Zero Cost To Taxpayers – Franking Credit Refunds – The Real Facts Franking Credit Refunds-
No Cost To Taxpayers
There is plenty of populist dribble and fake news being spread around about the costs to the Australian taxpayer of cash refunds of franking credits. The result is an almost universal misconception that cash refunds of franking credits costs the Australian taxpayer. It doesn’t.
Franking credit cash refunds is a simple concept and I hope this page will help you distinguish the “Fake News” from the “Real Facts.”
Franking Credit Refunds – No Cost To Taxpayers
Under Australia’s Tax Imputation System…..
Every Franking Credit issued by a dividend-paying company is credited in the shareholders’ tax returns.
Every Franking Credit issued by a dividend-paying company is ultimately refunded to the shareholders.
Franking credit refunds are made to shareholders either as a “cash refund” or a “tax-offset”.
Either Cash refunds are paid to the shareholders by the ATO from the tax paid by the dividend-paying companies.
Alternatively, tax-offsets are simply deducted from by the shareholder from their tax-bill.
No other taxpayer funds are used in this process and there is no cost to other Australian taxpayers.
Shareholders are responsible to pay the tax on the dividends they have received plus the franking credits received.
Here’s a bit more detail. There Is No Cost To The Taxpayers.
Despite what you may have been told, or thought, cash refunds of franking credits cost the Australian Taxpayer nothing at all.We have an Tax Imputation System in Australia which simply means that it is the shareholders who are responsible for the payment of tax on the dividends.
. Companies Pay The Company Tax To The ATO.
The first step in the process is that the dividend paying company pays company tax on the profits it has made. Even though it is known that perhaps 70% of the profits will be paid as dividends to the shareholders, the law requires that the company pay ALL the tax when it is due. Which it does.
Companies pay tax on profits at the rate of 30%. So for every dollar the company makes as profit, it pays $0.30 tax to the ATO The Company Declare And Pay A Dividend To the Shareholders.
Let’s say the company decides to pay a dividend to the shareholders a dividend of $0.70 per share.When the company pays this dividend, each shareholder receives a statement detailing that the shareholder has received the $0.70 per share, plus a statement that the shareholder is entitled to a franking credit of $0.30 per share. A copy of this statement is sent to the tax office to marry up with the individual shareholders returns, when they are lodged.
So at this point, the shareholder is responsible for the payment of tax on $1.00, of which $0.30 has already been paid, and the shareholder has received $0.70 cash. When the shareholders lodge a tax return they pay the tax on the $1.00 at their standard rate. EG a company would pay $0.30 and an individual would pay tax as per the standard tax scale. About The Franking Credits
This is the important part to understand. ALL franking credits are ALWAYS refunded 100% to the shareholders’ tax accounts. Most Franking Credits are used by shareholders as tax-offsets and some Franking Credits are refunded in cash. There is NO COST to the Australian taxpayers, despite the populist dribble to the contrary. The amount per share of cash-refunds is exactly the same as the amount per share of tax-offsets.
The taxpayers fund none of the these refunds. The entire value of the total franking refunds comes from the taxes already paid to the ATO by the dividend paying companies. No other taxpayers funds are affected. This system is called “Imputation”, and the Australian taxpayer does not fund any of it. The Individual Shareholders Lodge Their Individual Tax Returns
Now the shareholders lodge their individual returns. Each shareholder prepare and lodge their tax returns as normal. They must include the gross dividends as income in their tax return. So in the example we are using they would include income at the rate of $1.00 per share. (even though they only received $0.70 per share). In addition the shareholders must include all other income from other sources.
When the tax returns are completed, the shareholders must deduct from the tax payable the value of the franking credits they hold. Because this is tax that they have already paid. The Franking Credit Refund
The last step. Each Individual shareholder will now have their franking credits refunded in full. It is important to understand that the refunds come 100% from the funds paid to the ATO by the dividend paying companies, as detailed above. They are not paid from general tax receipts from other taxpayers. All franking credits in a shareholders account at the ATO are disbursed at this time.
If a shareholder has a tax bill which is higher than the value of the franking credits in the shareholder’s franking account at the ATO.
In this case the shareholder exhausts his franking credits as a “tax-offset” in part payment of the tax bill. The remaining tax outstanding must be paid by the shareholder at this time.
If a shareholder has a tax bill which is lower than the value of the franking credits in the shareholder’s franking account at the ATO.
In these cases the franking credits are still fully refunded to the shareholder at this time. However, there are slight differences dependant upon the “type” of shareholder, for example whether the shareholder is a company, a super fund or an individual. A) For Individuals and Superannuation Funds.
In these cases, any outstanding tax-bill is paid using available franking credits as a “tax-offset”. The value of any excess franking credits will be refunded in cash by the ATO, as a “cash refund”. But all available franking credits are fully refunded. Some are refunded as “tax-offsets” and some as “cash refunds”.
In some cases, say a superannuation fund, or an individual on a low income, there may not be any tax-bill outstanding. If that is the case the available franking credits are still fully refunded as a “cash refund.” B) For Other Types of Shareholders, for example, Companies.
As above, any outstanding tax-bill is paid using available franking credits as a “tax-offset”. The value of any excess franking credits are also fully refunded at this time, but as “tax-offsets”. This means the value of the unused franking credits remain in the shareholders account as a “carried forward” balance to be used as a “tax-offset” against tax-bills in the future. Tax Imputation Overview.
For every shareholder, 100% of all available franking credits are refunded, some as “cash-refunds”, and some as “tax-offsets”.
The refunds come from the money which was paid into the ATO by the dividend paying companies. They do not come from other taxpayer’s funds.
There is no cost to the Australian Taxpayer for either “cash-refunds” or “tax-offsets”.
Under the Tax Imputation System the entire franking credits pool provided by the dividend paying companies was always designed to be fully refunded during this process. Labor’s Proposed Changes To Cash-Refunds Policy
In march 2018 Bill Shorten announced Labor’s policy to deny cash refunds of franking credits. This policy simply means, that in the examples above, if a shareholder is unable to obtain their refund of franking credits by way of a “tax-offset”, Labor will simply refuse a “cash refund”. The policy is equivalent to denying tax refunds of overpaid tax.
The policy is equivalent legislated theft. Exclusions
Labor has excluded business’ with companies, and all companies from this pain. For example, even the largest companies from Mr Shortens beloved “big end of town” will be allowed to accumulate their unused franking credits to use for discounts off their tax bills in future years.
Mr Shorten also was kind enough to exempt the Government’s own super fund the Future Fund from the changes. Last year the Future Fund received $817 million in franking credit “cash refunds”. So that will continue under Mr. Shortens plan.
Obviously Mr Shorten was duty bound to exempt labor and union affiliated funds. If not for Mr. Shorten’s specific exclusion of these funds, they would have lost their cash refunds also
