Franking credits, also known as imputation credits, are calculated based on the amount of tax paid by a company on its profits. The calculation of franking credits involves the following steps:
- Determine the franking rate: The Australian Taxation Office (ATO) sets the franking rate for each company. This rate represents the company tax rate that applies to the profits from which dividends are paid. For example, if the company tax rate is 30%, the franking rate will be 30%.
- Calculate the franking credit: The franking credit is calculated as a percentage of the dividend paid to shareholders. To calculate the franking credit, divide the dividend amount by (1 – franking rate). For example, if the dividend is $100 and the franking rate is 30% (0.3), the calculation would be: $100 / (1 – 0.3) = $100 / 0.7 = $142.86. Therefore, the franking credit in this case would be $42.86.
- Apply the franking credit to tax liabilities: Franking credits can be used to offset the tax payable on the dividend income. If your marginal tax rate is lower than the franking rate, you may be eligible for a refund of the excess franking credits. If your marginal tax rate is higher than the franking rate, the franking credits can be used to reduce your overall tax liability.
It’s important to note that the calculation of franking credits can be more complex in certain situations, such as when there are multiple dividend payments or if you have specific circumstances that affect your tax obligations. Consulting a tax professional or referring to the guidelines provided by the ATO is recommended to ensure accurate calculations of franking credits based on your individual situation.