Tax Tutorials: Company Dividends and Franking Accounts

Introduction

• Presenter: Philip
• Topic: How companies pay dividends and the tax implications
• Previous tutorial: How dividends are taxed for shareholders

Key Concepts

Profit and Tax

• Company must make a profit
• After paying tax, remaining profit can be distributed as dividends
  • After-tax dividends: Dividends after company has paid income tax

Dividend Imputation System

• Introduced to avoid double taxation
• Company pays income tax on taxable income
• Taxable income = company's profit subject to tax
• Company tax rates: 30% or 27.5% (if base rate entity)

Franking Account

• Franking account balance reflects tax paid by company
• Example: Company ABC Pty Ltd
  • Year 1: Taxable Income: $100,000
  • Tax Rate: 27.5%
  • Tax Payable: $27,500
  • Retained Earnings: $72,500 (after tax)
  • Franking Account: $27,500 (tax paid)
• Franking account balance used to determine franking credits for dividends

Franked vs Unfranked Dividends

• **Franked Dividends: **Tax paid portion
• **Unfranked Dividends: **No tax portion paid
• Companies can pay partially franked dividends (e.g., 50%, 80%)

Practical Exercise

Year 2 Example

• Quarterly Tax Installments: Q1 and Q2: $5,000 each
  • Year 1 Tax Paid: $27,500
• Franking Account Balance Calculation:
  • 27,500 (Year 1) + 10,000 (Q1 and Q2) = $37,500
• **Income Tax from Received Dividends: **
  • Example: $50,000 income, franking credit based on 30% tax

Year 2 Tax Payments

• Year 2 Taxable Income: $80,000
  • Tax Payable: $22,000
• Dividends Paid: $72,500
  • Retained Earnings Year 2: $58,000
  • Franking Credits Calculation: $22,000

Franking Account Balance End of Year

• Year 2 Beginning Balance: $31,428
  • Additional Quarterly Installments: 4x $5,000 = $20,000
  • End Balance: $73,428 (after tax and dividend payments)

Available Dividend Payment

• Based on Franking Credits: $135,584
• Calculations include tax installments and received dividends

Disclaimers

• This is a simplified exercise
• For specific financial advice, consult a professional accountant or tax agent