In Australia, franking credits, also known as imputation credits, are a unique aspect of the tax system that aims to prevent double taxation of corporate profits. They are associated with dividend payments made by Australian companies to their shareholders. When a company earns profits, it pays corporate tax on those profits. If the company distributes a portion of its after-tax profits as dividends to shareholders, it can attach franking credits to those dividends.
Franking credits represent the amount of tax already paid by the company on its profits. When an individual receives a dividend with attached franking credits, they can use these credits to offset their personal income tax liability. If the individual’s marginal tax rate is lower than the company tax rate, they may be entitled to a refund of the excess franking credits. On the other hand, if the individual’s tax rate is higher, they may have to pay an additional tax to cover the difference.
Overall, franking credits help ensure that individuals are not taxed twice on the same income—once at the corporate level and again at the personal level. They play a significant role in Australia’s dividend taxation system and can have an impact on the effective tax rates for shareholders, depending on their individual circumstances and tax rates.