ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Dividend Imputation and Franking Credits

Updated on October 20, 2013

Dividend Imputation

Dividend imputation was introduced in Australia on July 1st 1987 as a means of relieving the double taxation of company dividends. Prior to implementation the company paid tax at the corporate tax rate and the investor then paid tax upon receipt of the dividend.

Imputation allows Australian companies to pass on a franking credit with the dividend payment. The franking credit represents the tax already paid by the company and serves to reduce the tax burden on the dividend recipient.

Dividends can be fully franked, partially franked or unfranked depending on where the company has derived their profits and the resultant tax payments to the Australian Taxation office. Where an investor has recieved excess franking credits they are entitled to claim a refund from the ATO in their tax return. Franking credits can only be paid to Australian residents.

In the past foreign investors have attempted to gain a benefit by entering arrangements to sell their holdings to Australian residents who would receive the dividend and franking credit and then immediately sell the shares back to the original owner at a discount which reflected the dividend and franking credit forgone. To alleviate this the ATO ruled that shares must be held for at least 45 days for the holder to qualify for franking credits.

Calculating Franking Credits

To calculate the franking credit we multiply the franked amount of the dividend by the company tax rate divided by 1- the company tax rate. This amount is then added to the cash portion of the dividend received and the grossed up amount is the assessable income for the dividend received. Tax is calculated on the grossed up amount and the franking credit is then applied thus reducing the tax burden on the investor.

Example:

A taxpayer owns 10,000 shares in XYZ Ltd which pay a fully franked dividend of $2.10.

The company tax rate is currently 30% and the tax payer is on the highest marginal tax rate at 45% excluding medicare levy.

Dividend received = 10,000 x 2.10 = $21,000

Imputation credit = 21,000 x (0.3/0.7) = $9,000

Grossed up amount = 21,000 + 9000 = $30,000

Tax payable = 30,000 x 0.45 = $13,500

Net income tax =13,500 - 9000 =4,500


Taxation and Franking

Franking credits can mean real money in a low tax environment. Those on low marginal tax rates can potentially get some real money tax returns. Can't think of a way to get yourself into a low tax bracket? The vast majority of working Australians have superannuation or pension funds. Franked dividends can be accessed through investment in specialised funds whose mandate is to invest for dividends. Some investor directed portfolio services allow for direct share investment. As do self managed funds. Readers are reminded of the need for personal professional advice before embarking on these types of strategies.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)