The MWL 2 Minute Guide to Franking Credits
Here at MWL Financial Group, we want to make finance easy for people to understand. As such, we have prepared a short guide to franking credits.
What are franking credits?
Franking credits, also known as Imputation Credits, are used to stop ‘double taxing’ company profits. As companies are not obliged to pay tax on profits distributed to shareholders via dividends (yet often do), franking credits are the safeguard against the possibility of double taxation, particularly on the end of the shareholder.
How do franking credits work?
When a dividend is paid to a shareholder, it can be fully franked (100%), partially franked or unfranked. To illustrate how franking credits work and to make things easiest to understand, we will apply a scenario where a shareholder receives fully franked dividends.
Say, for example, a shareholder receives $70 in dividends from a share that is fully franked. This means that the entire dividend before corporate tax was applied was $100 ($70 dividend + $30 corporate tax rate.
If the shareholder’s personal income fell into a tax bracket of 15%, this would mean they would only be required to pay $15 income tax on the dividend, rather than the higher 30% tax rate. The shareholder would therefore receive a $15 tax refund or franking credits. However, this can highly change dependant on the shareholder’s personal income tax rates.
How does it affect me?
Simply put, franking credits, along with any dividends received, will impact upon your assessable and taxable personal income. Contact a MWL Financial Adviser in order to receive information and advice catered to your personal financial needs.