Franking credits are a beneficial aspect of the Australian tax system. They allow businesses and individuals to reduce their taxable income, which can result in saving a lot of money on tax. However, many people don’t know who is eligible for franking credits or how they work.
In this article, we will answer these questions, so keep on reading to find out more!
What are franking credits?
Franking credits are a form of a tax offset in Australia that businesses and individuals may take advantage of for a certain amount of tax they have to pay on their income is directly reduced. They allow taxpayers to decrease their taxable income, saving them a lot of money. Your franking credit limit is determined by the type of investment you have and your marginal tax rate.
Those eligible for franking credits include:
- Retirees, who are eligible for franking credits on their investment income. This includes dividends, interest and rent from investments (such as bank accounts, shares, and property).
- Foreign investors, who are eligible for franking credits on their Australian dividends, interest and rent. However, if the foreign investor’s tax liability is less than the value of the franking credits, they won’t receive a refund.
- Individuals, who are not eligible for franking credits on their business income, but may claim a credit for franked dividends and rent received from investments (such as bank accounts, shares, and property).
- Businesses, who are eligible for franking credits on paid income tax on their profits. These include companies, trusts, and partnerships.
How do franking credits work in Australia?
Franking credits work by reducing your taxable income. The amount of your credit depends on your (or your company’s) marginal tax rate and the type of investment you have. For example, if you have an investment that pays franked dividends, you will receive a percentage of those dividends as a franking credit. This credit can reduce your taxable income by up to 30%.
How to claim franking credits?
The process of claiming franking credits depends on your income tax return:
- If you are lodging a paper tax return, you will need to complete form T53 and attach it to your return.
- If you are lodging an electronic tax return, the relevant details will be automatically entered into the system.
Regardless of how you lodge your tax return, you will need to provide the following information:
- Your Australian Business Number (ABN)
- The name of the company that paid the franked dividend
- The date the dividend was paid
- The amount of the dividend
If you own any shares or are considering participating in the stock market, you should be familiar with franked income. It’s a phrase you’ve probably heard before, and while it seems complicated, it’s actually rather simple.
We hope that our guide has helped you find out who is eligible for franking credits and how you can claim them.
1. Do I have to include franking credits in my taxable income?
No. You can choose to either include or exclude your franking credits from your taxable income. However, if you choose to exclude them, you cannot claim them as a tax deduction.
2. How long do you have to hold a share to get franking credit?
You need to hold the share for at least 45 days to get franking credit.
3. Do all companies have franking credits?
No. Only companies that pay franked dividends have franking credits. To find out more about who is eligible for franking credits, check the article above.