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Do you know there are 3 Types of Dividends for company shareholders? 

If you have read our previous post “Comparison on Business Structuresyou will find that company is the only structure that can distribute after taxed retain profits to its shareholders. This is so-called Dividends.

What are the dividends?

When companies make a profit they often reward shareholders by distributing some of this profit by way of dividends. Like individuals who earn an income or profit, companies are also required to pay tax on their earnings at the company tax rate of 27.5%. As such, the dividends received by shareholders may be partially, fully franked, or unfranked (that is, have had the tax partially, fully, or unpaid on that income).

dividend-franking-credit-cash-flow_

Here are 3 types of dividends: 

  1. Fully franked – 100% of company tax paid is attached to the dividend as franking credit to be distributed to shareholders,
  2. Partly franked – less than 100% of company tax paid is attached to the dividend as franking credit to be distributed to shareholders,
  3. Unfranked – No company tax paid is attached to the dividend.

This is called the Dividend Imputation system

Franked-Dividend

 

What Is a Dividend Imputation?

According to the Australian Tax Office (ATO), A dividend imputation is an arrangement in Australia and several other countries that eliminates the double taxation of cash payouts from a corporation to its shareholders. Australia has allowed dividend imputation since 1987.1 Through the use of tax credits called “franking credits” or “imputed tax credits,” the tax authorities are notified that a company has already paid the required income tax on the income it distributes as dividends. The shareholder does not then have to pay tax on the dividend income

 

Fully franked dividends

When companies pay fully franked dividends, they have paid the full amount of tax on their profits. Consider the following example: After making a profit and reinvesting some of those funds back into the business, Company ABC Pty Ltd distributes its remaining profit of $1,000 to investors (shareholders) via fully franked dividends. Investor A owns 10,000 shares in the company, and as such, receives a fully franked dividend of $1,000 (10 cents per share). As the dividend is fully franked, this provides Investor A with $275.00 in franking credits which they can use to offset their personal tax liability.

Depending on Investor A’s marginal tax rate, the impact of the imputation credits is demonstrated in the table below:

 

Personal Effective Tax Rate 0.00% 15.00% 30.00% 37.00% 45.00%
Franked dividend paid by a company $1,000 $1,000 $1,000 $1,000 $1,000
plus Franking Credits $275 $275 $275 $275 $275
Company tax rate 27.50% 27.50% 27.50% 27.50% 27.50%
Assessable Income  $1,275 $1,275 $1,275 $1,275 $1,275
Tax on assessable income $0 $191 $383 $472 $574
less Franking Credits $275 $275 $275 $275 $275
Tax Payable/(Refund or Excess credits for tax offset)  -$275 -$84 $108 $197 $299

 

Claiming a refund of franking credits

 In the example provided, it has been assumed that franking credits have been claimed when an investor lodges their personal tax return. However, this isn’t the only way that shareholders can claim their franking credits. For those people who don’t lodge a tax return, imputation credits can be claimed by completing an ‘Application for Refund of Franking Credits’ form which is available from the Australian Tax Office: ato.gov.au.

 

Unfranked dividends 

Companies are also able to pay unfranked dividends in some instances, in which no franking credits are passed on to shareholders. Using the example below, Investor A would receive a dividend of $1,000 on their shares, but no franking credits, meaning that the income will be taxed at their marginal tax rate:

 

Personal Effective Tax Rate 0.00% 15.00% 30.00% 37.00% 45.00%
Franked dividend paid by a company $1,000 $1,000 $1,000 $1,000 $1,000
plus Franking Credits $0 $0 $0 $0 $0
Company tax rate 27.50% 27.50% 27.50% 27.50% 27.50%
Assessable Income  $1,000 $1,000 $1,000 $1,000 $1,000
Tax on assessable income $0 $150 $300 $370 $450
less Franking Credits $0 $0 $0 $0 $0
Tax Payable/(Refund or Excess credits for tax offset)  $0 $150 $300 $370 $450

 

Do you need professional assistance for your tax concerns? Call BOA & Co. accountants in Chatswood on 02 9904 7886 and our SMSF specialist will be pleased to assist you.

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