Franking credits themselves do not count as taxable income. Instead, they are a form of tax credit that can offset the tax payable on dividend income.
When you receive a dividend that includes franking credits, you need to include the gross amount of the dividend in your taxable income. This represents the actual cash received from the dividend. The franking credits associated with the dividend are used to offset or reduce the tax payable on that dividend income.
Here’s how it works:
- Gross dividend: The gross dividend, which includes both the cash dividend and the attached franking credits, is included in your taxable income.
- Tax offset: The franking credits are used as a tax offset to reduce the amount of tax you owe on the dividend income. The offset is applied to reduce your tax liability dollar for dollar.
- Refund or carry forward: If the franking credits exceed your tax liability on the dividend income, you may be eligible for a refund of the excess credits. However, the availability of cash refunds for excess franking credits has been subject to certain changes and eligibility criteria introduced in recent years. Alternatively, if you have an insufficient tax liability to fully utilize the franking credits, you can carry them forward to offset future tax liabilities.
In summary, while franking credits are not taxable income themselves, they can impact the tax payable on dividend income. They are used to reduce your tax liability or potentially result in a refund, depending on your individual circumstances and the availability of cash refunds as per the current rules and regulations.
It’s important to note that tax laws and regulations can change, so it’s always advisable to consult a tax professional or refer to the guidelines provided by the Australian Taxation Office (ATO) to ensure you accurately account for franking credits and their treatment in your tax calculations.