NOTE: we do our best to share general resources so you can do your own research. When it comes to tax, this is personal to your investing and financial position. We are not a tax advisor, and don't have any information about your personal situation. When investing, there may be tax implications and you should get advice from a licensed tax adviser.
It’s tax time again! One of the most difficult parts of DIY tax in Australia is figuring out how the level of franking impacts the amount of tax you need to pay - and in some cases you might even be up for a tax refund!
The impact of franking credits on your take home income depends on multiple things - the percentage of franking, your tax bracket, and of course, the dividend amount!
This article explains what franking credits are, how to calculate franking credits and how our franking credits calculator works.
If you just want to skip straight to our user-friendly Franking Credits Calculator.
What are franking credits
A franking credit is a tax credit paid by companies to their shareholders at the same time as dividends are paid. Since corporations have already paid taxes on the dividends they distribute to their shareholders, the franking credit allows them to allocate a tax credit to their shareholders. Depending on their tax situation, shareholders might then get a reduction in their income taxes or a tax refund.
In Australia, franking credits effectively eliminate double taxation for local investors in local companies by allowing companies to pass on a tax credit equal to the amount of tax the company has already paid on the dividend.
While franking credits make a lot of sense (why tax investors twice on dividend earnings?!), Australia (and the handful of other countries who allow franking credits) are the exception rather than the norm.
How to calculate franking credits
A franking credit is simply the amount of tax paid on eligible dividends.
The general formula for franking credits is:
Fully franked means that the franking percentage is 100%. If a dividend is partially franked, that means the franking percentage is less than 100%. Unfranked means the dividend has no franking credits attached.
Here in Australia, our income is subject to the ATO marginal tax threshold, whilst companies, dependent on their size, are obliged to pay 27.5% or 30% tax. The 30% tax rate applies to all large corporations, so is the more widely stated (and used) figure.
So, how does this impact you? Well, it depends on your income tax bracket! For example, here's how a fully-franked $70 dividend impacts your bottom line, depending on your tax rate.
The Franking Credits Calculator
Instead of doing the maths yourself, just use our simple calculator to do the heavy lifting!
Simply enter the following three things (red circle below):
- Your total dividend amount ($ of Dividends)
- Your franking percentage (% of Franking)
- Your shareholding (# of Shares)
Once you’re done, we’ll calculate the Franking Credits you can claim (blue circle below).
Note that the graph at the bottom also lets you estimate your post-tax dividend amount!
The red column is the tax amount you owe (if your tax bracket is more than the company tax rate), or are owed (if your tax bracket is less than the company tax rate).
The blue column is your after-tax dividend value (or essentially the dividend, plus the tax difference).
It's that simple!
Check out our Franking Credits Calculator yourself. We hope this article has made your tax time easier!
Happy investing,
Kurt
At Pearler, we pride ourselves on the quality of the general financial advice we give. Please note though, that this advice has not been tailored for you. You have unique financial goals, circumstances and needs which may make this advice inappropriate, and it is important that you know whether it applies to you. If you are unsure we urge you to speak to someone you trust who is competent with money and understands your individual needs, whether they be a trusted friend or accredited professional.
