Question

In Australia, when calculating the total tax liability of an individual resident what happens with dividends earned from an investment and franked credits

Example: An individual made $10,000 from dividends and $3,000 of those were franked credits.

Question: using this formula income tax = (taxable income x tax rate) - tax offsets. Would I add the 10,000 to the taxable income and then add the 3,000 franked credits to the tax offsets. If not how and where would I input the numbers into he formula?

Answer 1

Dividends are paid out of profits which have already been subject to Australian company tax. Recognising that it would be unfair if shareholders were taxed again on the same profits, shareholders receive a rebate for the tax paid by the company on profits distributed as dividends.

These dividends are described as being 'franked'. Franked dividends have a franking credit attached to them which represents the amount of tax the company has already paid. Franking credits are also known as imputation credits.

The shareholder who receives a dividend is entitled to receive a credit for any tax the company has paid.

In the present case, taxpayer receives $13000 taxable income from company, being $10,000 dividend income and $3000 franking credit. So, below mentioned is the way in which the numbers need to be input into the formula:-

Gross Tax payable = Taxable income * Tax rate
Tax payable/ (refundable) = Gross Tax payable - Franking credit rebate

So, therefore formula mentioned in question for calculating income tax is correct.