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Tax Tutorials: Company Dividends and Franking Accounts
Jul 12, 2024
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
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Full transcript