Franking credits - explaination and calculations

The Australian corporate tax system is a system of taxation that attributes or imputes the tax paid by a company to the shareholders when a dividend is paid to those shareholders. The imputed tax is known as franking credits.

Shareholders receive a tax credit equivalent to the franking credit. The tax credit is a refundable tax credit. If the shareholder tax rate is less than the rate of franking, the Australian Taxation Office will refund the difference to the shareholder. The refund occurs after lodgement of the shareholder’s income tax return.

These dividends are described as being franked. The rate of franking is currently 30%.

The imputation system prevents double taxable of the same income.

Example

Companies are taxed at 30%. This means that a company generating a profit of $100 is taxed $30. This leaves the company with $70 profit after tax.

The company pays the $70 as franked dividend to its shareholder. The shareholder received the $70 cash dividend, and is attributed franking credits worth $30.

When the shareholder reports the dividend as income in their tax return, the shareholder will report $100 of dividend income, and corresponding credit of $30.

Application of franking credits to SMSF

If a SMSF in accumulation phase (accumulation phase rate of tax is 15%) receives $70 of franked dividends:

Gross up dividend amount ($70 + $30) $100 Tax at 15% $15 Franking credit $30 Excess franking credit refundable $15

Using the same example, if the SMSF was wholly in retirement phase (retirement phase rate of tax is Nil):

Gross up dividend amount ($70 + $30) $100 Tax at 0% $0 Franking credit $30 Excess franking credit refundable $30

Franking credits are refundable tax credits, which means it can be applied to tax on other income. Using the same example, if the SMSF in accumulation phase also received taxable contributions, such as employer contributions of $150:

Gross up dividend amount ($70 + $30) $100.00 Taxable contributions $150.00 Tax at 15% $37.50 Franking credit $30.00 Tax payable $7.50

Holding period rule

The holding period rule requires the SMSF to continuously hold shares 'at risk' for at least 45 days (90 days for certain preference shares), not counting the day of acquisition or disposal, to be entitled to the franking credits.

The holding period rule uses the 'last in first out' method to identify which shares will meet the holding period rule.

For example, a SMSF purchase a parcel of 3,000 shares on 1 January 2017. A further parcel of 2,000 shares was purchased 18 May 2017, 4 days before it went ex-dividend. 2,000 shares were sold 1 June 2017. Based on the last in first out method, the 2,000 shares purchased 18 May 2017 is not entitled to the franking credits. The SMSF would be entitled to franking credits on 3,000 shares purchased 1 January 2017.

Taxation of dividends

Dividends are taxed on the shareholders in the year that the dividend is paid. This is the date the company paid the dividend, not the date the payment is received by the shareholder.

For example, if the record date for determining eligibility for the dividend is 15 June 2017 and the payment date is 2 July 2017, the dividend is taxable in the 2017-18 income year.

Do you need help with your situation or if you wish to discuss the above, please contact us. Our contact details.

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