Knowledge is power in every aspect of life. This is especially true when dealing with economics and everything surrounding them. Today’s discussion focuses on understanding dividends and franking credits calculation in Australia. Read on to the entirety to find out more.
What is Franking Credit?
In Australia, corporations pay some type of tax credit to their shareholders together with their dividends. The tax credit is now referred to as franking credit or imputation credit. This doesn’t happen only in Australia, as other countries have adopted the culture and allowed these. They are a suitable way to minimize or do away with double taxation.
If a company has already been taxed for the dividends distributed to their shareholders, the credit enables them to assign a tax credit to the shareholders. The tax situation of these shareholders will determine the reduction amount on their income as well as the tax refund. In this case, it is essential to know more about franking credits calculation to enable you to work things out in your investment expectations.
You need to understand the basics of franking credits calculation. Australian companies are required to pay a flat tax rate of 30% on all profits yielded. Therefore, the amount of dividend received will depend on whether the investor payment is fully franked, partly franked, or not franked. These are the types available.
Fully franked credits mean that 30% tax is paid before the shareholder gets their dividend.
Partial franking is when 30% tax is paid on the franked portion of the dividend and this means that the shareholder will be taxed for the remaining unfranked dividend.
Unfranked credit means that no tax has been issued for the dividends.
When doing franking credits calculation, the amount is portrayed as a percentage. If it shows 75% as the partly franked credit, it means that the corporation has already been taxed on the 75% dividend at a flat tax rate of 30%, leaving out the remaining 25% of the unfranked dividend.
How does franking credits calculation work?
Dividends are considered a form of income in various countries. That said, the dividends will be put together in an income category to calculate total taxable income. As mentioned, the Australian government sets its tax at 30%, meaning the taxable income is calculated at that rate.
Before this was introduced, the tax authority in the country imposed a tax on both company profits and paid out dividends from investors. This means that the dividend income experienced double taxation.
Today, the country’s tax authority only taxes one front, whereby the shareholders receiving dividends will not pay added tax (this depends on their marginal tax rate). An investor with a 30% marginal tax will not incur more tax in dividends since the company will have paid 30% tax on the earned profits. However, if the shareholder has 45% as marginal interest, they are required to pay the difference between 45% and 30%.
If the tax rate of the shareholder stands at 0%, they fully receive a refund on these.
Franking credits Calculation
The formula used in franking credits calculation is as follows;
Dividend quantity x company tax rate or 1-company tax rate x fraction
Since the tax rate for Australian companies stands at 30%, the calculation goes as follows;
Dividend amount x 0.30 / 0.7 x proportion
Franking credit was recently introduced as an additional incentive for shareholders in the lower tax brackets. This has encouraged them to invest in companies that provide dividend payments. Therefore, it is essential to know how to calculate these.