Question

During the 2018/19 financial year, ABC Pty Ltd – a non-resident private company (not a SBE) received interest income of $6,000 and a franked dividend of $10,000 (with $3,150 of franking credits attached). ABC Pty Ltd had allowable deductions of $7,800. Required: What will ABC Pty Ltd’s net tax payable or refundable be? All calculations must be shown.

Answer 1

ABC Pty Ltd

(Add)

Interest Income = $6000

Dividend Income = $10000

franking credits = $3,150

Total = $19,150

(Less)

Allowable deductions = $7,800

Net tax payable income = $11,350

Note:

Franking Credit:

A franking credit, also known as an imputation credit, is a type of tax credit paid by corporations to their shareholders along with their dividend payments. Australia and several other countries allow franking credits as a way to reduce or eliminate double taxation.

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.

Calculating Franking Credits

This is the standard calculation for calculating franking credits:

Franking credit = (dividend amount / (1-company tax rate)) - dividend amount

If an investor receives a $70 dividend from a company paying a 30% tax rate, their full franking credit would be $30 for a grossed-up dividend of $100.

To determine an adjusted franking credit, an investor would adjust the franking credit according to their tax rate. In the previous example, if an investor is only entitled to a 50% franking credit, their franking credit payout would be $15.