Calculate Franking Rate 2017-18

Calculate your franking credits for the 2017-18 financial year with this accurate tool

Comprehensive Guide to Calculating Franking Rates for 2017-18

Franking credits (also known as imputation credits) are a fundamental aspect of the Australian tax system that help eliminate the double taxation of company profits. When a company pays tax on its profits and then distributes those profits as dividends to shareholders, the shareholders receive a credit for the tax already paid by the company.

This guide will walk you through everything you need to know about calculating franking rates for the 2017-18 financial year, including the formulas, tax rates, and practical examples to help you maximize your tax position.

What Are Franking Credits?

Franking credits represent the tax that a company has already paid on its profits before distributing them as dividends. When you receive a franked dividend:

• The dividend comes with an attached franking credit
• You must include both the dividend and the franking credit in your assessable income
• You can use the franking credit to offset your tax liability

Key Changes in 2017-18

The 2017-18 financial year saw several important changes to franking credit rules:

1. Small business company tax rate reduction: The tax rate for small business entities (with aggregated turnover less than $25 million) was reduced to 27.5% (down from 30% in previous years)
2. Franking account rules: Changes to how franking accounts are managed, particularly for private companies
3. Dividend washing integrity measures: New rules to prevent dividend washing arrangements

How to Calculate Franking Credits

The basic formula for calculating franking credits is:

Franking Credit = (Dividend Amount × (1 – Tax Rate)) ÷ Tax Rate

Or alternatively:

Franking Credit = (Franked Amount ÷ (1 – Tax Rate)) – Franked Amount

Company Type	2017-18 Tax Rate	Franking Credit Formula
Standard Company	30%	Credit = Dividend × (30/70)
Small Business Entity	27.5%	Credit = Dividend × (27.5/72.5)

Step-by-Step Calculation Process

1. Determine the company’s tax rate: Was it a standard company (30%) or small business (27.5%) in 2017-18?
2. Identify the franked amount: This is the portion of the dividend that has franking credits attached
3. Calculate the franking credit: Use the appropriate formula based on the company’s tax rate
4. Calculate the grossed-up dividend: Dividend + Franking Credit
5. Determine your tax position: Compare your marginal rate with the company tax rate

Practical Example

Let’s consider an example for the 2017-18 year:

• Company: Small business entity (27.5% tax rate)
• Dividend received: $1,400
• Franked amount: $1,000
• Shareholder: Individual with 37% marginal rate

Step 1: Calculate the franking credit

Franking Credit = ($1,000 ÷ (1 – 0.275)) – $1,000 = $1,380.95 – $1,000 = $380.95

Step 2: Calculate the grossed-up dividend

Grossed-up dividend = $1,400 + $380.95 = $1,780.95

Step 3: Calculate tax payable

Tax on grossed-up dividend (37%) = $1,780.95 × 0.37 = $659.16

Less franking credit = $659.16 – $380.95 = $278.21 tax payable

Franking Credit Benefits by Shareholder Type

Shareholder Type	Marginal Rate	Company Rate	Outcome
Individual	0-19%	27.5% or 30%	Refund of excess credits
Individual	32.5-37%	27.5%	Reduced tax liability
Individual	45%	30%	Additional tax payable
Company	30%	30%	Tax neutral
Super Fund	15%	27.5% or 30%	Refund of excess credits

Common Mistakes to Avoid

• Incorrect tax rate: Using the wrong company tax rate (27.5% vs 30%) can significantly affect calculations
• Mixing franked and unfranked dividends: Only the franked portion attracts franking credits
• Ignoring the gross-up: Forgetting to include the franking credit in assessable income
• Overlooking the refundable limit: There are limits on how much excess franking credits can be refunded
• Incorrect shareholder classification: Different rules apply to individuals, companies, and super funds

ATO Compliance Requirements

The Australian Taxation Office (ATO) has specific requirements for franking credits:

• Companies must maintain a franking account that tracks credits and debits
• Franking credits can only be attached to dividends if the company has sufficient franking account balance
• Dividend statements must clearly show the franked amount and franking credit
• Companies must lodge their tax returns before they can frank dividends

For official guidance, refer to the ATO’s franking account information.

Strategies to Maximize Franking Benefits

1. Dividend timing: Consider the timing of dividend payments to optimize franking credit utilization
2. Shareholder structure: Different entity types (individuals, companies, trusts) have different franking credit treatments
3. Loss utilization: Use carried-forward losses to generate franking credits
4. Small business concessions: Take advantage of the lower 27.5% tax rate if eligible
5. Franking credit trading: In some cases, it may be beneficial to trade shares based on franking credit availability

Historical Context: Franking Credits Over Time

The franking credit system was introduced in Australia in 1987 to eliminate the double taxation of company profits. Since then, the system has undergone several changes:

• 1987: Introduction of the imputation system
• 2000: Introduction of refundable franking credits for individuals
• 2015: Reduction in small business company tax rate begins
• 2017-18: Small business rate reduced to 27.5% for companies with turnover < $25m

For a detailed history of Australia’s dividend imputation system, see this Treasury publication.

Frequently Asked Questions

What happens if I receive more franking credits than I need?

Since 2000, individuals and super funds can receive refunds for excess franking credits. However, there are limits to prevent excessive refunds. The ATO provides detailed guidance on franking credit refunds.

Can I claim franking credits if I’m a non-resident?

No, franking credits are generally not available to non-resident shareholders. Non-residents are typically subject to dividend withholding tax instead.

How do franking credits work with capital gains?

Franking credits are separate from capital gains tax (CGT) calculations. However, the grossed-up dividend amount may affect your taxable income, which could indirectly impact your CGT liability.

What’s the difference between fully franked and partially franked dividends?

A fully franked dividend has the maximum possible franking credit attached (based on the company’s tax rate). A partially franked dividend has some franking credits but not the maximum amount.

Advanced Considerations

For sophisticated investors, there are several advanced strategies involving franking credits:

• Dividend substitution: Replacing salary with franked dividends for tax efficiency
• Trust distributions: Streaming franked dividends to specific beneficiaries
• Company structures: Using corporate beneficiaries to optimize franking credit utilization
• Franking credit arbitrage: Exploiting differences between company and shareholder tax rates

However, these strategies often come with complex compliance requirements and potential ATO scrutiny. Always seek professional advice before implementing advanced tax strategies.

Conclusion

Understanding and correctly calculating franking credits for the 2017-18 financial year can significantly impact your tax position. The key points to remember are:

• The company tax rate (27.5% for small business, 30% for others) is crucial for calculations
• Franking credits can reduce your tax liability or even result in a refund
• Different shareholder types have different treatments of franking credits
• Accurate record-keeping and compliance with ATO requirements are essential

For the most current information, always refer to the ATO website or consult with a qualified tax professional.