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5 Tax and Structures

Franking credits explained

When a large company makes a profit it pays tax at 30% on the net taxable income (or 27.5% if it is a small company).

It may then pay out a dividend to its shareholders from the money that remains after tax has been paid. 

In this case, the income paid out as a dividend to shareholders has already had tax paid on it. Such a dividend is called fully franked and comes with a tax credit to the shareholder at the appropriate company tax rate for that year. This credit is also called an imputation credit

This represents the tax the company has already paid. The income included as assessable income for the shareholder includes both the dividend amount and the franking credit.

The shareholder pays tax on the total amount, at their marginal tax rate less the imputation credit. This system ensures you're not taxed twice on the dividend. 

Sometimes a company may decide to pay dividends from gross (before tax) earnings. In this case, the dividend is said to be unfranked

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