Imputation Credits (Franking Credits) in Australia – What They Are & How to Claim Them

Imputation credits, also called franking credits, represent the tax a company has already paid on profits before distributing dividends. These credits are passed on to shareholders, who can use them to offset personal income tax.

This system prevents double taxation – ensuring profits are only taxed once between the company and shareholder. Ozobooks helps individuals and business owners understand and claim franking credits accurately.

How Franking Credits Work

1. A company earns profit and pays 30% tax on it (or 25% if a base rate entity).
   
2. It pays a dividend to shareholders with franking credits attached.
   
3. Shareholders declare both the dividend and the credit in their tax return.
   
4. The ATO adjusts your tax liability or may refund the unused credits.
   

Example: You receive a $700 franked dividend with a $300 franking credit. You declare $1,000 taxable income, and the $300 credit reduces what you owe the ATO.

Types of Dividends

• Franked Dividend: Includes tax credits from company tax paid.
  
• Unfranked Dividend: No credits attached; taxed in full.
  

Who Can Claim Franking Credits?

• Individuals (including retirees)
  
• Companies
  
• Trusts
  
• SMSFs (Self-Managed Super Funds)
  

Franking Credit Refunds

Some taxpayers, like retirees or low-income earners, may receive a cash refund of unused credits if their tax liability is low.

Franking Account & Company Obligations

• Companies must maintain a franking account to track credits
  
• Must issue dividend statements with correct credit amounts
  
• Must lodge franking account return with ATO if required
  

How Ozobooks Helps

• Prepares dividend statements with accurate franking credits
  
• Ensures franking account balances are correct
  
• Advises clients on tax-effective dividend strategies
  
• Helps with franking credit claims and refunds at tax time
  

FAQ:

Q1: Can I get a cash refund of franking credits?
Yes. If your tax liability is low or zero, the ATO may refund unused credits.

Q2: What’s the difference between a franked and unfranked dividend?
Franked has tax credits attached; unfranked does not.

Q3: Do I declare franking credits in my tax return?
Yes. You must declare both the dividend and the credit.

Q4: Can businesses benefit from franking credits?
Yes. Companies can pass credits to shareholders and plan tax-efficient dividend strategies.