Franking Tax:

Dividends that are paid to shareholders by Australian companies are taxed by the government under the taxation system known as imputation. The system is called an imputation system as the tax that the company is liable to pay is attributed, or imputed to the shareholders. Broadly speaking, this means that the tax paid by the individual company is allocated to the shareholder by way of a franking credit attached to the dividend that is received by the shareholder.

Generally speaking, you can include an amount equal to the franking credit that is attached to the dividend payment as part of your assessable income. You may also be entitled to a franking tax offset that is equal to the amount that you have included as part of your assessable income. Usually, the franking tax offset will partly or fully cover any tax that may be payable on the dividend. Where the franking tax offset you receive is more than the tax payable on your dividends, the excess franking tax may be applied to cover, or partly cover any other tax that may be payable on your assessable income.

In certain circumstances, and subject to any of the ATO’s anti-avoidance rules, you may be eligible for a refund where you have excess franking credits if:

• You receive a franked dividend directly, or through a trust or partnership; and
• Your basic tax liability is less than your franking credits after any other tax offsets you may be entitled to have been taken into account.

Broadly speaking, a dividend is income and is treated by the ATO the same as other assessable income and will generally be grouped together with your other assessable income when determining your total taxable income. In Australia, companies that earn a profit are required to pay tax on the profits that are earned at a rate of 30%.

The effect of the dividend imputation system is that investors who receive a dividend will generally only be taxed the difference between their own tax rate (for example 46.5%) and the company tax rate of 30%. Therefore, if your marginal tax rate is 46.5%, you will only need to pay tax on the franked dividend you receive at a rate of 16.5%.

Our experienced team of Tax Lawyers can advise you on how the franking tax provisions of the Income Tax Assessment Act may affect you. As one of the leading tax law firms in Sydney our tax lawyers have the experience and expertise to ensure that you receive the best possible advice. To book a consultation, please contact us by telephone on (02) 9233 4048 or send an email to info@navado.com.au. 

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