The system of Franking Credits and Dividend Imputation in Australia is both of the greatest and most poorly understood elements of our tax system. Therefore, we’ve decided to outline exactly what you need to know, and how as an Australian expat the franking credits can be of use to you.
Let’s start with the basics. Most companies in Australia pay a corporate tax rate of 30% before they distribute some of these profits to shareholders in the form of dividends. The Australian Taxation Office (ATO), very kindly, recognises that the company has already paid tax on these funds and that these ‘credits’ should be passed onto investors. This is done so in the form of franking credits, which reduce the tax liability of the investor.
Here is a simplified example for you.
Let’s assume company XYZ Ltd pays a dividend of $0.70 and has a corporate tax rate of 30%. When you’re filing your annual tax return, your taxable income will be $1.00 (dividend plus the franking credits of $0.30). XYZ Ltd has already paid $0.30 though so this amount will be deducted from your tax liability.
Here’s where it gets more exciting.
Let’s assume you’re earning $45,000 per year, and your tax rate is 15%. As a shareholder of XYZ Ltd, the company that has already paid 30% corporate tax, you could receive a credit in addition to the dividend as your tax rate is lower.
If your personal tax rate was above 30%, then you would simply have to pay the difference between your tax rate and the company’s tax rate of 30%. As you can quickly tell, the dividend imputation system is far more attractive and beneficial to lower income earners.
As Australian expats, we can look to utilise franking credits through our superannuation. Your superannuation will typically pay a tax rate on dividends received of 15%, so much like our first example, your super fund may also receive the franking credit and in turn improve the overall yield of your investments.
The net effect of the dividend imputation system and use of franking credits is that the company’s distribution of profits, in the form of dividends, is carried out at your own tax rate, rather than their own.
Ensure that you’re receiving the full benefit of the franking credits in your own portfolio.
To your financial success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group, division of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is licensed by Global Financial Consultants in Singapore, with a team of Australian-trained, experienced and qualified, allowing us to provide specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.