A brief synopsis of Franking Credits
There has been much discussion about franking credits, especially since Shorten came out saying franking credits were a gift.
To think about franking credits as a gift, proves the ignorance around our tax system. Yes, Shorten is ignorant about our tax system. Anyone who thinks franking credits is a gift is ignorant…. but let me explain before going on a full blown rant.
What are franking credits?
Dividends paid to shareholders by Australian resident companies are taxed under a system known as imputation. This is where the tax the company pays is imputed, or attributed, to the shareholders. The tax paid by the company is allocated to shareholders as franking credits attached to the dividends they receive.Australian Tax Office
Put simply, franking credits are where a company pays tax on the shareholders behalf and the credit for that tax is passed to the shareholder.
How do franking credits work?
- Shares are an investment into a company. You pay money for a share of that company.
- The company makes money for the investors.
- The return on investment is given to the shareholders as dividends.
- Shareholders pay tax on the dividends, not the company as they are making the money for the shareholder.
- Some of these dividends have no tax paid on them, they are unfranked dividends. The shareholder has to pay tax on these dividends at their personal tax rate.
- Some of these dividends, the company has paid tax on them at a rate of 30%, these are franked dividends. The company has paid tax on behalf of the shareholder.
- As franked dividends have already had tax paid on them, they come with a credit, so there is no double tax on the said earnings. The shareholder pays tax on the franked dividends at their personal rate, at the same obtains the credit from the tax that the company has already paid (think of it as a refund on overpaid tax).
A small example.
- Sadie has worked all her life as an Administration Clerk. Sadie has a self managed super fund, is now 72 and is in pension phase of her retirement. Part of Sadies super is in shares that pay dividends. Sadie relies on these dividends to live. The dividends Sadie receives are franked and unfranked dividends. The unfranked dividends have had no tax paid on them and since sadie pays no tax on earnings from her super, Sadie has all the money to buy food. Some of the dividends are franked, which means the company has paid tax on Sadies earnings already. Sadie only gets 70% of what the earnings are worth and also receives imputation credits for a refund of tax paid.
Essentially, If the government stops Sadie from obtaining the franking credits, Sadie is paying 30% tax when she should be paying none. This equates to the government stealing 30% of Sadie’s earnings.
Franking credits are certainly not a gift, they make up the whole amount of the dividend, and to take the franking credits off people is flat out stealing.
SL Accounting Services
blog site moneyhacks-au.com
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