What are franking credits?
A franking credit is allocated to a dividend paid to an Australian shareholder by a publicly listed Australian resident company when that company has already paid tax on that dividend. Banks are a good example of an Australian publicly listed company that pays their shareholders dividends that have franking credits attached to them.
Such shares are a common matrimonial asset. The party who retains such shares has the benefit not only of the dividends those shares earn but also the benefit of not having to pay tax on those dividends as this has already been paid by the company. This makes these shares a very tax effective asset to retain in a property settlement.
The rate of tax paid by the company on its dividends can be anything up to its maximum tax rate of 30%. When a company pays tax on dividends at the rate of 30% those dividends are referred to as `fully franked dividends’.
Very often companies pay the full amount of tax (30%) on the dividends they pay to their shareholders. So, if a shareholder has a marginal tax rate of less than 30% after taking into account any other tax offsets they might be entitled to, then they are eligible to receive a refund from the Australian Taxation Office. This system is known as dividend imputation as the tax paid by the company is `imputed’ or attributable to shareholders.
The same rules apply if a person receives a dividend that has been `franked’ indirectly through a trust or partnership. However, if the franked dividend is received through a trust then certain other rules apply that will determine whether or not a tax offset is available as a result of receiving the franked dividend.
Because of the benefit that franked dividends offer to shareholders there are anti-avoidance rules that must be observed in order to qualify for a tax refund. These rules apply when a shareholder’s total amount of franking credits is $5,000 or more. In this case shares must be held by the shareholder for at least 45 days.
The related payment rule is another anti-avoidance rule. This is a payment that has the effect of passing on the benefit of the franked dividend to another person. If there is a possibility that there might be a breach of the anti-avoidance rules then expert advice is essential.