Introduction
At Ample Finance, we believe it’s crucial for investors to understand the nuances of fully franked dividends. As an Australian investor, you may come across companies that offer fully franked dividends as part of their return on investment. But what does this mean for your tax obligations? In this article, we will explore the concept of fully franked dividends and clarify how they affect your taxation in Australia.
What are Fully Franked Dividends?
A fully franked dividend is a distribution made by a corporation to its shareholders that comes with a franking credit. In Australia, companies pay corporate tax on their profits before distributing these earnings to shareholders. When a dividend is fully franked, it means that the company has already paid tax on the income at the corporate tax rate, which is typically 30%.
The franking credit attached to the dividend indicates that tax has already been paid, which can be passed on to shareholders, potentially reducing their tax liabilities. For instance, if you receive a dividend of $70, you may also receive a franking credit of $30, making the total taxable amount $100 for tax purposes.
How Do Franking Credits Work?
Franking credits are designed to avoid double taxation. When you receive a fully franked dividend, you can offset the franking credit against your income tax liability. Here’s how it works:
Determine Your Tax Rate: The amount of tax you owe on the dividend income will depend on your individual tax rate.
Include Franking Credits: You add the franking credits to your income for the financial year when you report your income in your tax return.
Calculate Your Tax Liability: When you fill out your tax return, you pay tax on the total income (including franking credits) at your marginal tax rate.
- Claim a Refund or Offset: If the franking credit exceeds your tax liability, you are entitled to a tax refund from the Australian Tax Office (ATO).
Do You Really Pay Tax on Fully Franked Dividends?
The answer to this question largely depends on your individual tax situation. Here are some important points to consider:
Taxable Income: Since franking credits are added to your taxable income, you will likely have to pay tax, but you may be eligible for a refund due to the franking credits.
Low-Income Earners: If your taxable income is below the tax-free threshold (which is currently $18,200), you may not owe any tax on fully franked dividends, and you could receive a refund from the ATO for the franking credits.
- High-Income Earners: If you are in a higher tax bracket, you will still have to pay the difference between your marginal tax rate and the corporate tax rate represented by the franking credits.
Tax Implications for Different Entities
It’s also worth noting that different entities have different tax treatment concerning fully franked dividends:
Individuals: As mentioned earlier, individuals can use franking credits to reduce their tax liability, and they may even receive a refund.
Superannuation Funds: Super funds paying tax at a concessional rate of 15% can also benefit from franking credits, making fully franked dividends an attractive investment option.
- Companies: Generally, companies cannot claim franking credits unless they are part of a consolidated tax group.
Conclusion
Understanding fully franked dividends and their associated franking credits can significantly impact your tax obligations and help you make informed investment decisions. At Ample Finance, we encourage all investors to consult with tax professionals to navigate their unique financial situations effectively. If you have any questions about fully franked dividends or need assistance with your investment strategies, please contact Our team of experts. We are here to help you maximise your investment potential while ensuring compliance with Australian tax laws.
