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