s also worth noting that your marginal tax rate (that is, tax you pay on any additional income) and the tax rate for the company issuing the dividend impacts how much tax you owe on a dividend.
 
What’s the difference between franked and unfranked dividends?
 
Shares can be fully franked, partly franked or unfranked. Fully franked dividends are ones where the whole amount of the dividend carries a franking credit, which means the company has paid 100% of the tax on the dividend and you will be able to take this as a tax offset. Partly franked dividends have only had part of the tax paid, and unfranked dividends have not had any tax paid on them, so you will need to cover this in your tax return. If, once your tax return has been completed and Medicare levy liabilities have been met, you have any excess imputation credits, these will be refunded to you by the ATO.
 
How do the calculations for franked dividends work?
 
Here is a simple example to demonstrate:
 
Lee is a shareholder of a large corporate company and receives a fully franked dividend of $100 from an Australian resident company that has a corporate tax rate of 30%.
 
Lee’s franking credit would be: $100 / (1 - 0.30) - $100 = $42.86
 
The franking credit ($42.86) plus the original $100, means the total dividend would be $142.86.
 
If the dividend was partly franked at only 50% franked, then Lee’s franking credit payout would be $21.43.
 
Franking can significantly impact the amount of tax paid by companies, and by individuals like you, so it’s important to make sure you get the right information when making any choices and completing your tax return.
 
The consultants at H&R Block are experts when it comes to all aspects of your taxes – including franked income – and would be very happy to help you prepare your next tax return to make sure you do everything correctly and get the maximum possible refund that you deserve.
 
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