Author Topic: How franking credits work  (Read 711 times)

marty998

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How franking credits work
« on: July 31, 2017, 02:13:30 AM »
It doesn’t matter what tax rate you are on, you still get the benefit.

If a company pays you $70 in dividends, 100% franked, they are actually paying you $100 : $70/(1-0.3) - with 0.3 being the company tax rate.

The trick is, they are putting $70 into your account and $30 to the tax man. Think of it as PAYG tax, but at a rate of 30% regardless of your marginal rate. Honestly, I don’t know why they don’t just say “$100 with $30 tax withheld”. It would make it simpler for a lot of people to compare the yield of different products.

Come tax time, you tell the tax man that you have earnt $100, but already paid $30 tax on it. If you owe more, or less, than the $30, then the difference will be paid in one direction or the other.


I could write it up myself, but this post above covers it.

A couple of examples:

1) If you are on the 32.5% marginal tax rate, you end up paying $4.50 additional tax on a $70 cash dividend (incl 2% medicare levy).
2) If you hold the shares in a super fund in the pension phase, you receive the $70 cash dividend, you declare $100 as income in your tax return, and you get a tax refund of $30 - so you end up with $100 cash.


atreechange

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Re: How franking credits work
« Reply #1 on: September 16, 2017, 08:01:12 PM »
Just also adding recent changes with the small business company tax rate (<$10m turnover) which has been reduced from the 2016-17 income year to 27.5%, thereby reducing the franking credits available to shareholders:

https://www.ato.gov.au/Business/Small-business-entity-concessions/Concessions/Income-tax-concessions/Small-business-company-tax-rate/#Maximumfrankingcredits

Same formula applied by banksie but substitute 0.3 to 0.275.

The reduced company tax rate of 27.5% will progressively apply to companies with turnover less than $50 million by the 2018–19 income year. From 2024–25, the rate will reduce each year until it is 25% by 2026–27.