Franked Dividends and Franking Credits explained

In Community Coast News edition 206, Geoff Mitchell of Kariong wrote “Could someone explain to me how the franking component of the Labor Party’s promises works?”
Let’s look at Income and Income Tax with regards to Franking Credits.
Prior to 1987, Australian company profits were subject to Double Taxation because a company’s profits were taxed at the company tax rate and then the dividends in the hands of the shareholders were again taxed at the shareholders’ marginal tax rate.
So that the company tax profits were only taxed once in the hands of the shareholder, a system of Franked Dividends and Franking Credits was devised by Paul Keating.
It works similarly to an employee having tax taken from wages.
After the employee completes a Tax Return including all income and deductions, the ATO will determine the Taxable Income and tax payable at the marginal tax rate.
If too much tax has been deducted, the employee is entitled to a Tax Refund.
Now let’s look at income from investing in Australian companies which have paid Fully Franked Dividends at the company tax rate of 30 per cent.
Simply: Franked Dividend received: $70.00.
Franking Credit payed to ATO: $30.00.
Taxable Income: $100.00.
The investor received $70, the ATO received $30 and the Taxable Income was $100.
Same as with the employee, the Investor completes a Tax Return including all income and deductions and the ATO will determine the Taxable Income and whether Tax is Payable or Refundable.
If the Self-Funded Retiree is an investor in tax paying Australian companies, his Taxable Income may be less than a Marginal Tax rate of 30 per cent, in which case he is entitled to a Tax Refund because his Franking Credits exceed his tax obligations.
For older Australians who have forgone receiving an Aged Pension and rely on their investment income, the announcement in March, 2018, that the ALP’s policy, if elected, was to disallow franking credit refunds would, in other words, confiscate the tax which has been collected from low income self-funded retirees.
However, the ALP backed down with a “pensioner exemption” to 320,000 individuals on social security benefits held before or on March 28, 2018.
As I have said, the proposed policy will mean many shareholders who have a marginal tax rate below 30 per cent would no longer receive a cash refund from franking credits.
The sum result is that many self-funded retirees who rely on income from investments with fully franked dividends will suffer a loss of income of around 30 per cent if Labor is elected, and their policies on Refundable Franking Credits pass in the Senate.
I hope your readers now have a better understanding of Franked Dividends and Franking Credits.
The proposed ALP policy is an attack on one of the cornerstones of the Australian retirement system, that of voluntary savings for retirement.

Email, May 5
Barry Carson, Terrigal

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