We’ll discuss franking credit in Australia and how it works. Let’s get started:
What is Franking Credit?
In simple words, just like people pay tax annually on their annual income, similarly, companies pay tax on their profit made annually. When a company make a profit, it pays tax on those profits (as per the set tax rate by the government). After that, a dividend is paid to shareholders from the remaining profit after tax. To avoid paying double tax, companies attach franking credits to dividends. This credit shows the tax paid by the company, ensuring shareholders don’t pay tax again for the same income.
Franking credits are an important and unique feature of the Australian tax system. They allow companies to pass on the tax paid on dividends to shareholders, which helps in avoiding double taxation of dividends. Although it may seem complex, understanding franking credits is crucial for small business owners, as it can significantly affect their tax liability and overall financial well-being. As with any area of tax law, the franking credit system can undergo changes.
Who is Eligible for Franking Credits?
Here are the types of organisations that can receive franking credits:
- Charities endorsed as exempt from income tax
- Deductible gift recipients (DGRs) that are exempt from income tax
- Developing country relief funds that are exempt from income tax
- Entities that are exempt institutions and qualify for a refund under their obligations
- Income tax-exempt institutions that are eligible for a refund under a Commonwealth law other than the income tax law
Franking credits are provided to shareholders when companies pay income tax on their taxable income and distribute their after-tax profits. These credits are attached to franked dividends. Franking dividends are received either indirectly as a beneficiary of a trust or directly as a shareholder. Organisations that receive a franked dividend from a New Zealand company, which includes attached Australian franking credits, can obtain a refund of those credits if they are eligible to claim them and the dividend was paid by an Australian company.
New Zealand franking credits can’t be claimed. If the dividend paid by the New Zealand company has not specified that the franking credit is Australian, you need to contact the company to check whether the franking credit is New Zealand or Australian franking credit. Generally, if it’s not specified as Australian, it will be treated as a New Zealand franking credit. If you’re unsure about how this works, you might want to consult with tax accountants in Melbourne.
Endorsed Charities
To qualify for a refund of franking credits, a charity should meet the following conditions:
- meet the residency requirement
- it must be a registered charity with the Australian Charities and Not-for-profits Commission and endorsed by the ATO as income tax-exempt.
Deductible gift recipients
To receive a refund of franking credits, an endorsed income tax-exempt deductible gift recipient must meet the following conditions:
- meet the residency requirement
- must be endorsed by the ATO as a DGR in its own right.
The DGR must be endorsed in its own right, not just in relation to a fund, authority, or institution it operates, like a school building fund.
The following conditions must be met for a DGR to be eligible for a refund of franking credits when it is listed by name as an income-exempt DGR:
- have an ABN
- meet the residency requirement
- must be a DGR mentioned by name in the Income Tax Assessment Act 1997.
Developing Country Relief Funds
An entity qualifies if it is an income tax-exempt relief fund announced by the Treasurer to be a developing country relief fund. It should not be mentioned by regulation as ineligible for the concession.
Conclusion
Small businesses should stay informed about these changes. By managing their franking credits effectively and understanding their potential impact, they can maximize their benefits and navigate the complexities of the Australian tax system. For the latest updates on franking credits, consider contacting Reliable Melbourne Accountants.
More Useful Links:
Bank Reconciliation Statement