What exactly are fully franked dividends?
Fully franked dividends are dividends distributed by a company to its shareholders from profits that have already been taxed at the company level. These dividends include franking credits that represent the tax the company has already paid. This prevents shareholders from being taxed twice on the same income.
For example, if a company pays you a $700 fully franked dividend, and the corporate tax rate is 30%, it means the company has already paid $300 in tax on your behalf ($700 / (100% – 30%) * 30%). When you declare this income on your tax return, you’ll report $1000 (the $700 dividend plus a $300 franking credit). If your personal tax rate is 30%, the tax on the dividend would be $300, which is exactly covered by the franking credit, resulting in no additional tax on the dividend for you. If your tax rate is lower, you might even get a refund.
Why Consider Fully Franked Dividends?
They represent a tax-efficient way to distribute profits to shareholders. The franking credits can offset the tax liability on the dividends for the shareholders, potentially leading to a lower tax bill or even a tax refund.
How fully franked dividends are paid out?
Declaration of Dividends
The company’s board declares a dividend from its taxed profits.
Dividend Payment
Shareholders receive the dividends with a ‘franking credit’ attached, representing the tax already paid by the company.
Tax Offset
When shareholders lodge their tax returns, the franking credits can be used to offset their tax liabilities.
Key Benefits of Fully Franked Dividends
They prevent double taxation since the company has already paid tax on these profits.
Shareholders can benefit from tax refunds if their personal tax rate is below the company’s rate.
They make investing in the company more attractive, potentially boosting its share value.
Tax Implications
For the Company
The company won’t get a tax deduction for the dividend payments, but they are a distribution of profits that have already been taxed.
For the Shareholder
The dividend income, plus the franking credits, is included in the shareholders’ taxable income but the franking credits are used to offset the tax due.
What are the Challenges and Considerations?
The benefit is contingent on the individual tax circumstances of the shareholders.
Franking credits can only be passed on to the extent that the company has paid tax.
The company must have a franking account balance to declare fully franked dividends.
Case Study : John and Jenny’s Homeware Business and the Strategic Use of Fully Franked Dividends
John and Jenny have spent years building a thriving homeware business, operated through their company, which has turned out to be very successful. Over the years, the business has amassed substantial profits and has a sizeable amount of retained earnings. The company has been diligent in its tax obligations, resulting in a significant balance in its franking credits account.
Now seeking to wind down their active involvement in the business, John and Jenny wish to start drawing income from their company’s accumulated wealth. They plan to do this by extracting $100,000 annually in total, split evenly between them, through fully franked dividends.
Accumulated Retained Earnings: $1,500,000
Franking Credit Account: $500,000
Planned Annual Dividend Payout: $50,000 each
The Fully Franked Dividend Strategy:
Each receives a dividend of $50,000.
The franking credit attached to this dividend is $16,666 for each, reflecting the tax the company has already paid.
Their individual taxable income is grossed up to $66,666, which includes the dividend plus franking credit.
Franking Credit Account: $500,000
Planned Annual Dividend Payout: $50,000 each
The Fully Franked Dividend Strategy:
Each receives a dividend of $50,000.
The franking credit attached to this dividend is $16,666 for each, reflecting the tax the company has already paid.
Their individual taxable income is grossed up to $66,666, which includes the dividend plus franking credit.
The tax payable on the grossed-up income of $66,666 would be approximately $13,466 each.
However, they are entitled to claim the franking credit of $16,666 each.
This results in a tax refund of about $3,200 each, assuming they have no other income.
However, they are entitled to claim the franking credit of $16,666 each.
This results in a tax refund of about $3,200 each, assuming they have no other income.
The strategic use of fully franked dividends allows John and Jenny to not only receive income from their company without paying additional tax but also benefit from a tax refund. This scenario illustrates the effectiveness of tax planning and the advantages of utilizing franking credits.
Note for Similar Business Owners
If you’re like John and Jenny and have a company with accumulated profits, consider the benefits of fully franked dividends as part of your withdrawal strategy. With careful planning and guidance, you can optimize your tax position and potentially receive annual tax refunds. It is important, however, to consult with a tax professional to ensure your plans are compliant with current legislation and tailored to your specific financial situation.
Next Steps for Maximizing Your Benefits with Fully Franked Dividends
Unlock the Full Potential of Your Hard-Earned Profits
John and Jenny’s story is more than just a case study; it’s a pathway to smart tax planning. If their strategy resonates with you, it’s time to take decisive action for your own business.
Consult with Experts
The first step is to schedule a consultation with our team. We specialize in transforming complex tax situations into opportunities for business owners.
Strategic Financial Review
Let us conduct a thorough review of your company’s financial position, including retained earnings and the franking account, to tailor a dividend strategy that fits.
Personalized Tax Planning
We’ll align your personal financial goals with your business performance, ensuring that any dividends you receive work optimally for your tax situation.
Documentation and Compliance
We handle the meticulous documentation needed to support your fully franked dividends, keeping you compliant and stress-free.
Ongoing Support and Adjustment
Tax laws and financial situations evolve. Stay ahead with our ongoing advice and adjustments to your strategy, ensuring you continue to benefit year after year.
Take the First Step Towards a Brighter Financial Future
By tapping into our expertise, you can potentially enhance your income through tax-efficient strategies. Imagine the peace of mind knowing that you’re not only extracting value from your company but also doing so in a way that could result in a tax refund.
Let’s Make It Happen Together
Don’t let complexity hold you back. Reach out to us and let’s start the conversation that could redefine your financial landscape. With us by your side, you’re not just planning; you’re taking control of your financial destiny.
Connect with us today and let’s turn your company’s profits into your personal gain, the smart way.
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Frequently asked questions
What is a fully franked dividend?
A fully franked dividend is a dividend paid to shareholders by a company out of its after-tax profits, with a franking credit attached that represents the tax already paid by the company. This can be beneficial for shareholders when they file their taxes.
How do franking credits work with fully franked dividends?
Franking credits are a type of tax credit that shareholders receive with their dividends. They represent the tax amount the company has already paid on its profits. When shareholders file their taxes, these credits can offset their income tax liability.
How does paying a fully franked dividend relate to tax-efficiently withdrawing money from the company?
Are fully franked dividends better than unfranked dividends?
Fully franked dividends can be more beneficial than unfranked dividends because they come with franking credits, which can reduce or even eliminate additional tax on the dividends for shareholders.
Can I get a refund for excess franking credits?
Yes, if the franking credits attached to your fully franked dividends exceed your total tax liability, you may be eligible for a refund from the ATO.
What should I look for on my dividend statement to identify a fully franked dividen
On your dividend statement, look for the amount of the dividend and the franking credit. A fully franked dividend will indicate that 100% of the dividend amount is franked.
How do fully franked dividends affect my tax return?
On your tax return, you’ll need to declare the full amount of the dividend plus the franking credits as income. However, you’ll be able to use the franking credits to offset your tax payable.
Why do companies pay fully franked dividends?
Companies pay fully franked dividends to distribute profits to shareholders in a tax-efficient manner, avoiding double taxation of those profits since the company has already paid tax on them.
Can a company always pay fully franked dividends?
A company can only pay fully franked dividends if it has paid enough corporate tax to cover the franking credits for the dividend. This requires careful management of the company’s franking account.
How do I report fully franked dividends on my Australian tax return
Fully franked dividends should be reported on your tax return under the dividend income section, along with the franking credits attached to them.
How can you help companies with fully franked dividends?
We help companies plan how they distribute their profits so they can get the most out of franking credits. Think of it as making sure they use a special tax benefit to the fullest.
What assistance do you provide to shareholders regarding fully franked dividends?
We give personalized advice to shareholders on how to use franking credits effectively. This means helping them understand how these credits can benefit their taxes.
What's your role in ensuring compliance with ATO regulations?
Our experts make sure that when companies give out fully franked dividends, they follow all the rules set by the ATO (Australian Taxation Office). This way, everything is done correctly and legally.
How can companies and shareholders benefit from fully franked dividends?
When companies and shareholders work together to use fully franked dividends, they can get the most out of their profits and tax credits. This helps both parties have a tax strategy that’s efficient and follows the rules, so everyone benefits.
What does managing a franking account for my company mean?
Managing a franking account for your company is like keeping track of a special savings account. This account holds credits that your company gets from paying taxes. You need to make sure there’s enough money in this account so that when your company pays dividends (profits to shareholders), those dividends can come with a tax benefit for the shareholders.
Why do shareholders need to consider their taxes when they get dividends?
When you receive dividends, it’s important to know that there are two parts to them: the money you get as dividends and something called “franking credits.” These credits represent the taxes your company has already paid. To make the most of this, you should consider your personal tax situation because it can affect how much tax you owe or get refunded.
What should I do with dividends and franking credits on my tax return?
When you file your tax return, don’t forget to include both the money you received as dividends and the franking credits. This ensures you get the right tax benefit or pay the correct amount of tax. It’s like reporting all your income accurately so you don’t have any tax issues.