Franked Income: Understanding and Calculating Franking Credits

Franked income is important to know if you own shares or plan to invest in the stock market. There's a phrase you've probably heard at some point, and it might seem confusing at first, but it's really quite simple.

Here are the main points you need to know:

What is franked income?

A dividend is a piece of a company's profit that shareholders receive as dividends. A company can pass on franking credits when income tax has already been paid on this dividend. This system is called ‘imputation’. You are then able to use these franking credits as tax offsets.

What is the purpose of franked income?

The purpose of this system is to prevent double taxation on dividends. 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?

Australian residents will receive dividends via the imputation system. In the case of a non-resident, you will be taxed differently based on your situation, so you should consult an experienced tax advisor.

In addition, how much tax you owe on a dividend depends on your marginal tax rate (the tax you pay on any additional income) and the tax rate for the company issuing the dividend.

What’s the difference between franked and unfranked dividends?

Depending on the situation, shares can be fully franked, partly franked, or unfranked. When a dividend is fully franked, the company pays 100% of the tax on the dividend, so you can take this as a tax deduction. 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:

Sam 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%.

Sam'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 Sam's franking credit payout would be $21.43.

It is important to make sure you get the right information when making any choices and when completing your tax return, because franking can significantly affect the amount of tax you pay.

The team at TAS Tailored Accounting Solutions 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.