Dividends paid to shareholders by Australian resident companies are taxed under a system known as imputation. This is where the tax the company pays is imputed, or attributed, to the shareholders. The tax paid by the company is allocated to shareholders as franking credits attached to the dividends they receive.
The basic concept of franking credits is to avoid income being taxed twice. If you are an Australian resident shareholder [including compliant SMSFs], the franking/or imputation credits you receive reduce the tax liability from all forms of income [not just dividends].
Currently, when there is an excess in the total franking credits less any income tax liabilities for the income year, the franking credits are refunded.
For example, and not exclusive to –
- A SMSF which is completely in pension mode there is no income tax liabilities and therefore 100% of the franking are refunded back to the members account.
- An individual’s marginal tax rate may be lower that the franking credits received resulting in a cash refund to the taxpayer.
The ALP has indicated that if elected in the upcoming election they will remove cash refunds from Franking Credits, mainly affecting low or no-income taxpayers.