Changes are happening - please bear with us while we update our site.

Changes are happening - please bear with us while we update our site. Click here to give us your advice and feedback.

What’s The BIG Deal With Franking Credits?

What’s the deal with franking credits and what does Labor want to change?

Question: What’s the deal with franking credits?

Kyle’s answer:

Australian dividends are often “franked” which means they come attached with a “franking credit”. This comes about as the company has already paid tax on the profit they’ve earned to pay the dividend so the Government recognises this and is a way to avoid you paying tax twice.

Let’s say you own a share of a company that has a profit of $100 and it plans to pay out all of its profit after tax. As companies are taxed at 30%, the company pays tax of $30 so now has $70 to pay as a dividend.

Now let’s assume you have a “marginal tax rate” of 34.5%. If franking didn’t exist, you would now pay tax of 34.5% on this $70 ($24.15) meaning the Government has essentially received $54.15 on the $100 and you only have $45.85 left.

That doesn’t seem fair!

Luckily franking does exist, and the Government essentially ignores that the company paid tax and taxes the profit at the individual investor’s tax rate. So the Government should receive tax of $34.50 (34.5%) and the investor be left with $65.50.

So how does this work in practice?

Dividend received = $70

Grossed up dividend/taxable income = $100 ($70 / .7) – the 0.7 comes about from 100% minus the company tax rate of 30%

Franking credit/tax offset = $30 – grossed up dividend minus dividend received

Marginal tax rate – 34.5%

The $100 is added to the investor’s income and taxed at 34.5% meaning they have $34.50 tax payable however due to the franking credit they have a tax offset of $30 which reduces their tax payable so they only owe tax of $4.50 ($34.50 – $30).

So the investor has received $70 in cash from the dividend and only owes $4.50 in tax, leaving him or her with $65.50. Nice!

Franking credits are in the news all of the time at the moment as Labor is proposing to ban franking credit refunds. I summarised all of Labor’s proposed changes here.

Refunds will only come about if your marginal tax rate is less than 30%, for example, a retiree with lower income or super fund. I’ll cover this in detail on another day however the proposal effectively puts a minimum 30% tax (received by the Government) on all company profits.

[ls_content_block id=”18503″ para=”paragraphs”]

$50,000 per year in passive income from shares? Yes, please!

With interest rates UP, now could be one of the best times to start earning passive income from a portfolio. Imagine earning 4%, 5% — or more — in dividend passive income from the best shares, LICs, or ETFs… it’s like magic.

So how do the best investors do it?

Chief Investment Officer Owen Rask has just released his brand new passive income report. Owen has outlined 10 of his favourite ETFs and shares to watch, his rules for passive income investing, why he would buy ETFs before LICs and more.

You can INSTANTLY access Owen’s report for FREE by CLICKING HERE NOW and creating a 100% FREE Rask Account.

(Psst. By creating a free Rask account, you’ll also get access to 15+ online courses, 1,000+ podcasts, invites to events, a weekly value investing newsletter and more!)

Unsubscribe anytime. Read our TermsFinancial Services GuidePrivacy Policy. We’ll never sell your email address. Our company is Australian owned.

Information warning: The information on this website is published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.

Skip to content