What are franking credits?

24 Apr What are franking credits?

Image result for confused manIt’s a strange name but franking credits are big business. First introduced by the Hawke/Keating government in 1987, the concept of franked dividends has become
a vital component of share investing.
Prior to the advent of franking credits, a company would pay tax on its profit and then distribute this after-tax profit to the shareholders.

The ATO (Australian Tax Office) would then tax that same income stream without any consideration to the tax already paid on it. In effect, the ATO was double dipping on the tax it was taking on corporate profits with a tax rate at the time of 46% on companies and 49% on individuals.

This meant that on $100 of company profit, should that be paid out as a dividend, the ATO would take 73 percent!

Franking changed this.  Since 1987, the tax paid on a dividend income stream would take into consideration the tax already paid by that company.  The effect of this is that the highest amount that can be taxed is equal to the top marginal tax bracket.

In 2000, further changes were introduced and shareholders could receive a refund of the company tax paid if their personal tax rate was lower than that of the company.  Australia is the only country in the OECD that provides refunds to shareholders for excess franking credits.

Why are they gaining attention?

Franking credit refunds have been in the news of late because of comments and draft policy from the Opposition Party about restricting the refund of franking credits to shareholders.

While the dividend imputation system is safe and unlikely to change, the amendments introduced in 2000 allowing the refund of franking credits is under some pressure to change.

The opposition has already made a number of concessions to protect those on pensions, but is firming up its stance on the proposed legislative changes.

Who will be affected?

Those potentially greatest hit by the proposed changes to the refund of franking credits will be retirees.  Anyone on a tax rate that is below the company tax rate might be the recipient of franking credit rebates.

Those that are retired and living off their retirement savings are the most likely to be impacted, with Self-Managed Superannuation Fund (SMSF) investors in the pension phase likely to be the hardest.

Of the $10.7 billion of revenue that the opposition believes it will claw back in franking credit refunds, it’s estimated that $6.9 billion of this will come from superannuation funds.

Will changes to franking credit rules likely impact you? Give us a call on 4926 2699 to discuss!

Forsythes Business and Financial Advisors
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