Can my Company pay a Franked Dividend?
Franked Dividends pay the shareholder a dividend and credit some of the tax paid by the Company. This is called franking and is transferring the tax as a credit when the Company pays Profit to shareholders and ensures that the tax paid is passed onto the shareholders.
Running your own Company will mean that, as a shareholder, you will want to access these profits. This is done as a Dividend.
A dividend can only be paid to Shareholders when the company has retained earnings and is solvent. Meaning that the company can pay its debts at the time of paying the dividend.
In simple terms, your company is a money box, and the only way to legally take it out as a shareholder is to pay profits as a Dividend. This will either be paid to you as a Franked or unfranked Dividend. If your Company owes you money, then this can be taken as a loan repayment against a Debit Loan account.
Profits can be paid to shareholders from the Company’s retained profits as a dividend.
A company pays distributions to its members. Shareholder members may be individuals or other entities such as your family trust. The amount of a dividend allocated will depend on the number of shares you hold and the percentage of ownership.
What is a Franked Dividend and a Franking Credit?
Your Company, after paying a tax payment, either in the form of a company tax instalment or year-end company tax, will record these amounts as franking credits in the Company Franking Account. This account is off-balance sheet.
Presently, the Company Tax rate is set at 25% (2024 tax rate) for those who are active and don’t generate passive income.
When the Company issues a dividend, it will issue a distribution or dividend statement to each shareholder member.
A Dividend statement is then given to each shareholder who receives a distribution outlining their entitlement and any franking credits attached to it.
Dividends paid by your company will be either a Franked Dividend or an unfranked Dividend.
The franking amount will depend on the availability of tax paid by the company in the company’s franking account. If the company has paid no company tax, a franked dividend may not be paid. Therefore, the Company may choose to issue a dividend, as unfranked.
The Dividend statement will show the amount of franking credit attached to the distribution. The statement will also show how much of your dividend will be franked. Only resident taxpayers of Australia can claim a tax offset for a franking credit attached to a dividend.
Non-resident taxpayers, receiving a franked distribution, are exempt from withholding tax in Australia based on the extent to which it’s franked. Therefore, if a dividend is 100% franked, there is no final tax to pay or declare as a non-resident.
We recommend reviewing your Company’s Retained Profits regularly. Leaving large profits in retained earnings can lead to tax problems down the track when you decide you need to access these profits. Regular Dividends result in good planning and eliminate the problem of tax implications being paid out in large Dividends.
Grossing up your Dividend on your tax return.
An individual shareholder in your Company will pay you a dividend. The franked dividend from the Company must include the amount, together with any franking credit, as declared taxable income. A franked dividend is known as “grossing up your Dividend”.
Receiving a franked dividend also entitles you to a tax offset equal to the” franking credit amount.
For tax purposes, this effectively means any tax up to 25% on the income will result in a neutral result.
Will it help my refund?
A tax offset can result in a refund or excess tax payable. The tax may result in the need to pay additional tax liability on the distribution, which is known as a ‘top-up’ tax. Taxpayers with lower taxable incomes can receive a refund of all or almost all the franking credits. This will be dependent on their income position. For some taxpayers, they may have to pay top-up tax as they are on the higher tax rate above 25%
As your accountant, we try to work with you to obtain the best result for your tax position.
Managing how you declare your declared Frank Dividends using the right tax opportune time. The aim is to help smooth out your tax position and reduce your retained earnings in the Company.
Contact us for help 03 9597 9966
