Let’s consider an example to illustrate how franking credits work:
Suppose you are an Australian resident shareholder who owns shares in XYZ Company. XYZ Company declares a dividend of $1,000 and attaches franking credits of $428 to the dividend. The franking rate for XYZ Company is 30%, which represents the company tax rate.
Here’s how the example would play out:
- Gross Dividend: The gross dividend you receive is $1,000. This is the cash dividend plus the attached franking credits.
- Franking Credit Calculation: To calculate the franking credit, you divide the gross dividend by (1 – franking rate). In this case, $1,000 / (1 – 0.30) = $1,000 / 0.70 = $1,428.57. Therefore, the franking credit attached to the dividend is $428.57.
- Tax Offset: When you include the dividend in your taxable income, you will also include the franking credit. The franking credit can be used as a tax offset to reduce your tax liability on the dividend income. If your tax liability on the dividend income is $300, the franking credit of $428.57 would fully offset this tax liability, resulting in no additional tax payable.
- Excess Franking Credits: If your tax liability on the dividend income is lower than the franking credits received, the excess franking credits can be used to reduce other tax liabilities or potentially result in a tax refund.
It’s important to note that the above example is for illustrative purposes only and may not reflect the actual tax rates or calculations applicable at the time of your investment. The specific tax rates, franking rates, and rules can vary, so it’s recommended to consult a tax professional or refer to the guidelines provided by the Australian Taxation Office (ATO) for accurate calculations based on your individual circumstances and the prevailing tax regulations.