Franking, my dear, I do give a damm!
By Phillip Mortimer
A Belarusian, South African, and a Filipino walk into an accountant’s office, as they do their every working day at Lincolns. And it’s great having these people from all over the planet giving us their view of the world. But there is one thing we have had to teach them that is Australian about the job we do and that is dividend imputation. Dividend imputation, also known as franking, is not uniquely Australian but it’s only us, Chile, Malta and New Zealand that use this taxation system with a partial system operating in Canada, Korea and the United Kingdom (we have a few from there as well!).
So what is dividend imputation?
This is a system devised to eliminate the double taxation of dividends. Prior to the introduction of this system, a company would pay tax on profits. Then they would pay shareholders a dividend after the tax was paid and then the dividend was taxed in the hand of the shareholder. Then in 1987 the Treasurer, Paul Keating, introduced dividend imputation which enabled companies to pass on a tax credit, known as a franking credit, attached to the cash component on the dividend equivalent to the tax that was paid. This franking credit could be used to offset any tax liability but only to the point the shareholder's total tax liability could be reduced to zero. In 2000, Peter Costello as Treasurer changed the rules so that any excess franking credits could be refunded back to the taxpayer.
Why the fuss over franking?
Australia has a relatively high level of investors who own shares. The latest ASX/Deloitte survey (May 2017) shows 31% of all adult Australian hold shares (down from 36% in 2014). Much of this level of interest stems from the government privatisations such as Telstra, Commonwealth Bank and Qantas. Accompanying this was the growth in self-managed super funds. So now nearly a third of all Australian adults will be receiving dividends from their share investments and many of these will have franking credits attached.
How does dividend imputation work?
Let me explain this by example:
Lucky Country Ltd is a large ASX listed company
It makes $200 profit before tax
The large company tax rate is 30% so the tax bill is $60
The Profit After Tax is $140
The board decides to pay a dividend to their shareholders at 50% of after tax profits
Therefore, the shareholders will receive $70 in cash and a franking credit of $30. So the shareholders include in their tax return the income from the dividend as $100 ($70 + $30). The income tax payable will be based on this amount then the $30 franking credit is then offset against the tax liability.
How does this work for the shareholders?
That will depend on the marginal tax rate of the shareholder. Below is a table showing the various outcomes based on various shareholder tax rates from this dividend:
As you can see the value of these franking credits will differ between various shareholders depending on their tax rate. Also, as these franking credits are applied against the total income of the shareholder they can be used as a tax planning tool.
What about small companies?
Franking is not limited to large listed companies. All companies have the ability to pass on franking credits to their shareholders. Many small businesses are owned through a company structure so they too can attach franking credits to any dividends paid. The only pre-requisites are the company has paid Australian tax prior to paying the dividend and the shareholder has owned the shares for more than 45 days.
There is now a difference between large and small companies. From the 2017 financial year the government has lowered the tax rate for companies with turnover of less than $10 million to 27.5%. Those small companies that are not operating a business remain at 30%. Using the earlier example for a small business, going forward the $70 dividend will now have a franking credit of $26.55.
Our foreign colleagues are now the wiser. Though, to be frank (pardon the pun), who’d have thought we could teach them a new trick when it comes to tax.
Still not sure?
We can help you with your franking credits, call us on 9841 1200 to discuss.
Get to the Point - a Motor Neurone Disease Fundraiser
Would you like to support our own Gary Philpott (in budgie smugglers) doing an ice bucket challenge for MND? If so ...
On Saturday 16 September, a fundraiser will be held at the Emu Point Sporting Club from 1.30pm to raise funds for people living with MND. Everyone is welcome to join in the activities on the day to help raise money for this very special cause.
Gary and his wife Robin live at Emu Point and personally know two local Emu Point residents diagnosed with MND. Seeing the impact on family and friends of this debilitating disease encouraged Gary to take up the challenge.
Please sponsor his efforts - 100% of all donations go to the Motor Neurone Disease Association of WA.
Donations can be made to the account below or keep an eye on our Facebook page for our own fundraising effort to sponsor Gary's ice bucket challenge.
BankWest
Account name: MNDAWA
BSB: 306 004
Account number: 4177 960
See the flyer for more details.
