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What Are Franking Credits & How Do They Benefit Australian Expats?

What Are Franking Credits & How Do They Benefit Australian Expats? – franking credits can be a key asset in a investors portfolio but how do they benefit Australian expats?

In this article we run through what is a franking credit and why Australian expats should pay more attention to them.

 

What are franked and unfranked dividends?

 

In Australia, there are two types of dividends received by investors: franked dividends and unfranked dividends and depending on which you receive, the taxation various substantially.

Franked dividend payments have a tax credit attached, as the company has already paid tax on their annual profit, generally at the flat tax rate of 30% before declaring dividend payments.

As tax has already been paid by the declaring company, it would seem unfair for shareholders to pay tax on the dividends again, essentially the government will be ‘double dipping’.

To prevent ‘double dipping’ the concept of franking credit was introduced to the Australian tax legislation. Basically, if the company has paid tax on their profits before issuing out dividends to shareholders, the ATO passes personal franking credits to shareholders.

Unfranked dividends in contrast is profit that company has not yet paid tax on and therefore franking credit will not be attached to dividend payments.

Consequently, the dividend payments will be subject to a final withholding tax (WHT) for non-residents.

 

How are franked dividends and unfranked dividends taxed by the ATO for Australian expats?

 

Franked dividends paid to non-residents are exempt from dividend withholding tax (WHT) as the company has already paid tax on it. Generally, this will be passed onto shareholders as franking credit refunds for tax residents.

However, as non-residents for tax purposes, we are not entitled to receive franking credits refunds, but franking credits attached to dividend payments can be used to offset withholding tax on any unfranked or partially franked dividends received.

Unfranked dividends paid to non-residents are only exempt from dividend WHT if the dividends are declared by the company to be conduit foreign income, otherwise, all unfranked dividends will be subject to final WHT.

 

What is Conduit Foreign income and how is it taxed by the ATO

 

Conduit Foreign Income (CFI) is another form of dividend that is usually received from Australian corporate tax entities that is exempt from withholding tax.

CFI is generally a foreign income earned by or through an Australian corporate tax entity that is received by non-resident investors.

As non-residents of Australia are only taxed on Australian source income, CFI payments received by non-residents will be exempt from any tax in Australia.

For this reason, any unfranked dividend distribution with a portion of CFI is also not subject to withholding tax.

However, for Australian resident investors, any amounts of CFI will be claimed as part of an unfranked dividend and is therefore, subject to any tax implications that come with unfranked dividends.

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