How to Calculate Your Tax on Dividends and Franking Credits

If you're investing in shares, understanding the mechanics of how to calculate tax on dividends and franking credits is pretty damn important. We will walk you through the process, helping you maximise your tax deductions and avoid common pitfalls. 

Understanding Dividends and Franking Credits

Dividends are payments made by a company to its shareholders from its profits. Many companies attach franking credits to these dividends. Franking credits represent the tax already paid by the company on its profits, which can be used to offset your personal tax liability.

Calculating Tax on Dividends

When you receive dividends, you must include both the cash dividend and the attached franking credits in your assessable income. Here's how to calculate your tax liability:

1. Determine Your Grossed-Up Dividend: Add the cash dividend and the franking credit.

   Example: If you receive a $700 cash dividend with a $300 franking credit, your grossed-up dividend is $1,000.

2. Include in Assessable Income: Add the grossed-up dividend to your total income for the year.

3. Calculate Tax Payable: Apply your marginal tax rate to your total income.

4. Claim Franking Credit: Use the franking credit to reduce your tax payable.

   Example: If your marginal tax rate is 32.5%, your tax on the $1,000 grossed-up dividend is $325. Subtract the $300 franking credit, leaving $25 payable.

Traps to Avoid

1. Ignoring Franking Credits: Forgetting to include franking credits in your assessable income can lead to underreporting and penalties.

2. Holding Period Rule: To claim franking credits, you must hold the shares 'at risk' for at least 45 days.

3. Exceeding Franking Credit Limits: Be mindful of the $5,000 small shareholder exemption limit on franking credits.

Non-Deductible Examples

• Non-Qualified Shares: If you don't meet the holding period rule, you can't claim franking credits.
• Non-Resident Shareholders: Generally, non-residents cannot claim franking credits.

Gotax Deduction Grabber App

To efficiently track your dividends and franking credits, consider using the Gotax Deduction Grabber App. This app includes all the logbooks and tax expense recording systems you need to manage your tax deductions throughout the year. Download the app by scanning the QR code and streamline your tax return process.

Gotax Tax Advice

Here's a piece of Gotax advice to embrace: Regularly review your investment portfolio and the franking credits attached to your dividends. This not only helps in tax planning but also in making informed investment decisions. Consult a tax professional to ensure you're optimising your tax position and complying with ATO regulations.

Conclusion

Calculating tax on dividends and franking credits can seem daunting, but with the right approach, you can maximise your tax deductions and ensure compliance. For more insights and to explore Australia's easiest, cheapest, and smartest online tax service, visit www.gotax.com.au.

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