June 28, 2019 Pat Mannix

What Are Franking Credits?

Pat Mannix

Pat Mannix

Partner
Pat Mannix champions small business people. Owning and running his own financial services firm for over 20 years, Pat is an expert in small business tax, property investors and high net worth families via trust structures and SMSF's.

In the recent election, franking credits were one of the key topics of discussion.

Many people believe that the franking credits topic was what enabled ScoMo to win the unwinnable election. Billy simply tanked it with all of the changes to tax he was proposing and the scuppering of franking credits hurt his campaign.

So, why are franking credits so important to the Australian public? They were spinned by the Liberal’s Campaign against Labor in this election as a retiree’s tax, if they were taken away by Bill Shorten. Typical, misleading political bulls*** that is, no wonder us citizens get so cynical of the political elite.  They are often referred to as a retiree’s tax – is that a fair name for them?

I’m going to explain what franking credits are, and how you can be using them to your advantage.

Franking credits for retirees

It’s not uncommon to consider franking credits as a retiree’s refund. It is essentially a refund of previously paid company tax.

Many older persons, and many clients at Paris Financial, have self-managed super funds (SMSFs).

A person who is retired, over the age of 65, goes into a private pension in their SMSF and they may receive $60,000 for the year.

The tax on that $60,000 is zero. No money to pay on that.

However, there are franking credits of $10,000 attached to the income of the Super Fund that can be refunded.

Let’s say that the particular SMSF has invested into publicly-listed shares, such as Telstra. Telstra might pay a dividend to the superfund with $10,000 of attached company tax which they have already paid for a number of years ago.

That comes out as franking credits – the government give this $10,000 back to the retiree as a refund.

Franking credits for small business

For small business owners, franking credits are paper gold.

Franking credits are part of a pre-retiree strategy for small business persons who have a private company.

A typical client of ours will have sold their business, made a few bucks, worked hard for 20 or 25 years, and now they’re wanting to sit on a beach for a bit and be with their kids after working really diligently for a long time.

This is what we advise to them as their tax accountants, before they draw on their superannuation.

Let’s assume that a dad and mum are running the business.

We distribute an income amount to them called a dividend, from their private company.

In this example, we are issuing dad $30,000 as income and mom $30,000 as income, out of their private company in their individual tax return.

Small Business Franking Credits – Example
Dad Mum
$30,000 $30,000
Tax $2,000 $2,000
Franking Credits $8,000 $8,000
Refund $6,000 $6,000

 

When they come and do their individual tax return, the $30,000 in income is taxed at $2,000. That’s the tax rate in Australia today on a $30,000 income. For mum, the same.

Because that money comes from their private company, there are franking credits attached. In this example, they’re approximately $8,000 for dad and mom, each.

Voila – a refund to dad of $6,000 and a refund to mom of $6,000.

It’s paper gold for small businesses!

Franking credits can also be useful in other ways for small business, so this is just one quick example.

If you want to learn more about franking credits or join the Tax Champions to get some help with your business, contact us today for a no-obligation, initial consultation.

Pat Mannix

Pat Mannix

Partner
Pat Mannix champions small business people. Owning and running his own financial services firm for over 20 years, Pat is an expert in small business tax, property investors and high net worth families via trust structures and SMSF's.

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