Can someone explain franking credits and how they work?
Franking credits are an allowance for tax that has already been paid by a company (for example Commonwealth Bank) before they pay a dividend to you.
For example say the Commonwealth Bank made $100 profit, they would then pay $30 tax on that profit. With the $70 that remains (100-30) Commonwealth Bank keeps some of that to keep the bank running and the rest they pay out as profit to shareholders in the form of a dividend.
When you receive that dividend, the tax already paid by Commonwealth Bank is also counted as your income. So you as the shareholder are taxed on the divided received + the tax already paid by Commonwealth Bank. When your ultimate tax payable is determined an allowance is made for the tax Commonwealth Bank has already paid so you don’t have to pay double tax.
Now if your ultimate tax payable is more than the allowance for tax already paid you have to pay a little bit more tax. But if your ultimate tax payable is less than the allowance for tax already paid, you get the difference back in a refund.
There is currently a proposal to stop stop the refund back if your tax payable is less than the allowance for tax already paid.
Hope this helps.
Nice one Joel!!! also check out the diagram on this website, which helps a bit if you want to see a visual representation of the system.
Obviously, with a clear election result, the hype over refundable franking credits is going to die down......but I rather suspect that the issue of refundable franking credits is going to crop up again one day. It seems clear that Australia is one of the few countries that allows for the refund of imputation credits.
The argument will probably change from "its a free ride for self funded retirees" to "this country cannot afford to pay this tax benefit anymore".......
And then I suspect what will happen is that the rules will change to put a cap on the maximum refund available to any individual.......which would have been a much more logical method of dealing with this contentious issue in the first place........