What are franking credits?
30 Jul 2013
By Shadforth Financial Group
The dividend imputation system was put in place by the Government to avoid the double taxation of company profits. That is, company profit taxed in both the hands of the company and the shareholder. Under the system, shareholders receive a franking credit for the tax paid by the company.
Generally speaking, dividends sourced from company profits are assessable to the recipients, however the recipients are entitled to credits for the Australian income tax paid by the company in earning those profits. As a result these tax credits can be offset against the recipient's tax liability. Any excess imputation credits are refunded to resident individuals, superannuation funds and other eligible taxpayers.
To simplify, when an individual receives a franked dividend (with franking or imputation credits included) it means that tax has already been paid on the dividend (company tax in Australia is currently 30% ). The franking credit can then be used to offset further tax being paid depending on the individual's marginal tax rate.
Note that a holding period rule requires that the shares or units to which the distribution relates to, be held at risk for a certain period (the 45 day rule). There is a small shareholder exemption for individuals whose tax offset entitlement does not exceed $5,000 for the income year.