Are Franking Credits Included in Taxable Income

Franking credits, which are attached to dividends paid by Australian companies, are not included in a shareholder’s taxable income. Instead, they offset the tax payable on other income received by the shareholder. This means that franking credits can reduce the shareholder’s overall tax liability and potentially result in a tax refund. However, it’s important to note that franking credits are only available for dividends paid out of profits that have already been taxed at the corporate level.

Franking credits are a tax offset that companies can claim for certain dividends they pay to shareholders. These credits are designed to encourage the distribution of profits and investment in Australian companies.

Franking Credit Basics

Franking credits are attached to dividends paid by Australian companies out of profits that have already been taxed at the corporate tax rate (currently 30%).
The credit allows shareholders to offset the tax they would otherwise pay on the dividend income, effectively reducing their tax liability.
Companies that pay franked dividends are required to provide shareholders with a statement that shows the amount of franking credits attached to the dividend.

Franking credits can be used to reduce the shareholder’s tax liability in the following ways:

Offset against tax payable: The shareholder can offset the franking credits against their total tax payable.
Refund: If the franking credits exceed the shareholder’s tax payable, the excess can be refunded to the shareholder.

The table below provides an example of how franking credits can reduce a shareholder’s tax liability:

Dividend Income	Franking Credits	Taxable Income	Tax Payable
$1,000	$300	$700	$210 (30% of $700)
Less: Franking Credits	$300		$0

In this example, the shareholder receives a dividend of $1,000 with $300 franking credits attached. The shareholder’s taxable income is reduced to $700, and their tax payable is reduced to $0 due to the franking credits.

Impact on Taxable Income

Franking credits are not included in assessable income for individuals. This means that they do not form part of the income that is taxed. As a result, franking credits can reduce an individual’s taxable income and, therefore, their tax liability.

Franking credits can be claimed as a tax offset on the individual’s tax return.
This reduces the amount of tax that the individual has to pay.
The amount of the franking credit that can be claimed is limited to the amount of tax that the individual has paid on the franked dividend income.

In the example, the individual has received a franked dividend of $100. The franking credit attached to the dividend is $20. The individual has paid $20 in tax on the franked dividend. Therefore, the individual can claim a franking credit of $20 on their tax return, which will reduce their tax liability by $20.

Treatment for Individuals

For individuals, franking credits are not included in their taxable income. This means that when calculating your income for tax purposes, you can exclude any franking credits you receive. This is because franking credits are essentially a tax refund from the company that paid the dividend, so they are not considered to be income.

Treatment for Companies

For companies, franking credits are included in their taxable income. This means that when calculating your company’s income for tax purposes, you must include any franking credits you receive. This is because franking credits are considered to be a form of income for companies.

However, there are some exceptions to this rule. For example, if a company receives franking credits from another company within the same group, those credits may not need to be included in the company’s taxable income.

The table below summarizes the treatment of franking credits for individuals and companies:

	Amount of franked dividend	Amount of franking credit	Tax paid on franked dividend
$100	$20	$20

	Individuals	Companies
Franking credits included in taxable income	No	Yes

Considerations for Dividend Recipients

When determining if franking credits are included in taxable income, dividend recipients should consider the following factors:

Dividend Type: Franking credits are only available for fully franked dividends and not for partly franked or unfranked dividends.
Tax Residency: Only Australian resident taxpayers can claim franking credits.
Dividend Source: Franking credits are only available for dividends from companies that have paid Australian company tax.

If a dividend recipient meets all of these criteria, they will be eligible to claim franking credits on their tax return.

Tax Impact of Franking Credits

The inclusion of franking credits in taxable income has the following effects:

Increases Taxable Income: Franking credits increase the recipient’s taxable income, which can potentially increase their tax liability.
Reduces Tax Payable: Franking credits also reduce the recipient’s tax payable by the amount of the credit.

The net effect of franking credits on a dividend recipient’s tax bill depends on their individual circumstances, including their income and tax bracket.

Table: Impact of Franking Credits on Tax

Income	Tax Bracket	Franking Credits	Taxable Income	Tax Payable
$50,000	25%	$5,000	$55,000	$8,750
$100,000	32.5%	$5,000	$105,000	$26,250

As shown in the table, the tax liability increases with taxable income, but the impact of franking credits is more significant in the lower tax bracket.

Well folks, that’s all for today! I hope you found this article helpful in understanding the ins and outs of franking credits and taxable income. If you have any more questions, feel free to drop a comment below and I’ll be happy to answer them. Thanks for reading, and I’ll catch ya later!