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How Do Franking Credits Work?

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.

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