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Franking Credits Explained: What Is It, Benefits, And More

The investment world can be a scary feat to face but for those who are just starting, you won’t have to worry any longer. For those who are lost when it comes to shares, we’ve devised a guide on Franking Credits as explained to keep you from scratching your head. Here is a profile discussing the phenomenon, how it works, and its benefits. Let’s get started right now! 

What Is It? 

Franking credits as explained is a type of remittance that companies pay their shareholders in addition to their dividend payments. This is done in countries like Australia as an avenue to decrease or remove double taxation from occurring. Double taxation is getting more than what was offered, typically when an asset or income is taxed twice which can be an issue for filing a tax return. Franking credits explained prevents this, decreasing the tax liability of companies. 

Dividends are profits that a company receives that must be paid through taxes. Because of this, shareholders are able to get a rebate from these dividends. Franking credits as explained can provide payments to a companies shareholders, being able to give out the money evenly. The tax may vary depending on each of their shareholder’s particular financial circumstances. As a shareholder, they are entitled to be given franking credits explained for any tax the company has given back.

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In Australia, franking credits explained are essential for companies with large markets is it further improves their chances for long-term equity ownerships keeping their investors satisfied from the dividend payments. Imputation payments are given to shareholders whom are with the tax bracket of 0% all the way to 30%. For an investor with a tax rate at 0%, they will be given the full tax remittance given from the business to the ATO as an imputation payment. As the percentage increases the payouts further reduce meaning shareholders who have a tax rate more than 30% will not get franking credits explained. 

The holding period to get franking credits explained back is around 45 days. This means a shareholder must keep the share for the length of the purchase date as well as 45 days in order to receive the imputation payment.

How Does It Work? 

For those who are still not sure how franking credits as explained works, here is an example case down below: 

Company X pays 20% tax or 20 cents of tax for each and every dollar of profits made.  If Company X gave payments to its shareholder Sylvia a dividend of 80 cents out of the dollar, she would therefore get back franking credits explained of 20 cents. Then when Sylvia has to do her tax return, she can easily add the 20 cent imputation payment to her income instead of the dividend. Because Company X had already paid the 20 cent tax, this means it has to be paid through double taxation

As a result, dividends can change depending on the tax bracket of its shareholders. As mentioned in the last section, if Sylvia’s tax rate is lower than the business’ tax rate of 20%, then she can receive the benefits offered from franking credits explained.

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This is because she would be given back the extra tax given back as a refund. Rebate could even be used to receive payment for tax on a cheque or on an another income.

However, if Sylvia has a tax rate that is above the company’s 20% tax rate, this would decrease her chances of receiving the same benefits than if she were below it.

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