What are Franking Credits?

Some people think that when you pay income tax, you get nothing back in return. A lot of clients say to me, “show me how to pay less tax?” It’s an instinctive reaction to seek to minimise your income tax expense everywhere you can.

Sometimes those same people set up a company to run a business through. Understandably, they seek to also minimise the income tax paid by the company. What many of those people don’t understand is that there’s a key difference between the income tax paid by them personally and the income tax paid by the company. The difference is that the company can pass on every dollar of value it has paid as income tax to the shareholders using franking credits.

In simple terms, franking credits are a refund of income tax paid by a company to the shareholders of that company.

Why are Franking Credits important to you?

The reason why this is important to understand is that this “franking credit refund” or “tax shield” can be used by company shareholders to reduce their personal income tax expense. It doesn’t matter that the company is the entity that has paid the income tax in the first place, the law allows the shareholder to claim it back in their own income tax return. This tax shield works even better if the shareholder of the company is a self managed superfund because it is income taxed at a much lower rate than most individuals are.

For more information, call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au.