A simple example, below:
Company Profit:
- Your small business Pty Ltd company makes $1,000 profit.
- It pays 25% company tax ($250), leaving $750 in after-tax profit.
Dividend Payment:
- The Pty Ltd company decides to pay the entire $750 as a cash dividend to its owner (AKA shareholder).
- Along with this dividend, it attaches a franking credit of $250, representing the tax already paid by the company.
Owner’s Tax Situation:
- The business owner receives the $750 cash dividend with a $250 franking credit attached.
- The business owner must include both the cash dividend and the franking credit in their personal tax return, totalling $1,000.
Tax Calculation for Owner:
- Assume the owner is in the personal tax bracket of between $45,000 and $135,000, with their marginal tax rate being 32% (30% + Medicare levy).
- Therefore, the tax payable on the dividend received would be $320.
Applying Franking Credit:
The owner can use the $250 franking credit to offset their $320 tax liability. Since the franking credit is less than their tax liability, they would have to pay additional income tax on the dividend of $70.
Summary:
- Company profit of $1,000, pays $250 in company tax, left with $750 cash.
- Cash Dividend paid to the owner: $750
- Franking credit: $250
- Personal Taxable income: $1,000
- Personal income Tax on the dividend (32%): $320
- Franking credit applied: $250
- Additional Tax Payable by the business owner: $70
- Net after tax dividend kept by the owner: $680
Visual Summary:
DISCLAIMER: This is general information only and is not advice. Liability limited by a scheme approved under professional standards legislation.