What The Frank Is A Franking Credit?

April 6th, 2018
What The Frank Is A Franking Credit?

What the Frank?!

Sure, receiving a “Franking Credit” on your dividend distribution statement is good news, but can you confidently tell us exactly what the amount represents, why you qualify for it, and how to calculate it? If our clients are anything to go by, the answer is usually a vague shake-of-the-head.

Here’s a crash course in definitions of financial terminology – to save you the trouble of that 3+ year Accounting/Finance Degree you may not have gotten around to…

Keeping it simple, a ‘tax credit’ is a sum that can be offset against a tax liability. A ‘franking credit’, otherwise known as an ‘imputation credit’, is a particular type of tax credit that applies to Australian companies and shareholders.

Let’s walk it through. Under current Australian Federal Tax Law, Australian companies are required to pay a 30% company tax on their profits before distributing dividends to their shareholders. Those dividends are then subject to income tax once they are received by the companies’ investors. So, effectively, the final amount that the investor pockets has been taxed twice.

Franking credits exist to off-set this occurrence. How? Well, in some cases, the ATO will give the taxes paid by companies on their corporate profits back to the shareholder at the time of their dividend distribution.

In which cases? The eligibility of an individual’s right to receive a franking credit depends on their own tax rate. If a shareholder’s top tax rate is less than the company’s tax rate – so if you are in the 0%-30% tax bracket – then you qualify to receive a refund due to the imputation credits. Like all things tax-related, it’s proportional.

Finally, since the year 2000, investors who do not pay any tax are able to convert the tax credits into a cash refund from the ATO.

Hold the Frank up!

In cases where an investor’s total franking credit for a financial year exceeds $5000, a 45-day holding period rule applies. Investors must hold their shares “at risk” for 45 days – excluding the dates of purchase and sale – to qualify for their franking credit benefit. If the investors total franking credit does not exceed $5000, they are exempt.

Why the Frank?!

If you’ve got your finger on the financial and/or political pulse, then you may have noticed franking credits making headlines. The Federal Labour Party has introduced a new tax policy this month that will have repercussions for the dividends paid to low income earners and pensioners.

No changes have eventuated as yet, but let’s be frank, you know we’ll keep you posted.